The U.S. Securities and Exchange Commission (SEC) has now brought its first whistleblower enforcement action against a publicly traded company under the Dodd-Frank Act of 2010 for utilizing an overly broad employee confidentiality agreement. Specifically, the SEC alleges that KBR, Inc., has violated the Act by implementing employee confidentiality agreements that “potentially discouraged” employees from becoming whistleblowers by reporting misconduct to the SEC. This is illegal under the Act, and specifically under SEC Rule 21F-17 which prohibits employers “from taking measures through confidentiality, employment, severance or other type of agreements that may silence potential whistleblowers before they can reach out to the SEC.”
The company’s confidentiality agreement at issue made it a disciplinary offense for an employee to discuss internal investigations with outside parties, even governmental agencies, without first obtaining approval from the company’s legal department. The SEC viewed this language as possibly discouraging employees from becoming whistleblowers even though there was no evidence that KBR had ever used the agreement in that manner. The company claimed that the confidentiality agreements were used to preserve attorney-client privilege in internal investigations and claimed that “it never dawned on us” that this type of agreement might violate SEC rules. The SEC, however, took a broad interpretation and viewed the agreements as having a “chilling effect.” The company settled without admitting or denying that it violated the Act, but agreed to pay a fine and to revise its confidentiality agreements to explicitly state employees are still free to report alleged misconduct to the SEC or other federal agencies without company approval.
In a statement on the settlement, the SEC whistleblower enforcement chief advised that “[o]ther employers should similarly review and amend existing and historical agreements that in a word or effect stop their employees from reporting potential violations to the SEC.” Indeed, the SEC whistleblower enforcement chief previously admitted that he had been looking to bring an enforcement action against a company for overbroad employee confidentiality agreements in order to emphasize the issue. In fact, he indicated that “severance agreements, confidentiality agreements, and employment agreements” with overly broad confidentiality provisions were all targets, even if they do not explicitly state “you can’t report this to the SEC.”
Publicly traded companies that have confidentiality clauses in written agreements with its employees will want to revisit the agreements and determine if they must be amended due to the SEC’s broad interpretation of what constitutes a “chilling effect” in violation of SEC Rule 21F-17.