Change Act Rule 21F-17, adopted in 2011 beneath the auspices of the Dodd-Frank Wall Road Reform and Client Safety Act of 2010, prohibits any particular person from taking any motion to impede a person from speaking instantly with the SEC, together with by “imposing , or threatening to implement, a confidentiality settlement . . . .” The SEC has prioritized imposing this rule expansively, by requiring employers to supply SEC-specific carveouts to insurance policies and agreements governing confidentiality. In accordance with an Order issued final week towards The Brink’s Firm (“Brink’s” or “Brinks”), the SEC appears to counsel that employers should present a selected carveout in restrictive covenant agreements allowing workers and former workers to report info to the SEC along with the statutory disclosure offered for within the federal Defend Commerce Secrets and techniques Act (DTSA).
The DTSA requires employers to supply discover of whistleblower immunity “in any contract or settlement with an worker that governs the usage of a commerce secret or different confidential info.” The discover should inform workers that:
A person shall not be held criminally or civilly liable beneath any Federal or State commerce secret legislation for the disclosure of a commerce secret that—(A) is made—(i) in confidence to a Federal, State, or native authorities official, both instantly or not directly, or to an lawyer; and (ii) solely for the aim of reporting or investigating a suspected violation of legislation; or (B) is made in a grievance or different doc filed in a lawsuit or different continuing, if such submitting is made beneath seal.
The penalty for noncompliance with this requirement is that an employer is not going to be entitled to get better a number of damages and attorneys’ charges beneath the DTSA within the occasion of misappropriation by an worker who just isn’t so notified. Consequently, most employers now present this language in restrictive covenants agreements that include confidentiality necessities. These that don’t achieve this is not going to be entitled to a number of damages and attorneys’ charges beneath the DTSA, however there are not any civil penalties for failing to incorporate this discover.
The SEC’s Order issued towards Brink’s finds the above DTSA language inadequate and requires Brink’s to incorporate further language in its confidentiality agreements with workers that particularly references the SEC. Particularly, in its June 22, 2022 Order, the SEC introduced that, with out admitting or denying any wrongdoing, Brink’s had agreed to pay $400,000, consented to the issuance of a stop and desist order discovering that it violated Rule 21F-17(a) , and amended its agreements with US-based workers to incorporate the next new provision that outlines the workers’ rights beneath Rule 21F-17(a):
Protected Rights. Worker understands that nothing contained on this Settlement limits Worker’s skill to file a cost or grievance with the Securities and Change Fee, or every other federal, state, or native governmental regulatory or legislation enforcement company (“Authorities Businesses”). Worker additional understands that nothing on this Settlement limits Worker’s skill to speak with any Authorities Businesses or in any other case take part in or absolutely cooperate with any investigation or continuing which may be carried out by any Authorities Company [sic], together with offering paperwork or different info, with out discover to or approval from the Firm. Worker can present confidential info to Authorities Businesses with out threat of being held liable by Brinks for liquidated damages or different monetary penalties. This Settlement doesn’t restrict Worker’s proper to obtain an award for info offered to any Authorities Businesses.
As well as, Brink’s agreed to contact all present and former workers who signed the noncompliant agreements and supply them with a duplicate of the SEC’s Order and a press release outlining their authorized rights.
This got here in response to findings by the SEC that from not less than 2015 to 2019, Brink’s required its workers to signal restrictive covenants agreements that included noncompetes and confidentiality provisions that prohibit workers from disclosing any monetary or enterprise info to 3rd events, however didn’t embody any carveouts for potential SEC whistleblowers. Reasonably, Brink’s required prior approval earlier than disclosing such info to any third events, and any worker who did not adjust to this requirement could possibly be topic to $75,000 in liquidated damages, plus attorneys’ charges. In accordance with the SEC:
By requiring present and former workers to inform the corporate previous to disclosing any monetary or enterprise info to any third events, and threatening them with liquidated damages and authorized charges if they didn’t achieve this, Brinks took motion to impede potential whistleblowers by forcing these workers to decide on between figuring out themselves to the corporate as whistleblowers or doubtlessly having to pay $75,000 and the corporate’s authorized charges.
Not all SEC Commissioners agreed with the breadth of the Order, nonetheless. Following its issuance, Commissioner Hester M. Peirce issued a press release on the SEC’s web site by which she agreed with the discovering that Brink’s violated Rule 21F-17(a), however disagreed with the cures that transcend the “restricted scope” of the SEC’s authority. Particularly, Commissioner Peirce took situation with the breadth of the brand new provision Brink’s was required to incorporate in all new agreements with US-based workers as a result of it isn’t solely references an worker’s proper to file a cost or grievance with the SEC, but additionally with “every other federal, state, or native governmental regulatory or legislation enforcement companies.” In accordance with Commissioner Peirce:
The Fee plainly lacks statutory authority to impose such a broad requirement, and Rule 21F-17 doesn’t purport to claim such authority. I acknowledge that the Order states that Brinks’ settlement to this endeavor was merely a consideration when figuring out whether or not to simply accept the corporate’s provide of settlement. The Fee, nonetheless, have to be cautious about utilizing the settlement course of to acquire voluntary compliance with necessities that it lacks statutory authority to impose.
Commissioner Peirce went on, nonetheless, to clarify that the actual fact Brink’s had “agreed to notably broad language as a part of a settlement shouldn’t be misconstrued as a sign that different corporations are beneath any obligation to make use of the identical or comparable language to keep away from operating afoul of Rule 21F-17.” Additional, the Order itself states: “The findings herein are made pursuant to Respondent’s Provide of Settlement and should not binding on every other particular person or entity on this or every other continuing.”
Regardless of Commissioner Peirce’s misgivings, the Order follows a protracted line of SEC enforcement actions requiring confidentiality agreements and insurance policies to supply SEC-specific carveouts. In 2015, the SEC introduced an enforcement motion towards KBR alleging that language in KBR confidentiality agreements offered to workers in reference to inner investigations stifled whistleblowing. Then in 2016, BlueLinx Holdings Inc. agreed to pay a penalty to the SEC in reference to confidentiality language in its severance agreements. In June 2021, the SEC fined Guggenheim Securities, LLC for sustaining a coverage that it contended impeded potential whistleblowers from speaking with the SEC by requiring workers to acquire permission earlier than reporting securities violations. The SEC’s Order issued towards Brink’s represents the newest improvement on this development, this time discovering for the very first time {that a} failure to incorporate carveout language expressly referencing the SEC in a post-employment restrictive covenant settlement constitutes a violation of Rule 21F-17.
Employers ought to take heed of the SEC’s place {that a} failure to incorporate a selected carveout in a confidentiality provision referencing an worker’s proper to reveal info to the SEC is a violation of Rule 21F-17 and will topic employers to substantial fines and penalties. And as now we have beforehand reported, states are starting to require comparable carveouts for claims of discrimination, sexual harassment, and the like.
Please attain out to any member of EBG’s Commerce Secret & Worker Mobility and/or Whistleblowing and Compliance follow teams, or your EBG relationship companion, to evaluate present agreements and insurance policies, and to supply updates that comply not solely with this SEC Order, but additionally quite a few current adjustments in state legislation regarding noncompetes and different post-employment restrictive covenants.
