03 April 2015

SEC Takes First Enforcement Action Involving Employee Agreement Restricting Disclosures to Government

Posted by Scott SteinSarah Konsky and Natalie Chan

The Securities and Exchange Commission made good on its promise to crack down on employment-related agreements that it believes improperly restrict protected whistleblowing. The agency broke new ground yesterday, when it issued a cease-and-desist order against a company for using confidentiality agreements with allegedly “improperly restrictive language” that could potentially stifle the whistleblower process. This is a first-of-its-kind enforcement action by the SEC, as it was based solely on the language of the confidentiality agreement. In fact, the SEC specifically stated in its order that it was unaware of any instance in which the agreement had prevented any employee from communicating with the SEC, or in which the company had enforced the agreement against any employee.

According to the order, KBR, Inc., a Houston-based global technology and engineering firm, used the confidentiality agreement in connection with internal investigations. When KBR received a complaint or allegation from an employee about potentially illegal or unethical conduct by KBR or its employees, KBR required employees interviewed as part of its internal investigation of the complaint or allegation (including the employee or employees who originally lodged the complaint or allegation) to sign the confidentiality agreement. The confidentiality agreement provided that:

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.

The SEC charged KBR with violating Rule 21F-17, a whistleblower protection rule enacted under the Dodd-Frank Act, by requiring employees to sign the confidentiality agreement in internal investigations. That rule prohibits a company from “tak[ing] any action to impede an individual from communicating directly with the [SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.”

Without admitting or denying the charges, KBR consented to entry of the cease-and-desist order. The order states that KBR has amended its confidentiality agreement to say that it does not prohibit employees from reporting possible violations of federal law or regulation to any governmental agency or entity, without prior authorization. KBR also agreed to pay a civil money penalty of $130,000 to the SEC.

This is a significant action by the SEC, further signaling its intent to crack down on agreements that could be construed as restricting whistleblowing behavior. This crackdown comes on the heels of actions by the EEOC and NLRB challenging confidentiality and non-disparagement provisions in severance agreements that, according to the government entities, improperly prohibit employees from engaging in protected activities.

In light of these actions, entities should review their agreements with employees that contain confidentiality and non-disparagement provisions. Government entities are making clear that they intend to crack down on provisions that they deem to restrict or prohibited protected activity – including whistleblowing and certain other communications or cooperation with government agencies. As a result, entities should ensure that the confidentiality and non-disparagement provisions in their agreements with employees contain appropriate carve-outs for protected activity.

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