Company contracts restricting employees from disclosing sensitive business information are commonplace. Whether referred to as a Non-Disclosure Agreement, Confidentiality Agreement, Employment Contract, or Severance Agreement, or through the execution of internal Codes of Ethics, it is common for businesses to require employees to affirm that they will not report confidential business information to outsiders.
NLRB’s Stance on Confidentiality Agreements
Generally, confidentially clauses are commonplace and uncontroversial. But the devil is in the details. Several regulatory agencies have imposed exceptions to these confidentiality policies to protect other public interests. The National Labor Relations Board (NLRB) – the U.S. union watchdog – has cautioned that strong confidentiality agreements or policies may act to discourage employees from collectively bargaining such that the employer has violated the NLRA. The NLRB’s recent statements on this issue include the NLRB’s decision in McClaren Macomb, where the Board concluded that broad confidentiality provisions in separation agreements violated the NLRA.
SEC Enforcement: When Confidential Information Meets Whistleblower Rights
Recently, through enforcement actions, the Securities Exchange Commission (SEC) has bolstered its previous warnings with a specific concern about whistleblowers under the Dodd-Frank Act. Part of the Dodd-Frank Act includes whistleblower protections, which make it unlawful to impede individuals from communicating with the SEC about a possible securities law violation that would require the employee to disclose confidential information. The SEC has recently signaled that confidentiality policies can run afoul of that rule.
Three Key Issues in Written Confidentiality Clauses
Last month, the SEC charged and settled matters against seven major companies for violations of the Dodd-Frank Act’s whistleblower protections, assessing over $3 million in civil penalties. Companies subjected to the orders include Acadia Healthcare Company, a.k.a. Brands Holding Corp., AppFolio, and TransUnion, among others. In reviewing the SEC’s allegations, three lessons come to light:
1. Missing Whistleblower Carveouts in Nondisclosure Agreements
First, ongoing policies, employment agreements, or contractor agreements can run into trouble when they have confidentiality agreements that do not contain a whistleblower carveout that clearly states that whistleblowing under the Dodd-Frank Act is permitted. The SEC specifically alleged that this violated the law on the theory that, in failing to provide this clarity to employees, contracts could impede whistleblower activity.
2. Separation Agreements and Whistleblower Rewards
Second, when an employee leaves the company, entering into a separation agreement is common. In this agreement, the employee releases the employer from liability for any potential employment-related claims in return for severance. These agreements did not prohibit whistleblowing, per se, but they did include a contract provision where the employee waived their right to receive any whistleblower rewards even if they qualified for them under applicable law. The SEC believed this discourages whistleblower reporting, violating Dodd-Frank and SEC regulations.
3. The Deterrent Effect of a Confidentiality Clause
Third, the SEC specifically asserted that the potential deterrent effect was a problem even if the contracts were never enforced against whistleblowers.
Moving Forward: Reviewing Your Confidentiality and Non-Disclosure Agreements
Each of these seven companies entered into settlement agreements with the SEC, so this announcement does not necessarily mean that courts would agree that the Dodd-Frank Act was violated in every case where a contract did not contain express protection for whistleblowing. However, given the significant penalties assessed against these issuers, businesses will benefit from carefully reviewing their approach to confidentiality policies and agreements with their contractors and employees and their approach to these topics when entering into severance and separation agreements with former personnel.
If you are unsure if your company policy meets the Dodd-Frank Act, contact one of our Salt Lake City Business and Securities attorneys today.
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