On September 9, 2024, the Securities and Exchange Commission (SEC) announced settlements with seven public companies concerning their use of separation agreements that allegedly violate whistleblower protection rules. These agreements restricted employees from claiming financial rewards for future whistleblowing, leading the companies to collectively pay over $3 million to resolve the SEC’s allegations.
The Issue: Separation Agreements vs. Whistleblower Awards
While the separation agreements in question allowed employees to report misconduct to authorities, they included clauses that prevented these individuals from receiving monetary awards for their whistleblower efforts. The SEC argued that such provisions deterred potential whistleblowers from coming forward.
The agreements typically stated that employees could engage in investigations or report misconduct to federal authorities, but they required employees to waive their rights to any financial recovery related to these actions. Notable excerpts from the agreements include:
“I further acknowledge that I am not waiving and am not being required to waive any right that cannot be waived under law…; provided that I disclaim and waive any right to share or participate in any monetary award resulting from the prosecution of such charge or investigation.”
“Excluded from this waiver is any claim or right that cannot be waived by law…; however, [employee] is releasing his right to recover any monetary or non-monetary relief… in connection with a charge and/or investigation filed or initiated by him…”
Some agreements also included clauses that prohibited employees from participating in government investigations, further violating whistleblower protection regulations.
The Legal Framework: Whistleblower Incentives and Protections
The SEC cited violations of Rule 21F-17, established under the Dodd-Frank Wall Street Reform and Consumer Protection Act. This rule aims to incentivize whistleblowers to report possible securities law violations by offering financial rewards, protecting against retaliation, and ensuring confidentiality.
Effective since August 12, 2011, Rule 21F-17 states:
“No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation…”
Although the SEC acknowledged that none of the companies enforced these waivers or that affected employees refrained from reporting misconduct, it emphasized that the agreements nonetheless created obstacles to participating in the whistleblower program.
Public Policy Implications
Historically, companies have crafted whistleblower provisions in separation agreements to align with public policy. The Supreme Court’s decision in Town of Newton v. Rumery established that an agreement may be deemed unenforceable if its enforcement conflicts with public policy interests. Lower courts have since evaluated these agreements by weighing the public interest in uncovering information against the benefits of dispute resolution.
As a result, provisions that prevent individuals from pursuing whistleblower claims have often been ruled unenforceable.
Best Practices for Crafting Severance Agreements
Our DC Employment lawyers advice to companies drafting severance or employment agreements is they must be cautious not to violate SEC rules, especially Rule 21F-17. While these agreements aim to maximize releases and resolve post-employment issues, companies should include clear language stating that the agreement does not restrict the employee’s ability to report misconduct or participate in investigations. However, recent SEC actions suggest that such language alone may not suffice. If an agreement undermines the employee’s incentives to report wrongdoing, it may still be considered a violation of whistleblower protections.