Whistleblower Carve-outs to Confidentiality Agreements: Why Attorneys Should Revisit Past Agreements or Risk Liability
| Publication year | 2016 |
| Pages | 15 |
Articles Business Law
Whistleblower Carve-Outs to Confidentiality Agreements: Why Attorneys Should Revisit Past Agreements or Risk Liability
By John A. Chanin, John S. Cutler.
Business Law articles are sponsored by the CBA Business Law Section to apprise members of current substantive law. Articles focus on business law topics for the Colorado practitioner, including antitrust, bankruptcy, business entities, commercial law, corporate counsel, financial institutions, franchising, and securities law.
Coordinating Editors
David P. Steigerwald of Sparks Willson Borges Brandt & Johnson, P.C., Colorado Springs—(719) 475-0097, dpsteig@sparkswillson.com; Curt Todd, Denver (bankruptcy)—(303) 955-1184, ctodd@templelaw.comcastbiz.net
In a recent enforcement decision with implications far beyond the securities industry, the SEC aggressively targeted confidentiality agreements that may discourage employees from blowing the whistle. This action should prompt both public companies and their attorneys to rethink their standard confidentiality agreements and revisit past agreements.
In In the Matter of KBP, Inc., the Securities and Exchange Commission (SEC or Commission) aggressively targeted confidentiality agreements that might discourage employee whistleblowing.[1] Notably, the SEC also suggested that it may target attorneys who draft such agreements. Although the SEC offered little specific guidance regarding what would constitute a compliant agreement, the Commission appears to broadly construe its power, and may challenge companies with any confidentiality agreement that does not specifically allow for whistleblowing speech.
Although the SEC's decision has been much discussed in securities law circles, its implications are widespread. Indeed, this recent action follows a trend in other federal agencies and in Congress of attacking confidentiality agreements that stifle the reporting of possible violations of federal laws or regulations.
The broad scope of the SEC's action, along with the actions of Congress and other agencies, should give pause not only to securities lawyers and lawyers advising public companies, but to all attorneys who draft contracts executed by employees. In light of this recent action, attorneys and companies should revisit past confidentiality agreements and provisions and rethink whether such agreements should be modified to carve out whistleblowing speech.
KBR Decision
KBR Inc., a global engineering, procurement, and construction company, required employees who internally reported potentially illegal or unethical actions to execute a confidentiality agreement according to the company’s policy.[2] That agreement prohibited the employee from discussing the substance of such report without prior company approval, stating in part:
I understand that in order to protect the integrity of this review, I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.[3]
The SEC determined that this confidentiality agreement violated Rule 21F-17(a) of the Securities Exchange Act, which prohibits actions that would impede whistleblowing activities:
No person may take 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 . . . with respect to such communications.[4]
The SEC recognized that it was unaware of any examples where a KBR employee failed to communicate with the Commission as a result of a confidentiality agreement.[5] The SEC also noted that it had no evidence that KBR took any action to enforce these confidentiality agreements against any specific employee.[6]
Nevertheless, the SEC imposed a $130,000 fine and required KBR to add language to its confidentiality agreement that specifically exempted whistleblowing communications.[7] The additional language states:
Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.[8]
The SEC also required KBR to make reasonable attempts to contact employees who had signed the confidentiality agreement and clarify that the agreement did not preclude whistleblowing.[9]
To be sure, KBR’s confidentiality agreements were particularly egregious, as employees signed them only after reporting alleged misconduct. The agreements arguably sought to silence communication of specific company wrongdoing, so aggressive SEC action in response is perhaps not surprising.
What is surprising is that KBR may prove to be an example of "regulation by enforcement action." Rather than issue an advisory opinion, the SEC signaled its intent and resolve by making an example of KBR and emphasizing that it intends to apply the enforcement principle broadly.
Sean McKessy, chief of the SEC’s Office of the Whistleblower, indicated even prior to the KBR order that the Commission intended to aggressively pursue companies with confidentiality agreements that may stifle whistleblowing, regardless of whether the companies actually enforced the agreements. "We are going to bring a case where somebody has asked an employee or forced an employee to sign a document that in order of substance means they can’t report to us. This is now the new thing that I’ve got people really enthusiastic for," he said.[10]
The SEC’s action was perhaps prompted, in part, by pressure from Congress. On October 27, 2014, almost six months before the Commission issued the KBR order, eight members of Congress wrote a letter to SEC Chair Mary Jo White, encouraging the precise action taken in KBR. The letter noted the potential danger of overbroad confidentiality agreements and "strongly encourage[d] the Commission to enforce its regulations protecting corporate whistleblowers."[11] The letter noted that "[w]hile there are legitimate reasons for companies to use confidentiality agreements to protect sensitive information, such agreements should be structured as narrowly as possible. Employees should also be clearly informed that these agreements in no way restrict their right to voluntarily report securities law violations to the commission."[12]
Scope of KBR’s Confidentiality Agreement
KBR employees were required to execute confidentiality agreements only after reporting alleged misconduct. The agreements thus appear to have been targeted to restrict whistleblowing regarding specific allegations of wrongdoing.
The KBR order suggests, however, that the Commission will focus not only on companies that actively attempt to prohibit whistleblowing, but also on companies whose confidentiality agreements may have the effect of chilling reports of possible violations of federal laws or regulations, even where there is no evidence that an agreement had a demonstrable negative effect. The order specifically points out that the Commission knows of no instances where KBR enforced the confidentiality provision against an employee, or where an employee was prevented...
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