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Your Company's Severance Agreements Probably Violate Dodd-Frank

By Casey C. Sullivan, Esq. on August 30, 2016 | Last updated on March 21, 2019

Your company's overzealous protection of its secrets could put it on the wrong side of Dodd-Frank. The Dodd-Frank Act Wall Street Reform and Consumer Protection Act, passed in 2010, sought to make it much easier for employees to report corporate wrong doing. And the SEC has made it clear that company confidentiality agreements that impede whistleblowing can violate that law. Just last spring, the SEC settled one of its first confidentiality-based enforcement actions, claiming that a corporate confidentiality agreement was unlawful "pretaliation."

Now, the SEC has severance agreements in its sights as well. The Commission recently took action against two companies whose pretty standard severance agreements the SEC felt violated Dodd-Frank. It might be time to redo your standard severance agreements before the SEC comes your way, too.

The SEC Turns to Severance Agreements

Given the SEC's recent actions, it's quite possible that your standard severance agreement will be viewed as violating Rule 21F-17 of Dodd-Frank. That rule prohibits taking "any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement."

This August, the SEC brought two actions against U.S. companies, accusing them of using severance agreements that violated that rule. News of the SEC action comes to us from Bill Hayden and Anne Dwyer on the Employment and the Law blog, via Inside Counsel. The first action was brought against BlueLinx Holdings and resulted in a $265,000 fine. The second, brought just one week later, was against HealthNet, a California-based insurance company, resulting in a $340,000 fine.

Severance Boiler Plate as Dodd-Frank Violation

Both companies had used severance agreements that would strike many as standard. For example, BlueLinx 's severance agreements limited the disclosure of confidential information "unless compelled by law and after notice to BlueLinx." It was even, Hayden and Dwyer write, updated last year to note that nothing in the agreement should prevent employees from filing charges with the SEC or other government agencies.

But there was a catch; if workers went to the feds, they'd waive the right to "any monetary recovery" they might be entitled to as a whistleblower. HealthNet included a similar clause it its severance agreement. That, the SEC found, "directly targeted the SEC's whistleblower program" by getting rid of its financial incentives.

Altogether, the companies' severance agreements violated Rule 21F-17 in three ways. First, they prohibited disclosure of company information "unless required by law." Second, they demanded prior notice to the company. Finally, they forced former employees to waive their right to whistleblower awards.

So, if your severance agreements have similar conditions, it's likely time to revise them.

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