The Securities and Exchange Commission (SEC) on April 1 announced it had settled an enforcement action over an employer’s use of a restrictive confidentiality agreement. The SEC brought the enforcement action against KBR, Inc., which had a practice of requiring its employees to sign a confidentiality agreement, when they were serving as witnesses in an internal company investigation.

The SEC alleged that KBR’s standard confidentiality agreements used in investigations were so restrictive that they potentially discouraged employees from reporting any law violations to the SEC. The agreements’ confidentiality provisions, according to the SEC, violated the whistleblower protections of the Dodd-Frank Act. The confidentiality provisions required any KBR employee-witness to agree to keep any matters being investigated confidential and not to discuss any such matters with any outside parties, unless the person obtained prior approval from the KBR legal department. If the employee-witness violated the confidentiality provisions, the employee faced discipline or termination.

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The SEC considered the confidentiality provisions so restrictive that they violated Rule 21F-17 of the Dodd-Frank Act. That rule protects the rights of whistleblowers to report possible securities law violations to the SEC without employer interference or retaliation. Even though the SEC had no examples of KBR specifically preventing employees from going to the SEC with any specific law violations, the SEC found that with these agreements, KBR “potentially discouraged” employees from reporting violations.

KBR, a Houston-based technology and engineering firm, denied any wrongdoing. The company did agree, however to pay a $130,000 penalty, and it agreed to revise its standard investigation agreements “to make clear that its current and former employees will not have to fear termination or retribution or seek approval from company lawyers” before contacting the SEC.

Takeaway

Savvy employers know that the SEC has begun an active review of such confidentiality agreements. This effort is consistent with similar efforts by the National Labor Relations Board and the Equal Employment Opportunity Commission. These agencies have been reviewing critically the confidentiality provisions of severance agreements and documents used as part of internal investigations.

This announcement from the SEC is a further reminder that employers should have such confidentiality provisions reviewed by counsel or risk similar consequences.

Tim K.Garrett, a member at Nashville-based Bass, Berry & Sims PLC, is an experienced trial lawyer whose practice is focused on employment litigation defense. He can be reached at (615) 742-6270 or tgarrett@bassberry.com.

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