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SEC Claims Employer’s Confidentiality Agreement Muzzles Whistleblowers; Orders Change to Agreement and $130,000 Fine

April 2, 2015

Author: Stephen M. Byers.

The SEC issued a cease and desist order to KBR, Inc. this week requiring the company to revise the confidentiality agreement it insists witnesses sign during internal investigations. The SEC also imposed a $130,000 fine. This announcement comes on the heels of a recent report that the SEC is scrutinizing non-disclosure, confidentiality and other agreements to determine whether, in the SEC’s view, the agreements improperly prevent whistleblowers from reporting concerns to the SEC or other government agencies. The KBR order is the first of its kind and is likely a signal of what is to come in the near future. The policy motivating the SEC’s order also serves as a warning for all employers, not just those publicly traded, as other government agencies are taking similar positions on the issue.

The SEC alleged that KBR required witnesses interviewed during an internal investigation to sign an agreement prohibiting the witness from disclosing “any particulars regarding [the] interview and the subject matter discussed during [the] interview” to anyone without prior authorization from KBR’s legal department. The agreement further stated that unauthorized disclosure of information could result in discipline up to and including discharge.

According to the SEC, KBR’s policy and the underlying agreements violated SEC Rule 21F-17. That rule prohibits companies from impeding individuals from communicating with the SEC about possible securities law violations “including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.” The SEC said that even though there was no evidence that KBR ever tried to enforce the confidentiality agreements or that any KBR employee was ever impeded in reporting concerns to the SEC, the policy was still facially invalid.

In addition to the $130,000 fine, KBR agreed to revise its confidentiality statement to clarify that employees can report any possible violations of federal law or regulations to any government agency or entity without prior approval from KBR. KBR is also required to make efforts to provide a copy of the order to and notify any employees who signed the improper agreements that they are not bound by the provision requiring prior authorization.

The SEC’s order is consistent with positions taken by other government agencies on this issue. For example, companies under criminal investigation that have overly broad “gag rules” in employee agreements or document preservation orders may draw obstruction-of-justice accusations if law enforcement agents or prosecutors believe they are attempting to use those documents to prevent employees from voluntarily cooperating with government investigators. The EEOC has also filed a number of high profile cases claiming similar language in confidentiality agreements improperly prevents employees from bringing charges of discrimination.

However, companies have a legitimate interest in protecting privileged and confidential information in connection with internal investigations. Judgments on such issues must be made on a case-by-case basis because any number of variables could be in play in any given situation. At a minimum, companies should review existing policies to ensure they are not incurring undue risk as they attempt to walk the delicate line between preserving privileges and protecting confidential information versus improperly impeding an employee’s ability to report or otherwise provide the government with information regarding potential violations of law.

Stephen M. Byers
Partner – Washington, D.C.
Phone: +1.202.624.2878