It is a common practice for employers to obtain a written agreement from employees to refrain from disclosing company trade secrets and other confidential and proprietary information. Such agreements are structured to be effective after an employee departs, as well as while he or she is actively employed. Confidentiality and non-disclosure agreements can be an important tool in an employer’s efforts to protect trade secret, business-sensitive, and other confidential information, but if they are not thoughtfully and carefully drafted, they could engender unwelcome scrutiny, or even enforcement action, from executive agencies, such as the U.S. Securities and Exchange Commission (“SEC”) and the National Labor Relations Board (“NLRB”). The SEC and NLRB have shown interest in confidentiality provisions even in the absence of an existing action or a complaint from the employee.
The SEC, NLRB, and other executive agencies have expressed concerns that the prevalence and broad language of confidentiality agreements could prevent or discourage employees from engaging in lawful activities, such as whistleblowing, or otherwise reporting potential violations of law to outsiders, or engaging in concerted activity relating to the terms and conditions of their employment. Accordingly, the SEC and NLRB have each taken an aggressive stance that seeks to examine and limit the extent to which employers can require total confidentiality, even if such confidentiality agreements are not being enforced by the employer or otherwise involved in a dispute.
SEC Encourages Whistleblowing
The Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted in 2010 (“Dodd-Frank”), among many other things, amended the Securities Exchange Act of 1934 (“Exchange Act”) to encourage, and enhance protection of, whistleblowers who might have knowledge of a potential violation of securities and other laws. The new provision is Section 21F of the Exchange Act, entitled “Securities Whistleblower Incentives and Protection.” The SEC adopted Regulation 21F, effective in August 2011, to implement the new provision, and established an Office of the Whistleblower to administer it. The SEC whistleblowing law provides for financial payments for whistleblowers who meet the appropriate standards, prohibits retaliation by employers against whistleblowers, and includes other protections. In 2014, as part of its administration of the Dodd-Frank whistleblowing provision, the SEC announced its intention to closely examine employee agreements that, in the agency’s view, could discourage whistleblowers, in violation of Rule 21F-17 of the SEC’s 2011 regulations.
Consistent with this expressed intent, on April 1, 2015, the SEC brought an enforcement action under Rule 21F-17 against KBR Inc. (“KBR”), a global-based technology and engineering firm. The enforcement action arose entirely out of the language of KBR’s confidentiality agreements, even though the agreements were not enforced against any employee (i.e., no employee suffered any adverse action) and even though no employee appears to have complained to the SEC. During select internal investigations, including allegations of possible securities law violations, KBR required witnesses to sign confidentiality agreements that contained language warning that they could face discipline and even termination if they talked about the inquiries with outside parties without first receiving prior approval of KBR’s legal department. Such terms are similar to those in confidentiality agreements of numerous employers, but the SEC deemed the terms improperly restrictive language that could potentially impede whistleblowing.
As a result, the SEC obtained a settlement in which KBR agreed to (i) revise the confidentiality language to explicitly clarify that employees were free to report possible securities violations without employer approval or fear of retaliation, (ii) send out notices to that effect to current and former employees who had signed the confidentiality agreement containing the old language, and (iii) comply with a cease and desist order and pay a $130,000 fine to the SEC.
The clear message from the SEC is that any confidentiality provisions that may have the effect of discouraging whistleblowing, even by implication, could be problematic. Employees are not expected to automatically know or understand that, despite a general confidentiality requirement, they may bring potential violation of securities laws to SEC investigators. Rather, in order to be safe from enforcement action, such agreements should clearly provide that the employee is not only entitled to notify authorities of suspected violations of law but also does not have to seek permission from the employer before doing so, and cannot be subject to reprisals.
NLRB Protects Concerted Action
The NLRB has also moved on its own initiative to scrutinize confidentiality agreements, as well as employment manuals, handbooks, and other employee directives. In March 2015, the agency issued a General Counsel report (“Report”) relating to employer rules. In its Report, the NLRB provided numerous examples of unlawful confidentiality provisions and rules.
For example, the NLRB indicated that an employer rule stating, “You must not disclose proprietary or confidential information about [the Employer, or] other associates (if the proprietary or confidential information relating to [the Employer’s] associates was obtained in violation of law or lawful Company policy)” would be unlawfully overbroad because a reasonable employee would not understand how the employer determines what amounts to a “lawful Company policy.”
In addition, a policy defining confidential information as “[A]ll information in which its [sic] loss, undue use or unauthorized disclosure could adversely affect the [Employer’s] interests, image and reputation or compromise personal and private information of its members” is unlawful because employees have a National Labor Relations Act (“NLRA”) Section 7 absolute right to complain about their wages and work conditions, and the right to discuss and share information in support of such complaints. As such, the NLRB found that a rule broadly prohibiting disclosure of employment information would reasonably, but unlawfully, lead employees to believe they could not even disclose information about the terms and conditions of employment, because it might negatively affect the employer’s interest, image, or reputation.
The NLRB has enforced those policies very recently in a detailed decision regarding a challenge to numerous provisions of an employment manual maintained by employer Quicken Loans, Inc. and several other companies, colloquially known as the “Big Book.” In Quicken Loans, the administrative law judge (“ALJ”) painstakingly analyzed each of the challenged provisions separately and decided many of them violated Section 7 of the NLRA, while others did not.
For example, a rule in the employee handbook prohibiting disclosure of unspecified “confidential information” was deemed overly broad. Another rule was also found by the ALJ to unlawfully chill employees’ rights to engage in protected activities, such as discussing workplace conditions and wages, in violation of Section 7, since the rule stated, in part, “[K]eep it confidential. What shouldn’t you share? Non-public financial or operational information. This includes . . . anything with a dollar figure attached to it.” Because employees unquestionably have a right, under the NLRA, to disclose and discuss salary and operation information, for example, the ALJ deemed the phrases “anything with a dollar figure attached to it” and “non-public financial or operational information” to be overly broad restrictions that employees would reasonably understand to prohibit protected activity.
In contrast, a more specific provision directing employees to keep confidential “private Company information, for example, information about financial performance, strategy, forecasts, etc.,” was found to be permissible. The ALJ noted that employees would reasonably understand the more specific rule to be directed to the employer’s interest in its own proprietary information, as opposed to information that employees are entitled to discuss and share.
Indeed, the lengthy Quicken Loans decision provides valuable guidance about the limitations on employers’ efforts, through confidentiality agreements or otherwise, to protect confidential information from disclosure by employees.
What Employers Should Do Now
The more aggressive enforcement actions being taken by government agencies do not mean that employers must stop using confidentiality agreements. Employers, however, would be well advised to review existing agreements and revise them, if necessary, to ensure that they do not, intentionally or inadvertently, discourage or chill employees from taking lawful action, such as whistleblowing or engaging in concerted activity.
A version of this article originally appeared in the Take 5 newsletter “Restrictive Covenants: Do Yours Meet a Changing Landscape?”