Muzzling Whistleblowers: When Confidentiality Agreements Go Too Far

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http://blogs.orrick.com/trade-secrets-watch/files/2014/08/shutterstock_104640485-1-200x150.jpgConfidentiality agreements can be useful to a company. For example, they can ensure that employees are aware of their company’s valuable trade secrets and can establish requirements to safeguard those assets. But when do these non-disclosure agreements go too far? 

In the eyes of the SEC, agreements that incentivize keeping mum about securities violations or that prohibit the disclosure of confidential information for the purposes of whistleblowing may cross the line. Sean McKessy, Chief at the SEC’s Office of the Whistleblower, emphasized in his Office’s 2013 Annual Report to Congress that “the Commission’s rules prohibit any person from taking action to impede an individual from reporting a securities law violation to the Commission, including through the use of a confidentiality agreement.” Indeed, Rule 21F-17 already provides that “[n]o person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . .” McKessy reiterated his warning before the Georgetown University Law Center Corporate Counsel Institute in March, cautioning that the Commission would go after companies that used confidentiality or employee agreements to incentivize would-be whistleblowers to not go to the SEC.

Still, pro-whistleblowing organizations are pressuring the SEC to do more. Just last month, a coalition of 250 organizations petitioned the SEC to clarify and strengthen aspects of its whistleblower program. In particular, the petition requested immediate action regarding the “proliferation of increasingly creative private agreements designed to silence or otherwise limit employee’s rights to as SEC whistleblowers . . . .” Another petition requested that the SEC explicitly “clarify that it is legally protected to disclose evidence of crime or other violations of SEC rules, despite any assertions by wrongdoers that employees have stolen their ‘property.’”

With mounting pressure from advocates and with one of its Chiefs having pledged a commitment to curtail the use of overly restrictive confidentiality agreements, the SEC looks to be ready to ramp up its investigations against companies. Trade Secret Watch will continue to monitor the SEC’s regulatory and investigative moves in this area as they arise.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Orrick - Trade Secrets Group | Attorney Advertising

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