SEC Joins Agency Attack on Confidentiality Clauses in Employee-Related Agreements and Policies

by Wilson Sonsini Goodrich & Rosati

In a recent enforcement action, the Securities and Exchange Commission (SEC) took action against a company for "using improperly restrictive language in confidentiality agreements with the potential to stifle the whistleblowing process." The SEC's action reveals the agency's desire to ensure that employers do not use employment-related agreements that, at least in the eyes of the SEC, have the effect of "silenc[ing] potential whistleblowers before they can reach out to the SEC." While at first blush the SEC's action might appear applicable to only public company employers, all employers must appreciate that the SEC's action is perhaps just the latest federal agency attack on the use of confidentiality provisions in employment-related agreements, policies, and communications.

The SEC's KBR Cease and Desist Enforcement Action

In its enforcement action against KBR, Inc., a public company, the SEC both initiated and settled its dispute with KBR. The SEC took action against KBR because in responding to employee complaints of potential illegal or unethical conduct by KBR or its employees, including possible violations of federal securities laws, KBR's internal investigation procedures included the use of a form confidentiality statement that it required investigation witnesses to sign. In particular, KBR required these employees to sign a statement acknowledging that they could not discuss their interviews or the subject matter of the interviews without the prior authorization of KBR's legal department, as well as the fact that "the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment."

The SEC found this practice unlawful under the Dodd-Frank Act of 2010 (Rule 21F-17), notwithstanding that it found no instances where KBR prevented an employee from communicating directly with the SEC's staff about any alleged securities law violations. Similarly, the SEC acknowledged that it was unaware of KBR actually having enforced the form confidentiality statement. Nevertheless, the SEC determined that the confidentiality statement "impedes such communications by prohibiting employees from discussing the substance of their interview without clearance from KBR's law department under penalty of disciplinary action including termination of employment." This, the SEC said, undermines federal securities laws intended to "encourage individuals to report to the Commission."

To settle the SEC action, KBR agreed to pay $130,000, and to voluntarily amend its confidentiality statement to include the following statement:

Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.

The SEC's KBR enforcement action perhaps comes as no surprise. In recent months, SEC representatives have not only made clear that the SEC intends to bring more retaliation cases against companies for retaliating against employees going to the SEC with whistleblower complaints, but also intends to "send a message" to those companies using confidentiality agreements that have the effect of stopping their employees from reporting potential securities laws violations to the SEC. Indeed, in its press release announcing its KBR action, an SEC representative stated that "SEC rules prohibit 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[,]" and stated that it would "vigorously enforce this provision."

NLRB Also Takes Aim at Confidentiality Provisions

For employers, the above-described SEC action takes place against a backdrop where the National Labor Relations Board (NLRB) is also aggressively pursuing the repudiation of what it considers overbroad employer work rules that violate the right of employees to engage in "concerted activity" under the National Labor Relations Act (NLRA). In numerous cases, the NLRB has found such work rules unlawful in whatever form they may appear, be that confidentiality agreements, handbooks, codes of conduct, stand-alone policies, settlement agreements, or other employee communications.

For example, in Chipotle Mexican Grill, Inc. (4/2/15), an NLRB administrative law judge found that Chipotle violated the NLRA (Section 8(a)(1)) by threatening and interrogating employees, telling them that managers were instructed to report any employee discussion about wages, and by telling the employees that they could not talk about their wages. The ALJ stated that "[i]t is axiomatic that discussing terms and conditions of employment with coworkers lies at the very heart of protected Section 7 activity," and that the board had "long found that it is unlawful for employers to prohibit employees from discussing wages among themselves." While the Chipotle decision reflects a common outcome in those cases where employers seek to prohibit employees from discussing their wages, other recent NLRB decisions make clear that the NLRB also seeks to protect the right of employees to discuss other "terms and conditions of employment," and to prohibit employer policies that "interfere with concerted activity rights."

