By following a few principles, companies can protect their confidential information with tough language in their agreements without running afoul of stepped-up whistleblower enforcement efforts by the Securities and Exchange Commission, employment law specialists say.
It’s not uncommon for companies to rescind severance pay or seek liquidated damages from employees who spill confidential information on their way out the door, and these protections continue to be okay as long as employment agreements are clear they don’t apply to whistleblowers.
“You have to allow people to go forward to the SEC and report their whistleblower claims,” said Sheri Adler of Troutman Pepper in a podcast. “If you just have liquidated damages [for disclosure breaches] I don't think the SEC has any issue with that. It's just that you can't tell someone, you can't go to the SEC with a whistleblower claim and you can't punish someone for doing so.”
The same caution applies to provisions that let companies rescind or restrict severance pay; as long as an exception is clearly written into the agreement for whistleblowing.
“It’s not a breach of the confidentiality provision to go to the SEC with a whistleblower claim,” Adler said.
Nor can companies require employees, as a condition of obtaining their severance pay, to disclose if they’ve met with regulators.
“The SEC views it as problematic if the employee has to notify the employer after the fact that it brought a claim because that could really chill the whistleblowing activity,” Adler said.
The SEC’s whistleblower protections have been in place since 2010, when Congress created the program as part of the Dodd-Frank Act, but the agency has ramped up enforcement. Last year, it went after companies in almost half a dozen cases for using agreements to protect their secrets without adequately carving out exceptions for whistleblowers.
In one case, the SEC fined Monolith Resources $225,000 for prohibiting employees in their separation agreements from collecting money for whistleblowing. In another case, it fined D.E. Shaw $10 million for prohibiting employees from disclosing confidential information to third parties with no exception for SEC whistleblowers.
It’s not even necessary for companies to enforce their confidentiality agreements against an employee to run afoul of the SEC; it’s enough simply to have no carve-out language in their agreements.
“One thing that I think is surprising to folks is that it really is, and can be, just about a documentary violation,” said Adler. “It's clear from the enforcement actions that an individual doesn't actually have to be impeded from reporting in order for the SEC to charge a company with a rule violation.”
The SEC’s focus isn't just on severance and other employment-related agreements; any agreement – non-disparagement, non-disclosure, even a vendor agreement – can be in violation.
Bottom line: No matter how much a company wants to protect its confidential information, if it doesn’t include language making an exception for whistleblowing, the SEC can go after the company whether or not an employee has actually been discouraged from whistleblowing.
