SEC Whistleblower Enforcement Targets Company Confidentiality Provisions in Severance Agreements, Employment Contracts

April 17, 2015

Companies may be forced to rethink the phrasing of confidentiality language in employment contracts and severance and other agreements on the heels of a Securities and Exchange Commission enforcement action and settlement targeting any language which could potentially dissuade employees from reporting violations and sharing information with authorities.  The enforcement action was brought against Texas-based KBR, an engineering and construction firm, focusing on its requirement that employees questioned as part of an internal investigation sign confidentiality agreements that prohibit them from discussing the investigation with "outside sources" without permission, enforced through potential suspension or termination.  The SEC even acknowledged that it was unaware of any employees who were actually dissuaded from reporting a violation of the federal securities laws, or even any improper motivation on the part of the company.  The SEC's action was taken under whistleblower protections included in the Dodd-Frank Act that provide financial incentives for whistleblowers to report violations and share information.  It follows a series of letters the Commission sent to dozens of companies in February seeking nondisclosure agreements, employment contracts, severance agreements, and other employment-related documents containing confidentiality provisions, thus allowing the agency to evaluate whether the language may be dissuading employees from notifying the SEC of a suspected violation.  However, the SEC's whistleblower rules do not prevent confidentiality or other agreements, nor do they prevent employers from including certain language in such agreements.  By pursuing an enforcement action and achieving a settlement with KBR, the SEC has indicated an intent to focus on any language which could potentially dissuade a would-be whistleblower.  The SEC's decision has drawn significant criticism from commentators and companies, which seek to incorporate confidentiality provisions for legitimate business purposes and are now faced with a significant amount of ambiguity concerning what language and structure will avoid potential SEC enforcement actions.