Although the summer is usually a quiet time for regulators, the Securities and Exchange Commission ("SEC") has been busy. Within a one-week period this August, the SEC issued cease-and-desist orders and imposed remedial sanctions against two public companies – BlueLinx Holdings Inc. ("BlueLinx") and Health Net, Inc. – regarding their forms of separation and general release agreement. In addition to requiring them to change their release agreement and notify prior employees who signed the agreement of their affirmative right to report securities violations to the SEC, the SEC imposed a fine of $265,000 on one company and $340,000 on the other. As a result of these two matters, companies that are publicly traded or otherwise regulated by the SEC are encouraged to consider updating their confidentiality agreements as well as their release agreements.

SEC Rule 21F-17(a) prohibits a person or business from impeding an individual from communicating directly with the SEC about a possible securities law violation, including by enforcing or threatening to enforce a confidentiality agreement. The SEC asserted that BlueLinx, a publicly traded company, violated the Rule by using confidentiality and release provisions that required outgoing employees to waive their rights to monetary recovery if they filed a charge or complaint with the SEC or another federal agency. Although there was no evidence that the company sought to enforce the relevant provisions, the SEC determined that the mere presence of such language in a release is sufficient to constitute a violation. Likewise, the SEC determined that Health Net, Inc., violated that same Rule by including language in their releases requiring employees to waive their right to monetary recovery in any government investigation in which they may participate.

Employers may be familiar with EEOC Guidance No. 915.002, issued in April 1997, which states that an employer may not interfere with the protected right of an employee to file a charge or participate in an investigation, hearing, or proceeding under the laws enforced by the EEOC. While requiring language that an employee does not waive his/her right to participate in an EEOC investigation, the EEOC Guidance does permit language restricting employees from obtaining monetary damages from their participation in an EEOC matter. However, the SEC has taken a more aggressive position than the EEOC, now requiring employers subject to the SEC's jurisdiction to affirmatively state that employees may initiate contact and communicate with the SEC or other governmental agencies, provide documents or information, and receive awards for any such information provided to the government.

In the BlueLinx matter, in particular, the cease-and-desist order between that company and the SEC required the insertion of the following language in any future release agreement between BlueLinx and departing employees.

Protected Rights. Employee understands that nothing contained in this Agreement limits Employee's ability to file a charge or complaint with the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other federal, state or local governmental agency or commission ("Government Agencies"). Employee further understands that this Agreement does not limit Employee's ability to communicate with any Government Agencies or otherwise participate in any investigation or proceeding that may be conducted by any Government Agency, including providing documents or other information, without notice to the Company. This Agreement does not limit Employee's right to receive an award for information provided to any Government Agencies.

Although the BlueLinx and Health Net decisions are not legally binding on other companies, publicly traded employers and all other companies regulated by the SEC should take notice of the SEC's aggressive scrutiny of release agreements and consider modifying their release agreements, confidentiality agreements, and cooperation provisions with employees going forward. Release agreements should contain express language allowing an individual who has entered into a severance and release agreement to freely communicate with the SEC about the individual's knowledge of any possible violation of SEC rules or law and to recover any award for providing information to the SEC or other governmental agency. Employers also may wish to review their confidentiality agreements and other agreements regarding employee cooperation in litigation and other such matters.

If you have any questions about this or any other employment matter, please contact Julie Werner at or any other Lowenstein Sandler attorney with whom you typically consult.