Confidentiality Agreements - Do They Stifle Whistleblowers?

The Securities and Exchange Commission (SEC) yesterday announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements that have the potential to stifle the whistleblower process. The action was taken against a Government contractor.

The SEC charged Houston-based KBR Inc. (Kellogg Brown & Root) with violating whistleblower protection rules enacted under the Dodd-Frank Act. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR's legal department. Employees were warned that if they violated the terms of the agreements, they could face disciplinary action up to and including termination of employment. Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated a rule that prohibited companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

KBR paid a $130 thousand fine and amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

By requiring employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting government officials, KBR potentially discouraged employees from reporting fraud, waste, abuse, securities violations, and other wrongful acts. Whistleblower protections prohibit confidentiality agreements, severance "packages" or any other type of agreement that may silence potential whistleblowers before they can reach out to the Government.

According to the SEC, there are no apparent instances in which KBR specifically prevented employees from communicating the the Government however the company's blanket prohibition against witnesses discussing the substance of the interview has a potential "chilling" effect on whistleblowers' willingness to report illegal conduct.

The SEC is recommending that all employers review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations.

KBR for their part, stated that it only wanted to protect attorney-client privilege and it never intended to stifle whistleblowers.

The SEC press release can be viewed here.