In Battle's Transportation, Inc. (2/24/15), the NLRB found the employer's confidentiality agreement overbroad and unlawful because it barred employees from discussing "human resources related information" and "investigations by outside agencies." It concluded that employees "would reasonably construe those phrases to encompass terms and conditions of employment or to restrict employees from discussing protected activity such as Board complaints or investigations." The decision also found unlawfully vague and overbroad an employer communication prohibiting employees from discussing "any ... company business with our clients." The NLRB has reached a similar result where a rule instructed employees to "[k]eep customer and employee information secure" and that "[i]nformation must be used fairly, lawfully and only for purpose for which it was obtained." Similarly, in another case where the employer defined "confidential information" to include financial matters, budgets, compensation, and other topics that could be reasonably interpreted by employees to prohibit discussion or disclosure of their personal compensation, the NLRB found the policy unlawful, notwithstanding the legitimate interests the employer sought to advance.

Recent EEOC Activity Highlights Desire to Prevent Policies Chilling Employee Opposition

The Equal Employment Opportunity Commission has long sought to ensure that employers do not "interfere with the protected right of an employee to file a charge, testify, assist, or participate in any manner in an investigation, hearing, or proceeding under Title VII of the Civil Rights Act of 1964 and other anti-discrimination statutes," and maintains that such employee rights cannot be waived. For that reason, most release agreements make that right explicit.

In recent months, the EEOC has brought "pattern or practice" lawsuits against employers that use settlement agreements in certain circumstances in an effort to keep employees from exercising their rights under Title VII (or similar statutes), including the filing of charges with the EEOC, or interfering with the employee's ability to communicate with the EEOC, or to participate or cooperate with an agency investigation. In one case, the EEOC took issue with the employer's use of certain provisions in its form release agreement, including those dealing with cooperation, non-disparagement, non-disclosure of confidential information, release of claims, no pending action/covenant not to sue, and the breach of agreement (permitting injunctive relief and attorneys' fees in the event of a breach). Many employers consider such provisions "standard," or "boilerplate."

The EEOC has also taken issue with broad employer policies that impose, or threaten to impose, discipline on employees that fail to comply with strict confidentiality requirements to keep confidential any information relating to workplace investigations addressing employee complaints of discrimination or harassment. The EEOC's position is that employees are free to complain about discrimination or harassment, and therefore policies that prohibit such protected activity or threaten to punish it, are unlawful.

How Should Employers Respond to Attacks on Certain Confidentiality Restrictions?

Employers, of course, typically have valid business objectives in adopting the very confidentiality provisions under attack. For example, companies understandably wish to keep confidential business information out of the hands of competitors. Similarly, in the context of investigations, they seek to ensure that the integrity of an investigation is not compromised by needless chatter, or they seek to protect a victim that has complained (perhaps against potential retaliation), or protect the reputation of an executive accused of harassment in the face of what may turn out to be an unfounded charge. Regardless, the above discussion highlights the need to ensure that employer policies are not subject to attack as violations of applicable law because they prohibit protected activity. As a result, employers should:

  1. Understand what constitutes "protected activity" under applicable law, including the anti-discrimination laws, the NLRA, and the whistleblower protection provisions of Dodd-Frank. Identifying troublesome provisions will be a challenge absent such knowledge.
  2. Train managers, especially HR professionals, as to what constitutes "protected activity," and ensure that they use discretion in drafting employee communications dealing with these sensitive areas.
  3. Identify those policies, written or not, that may raise concerns as to whether they may be construed or interpreted as an impermissible attempt to prohibit lawful protected activity. As noted, such policies may be found in form confidentiality agreements, non-disclosure agreements, release of claims agreements, employee handbooks, codes of conduct, investigation memos, or ad hoc employee communications regarding the need to keep certain company information confidential.
  4. In the words of the Chief of the SEC's Office of the Whistleblower, employers should "review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations to the SEC." This admonition applies equally to NLRB and EEOC-related concerns addressed above. In many instances, the addition of exculpatory language may remedy potential problematic provisions.
  5. For in-house counsel working with the SEC, understand that the SEC is serious about this matter, and wants not only companies to get the message, but in-house counsel, too. Thus, while professing that it will not do so lightly, it has reportedly threatened to "eliminate the ability of lawyers to practice before the commission."

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.

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