A non-disclosure agreement or NDA is a legal contract between two parties, like an employer and employee, that prohibits the sharing of information deemed confidential or proprietary.
NDAs are common across numerous industries. However, such agreements can be used to silence whistleblowers in order to keep illegal activity under wraps. Additionally, NDAs may prohibit the employee from informing the government about the existence of the NDA and the restrictions placed upon them.
Restrictive non-disclosure agreements are blatant attempts to censor employees and limit the exposure of company misconduct. Many are also illegal.
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Laws and Precedents Prohibiting Restrictive and Illegal NDAs
Federal Laws
Under federal statutes and regulations, restrictive non-disclosure agreements are prohibited in government contracts and in government-funded business.
In 2017, the Federal Acquisition Regulation (FAR), the primary regulation used by agencies when acquiring supplies and services through appropriated funds, was amended to prohibit “the use of funds, appropriated or otherwise made available, for a contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement that restricts such employees or subcontractors from lawfully reporting waste, fraud, or abuse” to the appropriate regulatory authority.
There are also multiple public laws that include clauses that prohibit restrictions on federal employees to communicate to Congress or file whistleblower claims. In the Consolidated Appropriations Act of 2016 (Public Law No. 114-113 § 713 (2015)), Congress prohibited funds appropriated by the Act for “a contract, grant, or cooperative agreement with an entity that requires employees or contractors of such entity seeking to report fraud, waste, or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud, or abuse.”
The Whistleblower Protection Enhancement Act of 2012, which applies only to federal employees, also contains provisions protecting whistleblower disclosures to Congress and Inspectors General. Under the Whistleblower Protection Enhancement Act, any nondisclosure policy, form, or agreement from the government shall include a statement noting that it shall “not supersede, conflict, or alter the employee obligations, rights, or liabilities created by existing statute or Executive order” relating to classified information, communications to Congress, reporting to an IG, or any other whistleblower protection.
SEC Enforcement Action
In April of 2015, the U.S. Securities and Exchange Commission (SEC) sanctioned defense contractor, KBR, for requiring its employees to sign restrictive non-disclosure agreements that barred employees from reporting fraud and misconduct to the proper regulatory authorities. Triggered by a whistleblower complaint made by former KBR employee, Harry Barko, the SEC conducted an investigation into KBR’s NDA practice, culminating in KBR paying a $130,000 penalty and ceasing the practice.
This action marked the first enforcement action against a company by the SEC for using overly restrictive non-disclosure agreements that could prevent whistleblower complaints and disclosures. In certain instances, KBR required witnesses to sign confidentiality agreements that warned employees that they could face discipline or termination if they discussed matters outside of KBR’s legal team without prior approval. The SEC subsequently found such language to be in violation of the whistleblower protection rule, Rule 21F-17, under the Dodd-Frank Act.
Rule 21F-17 states that: “No person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.”
This enforcement action by the SEC barring the use of NDAs set a precedent and now applies to all SEC-regulated entities. Andrew J. Ceresney, the then Director of the SEC’s Division of Enforcement, said on the matter that “SEC rules prohibit employers from taking measures through confidentiality, employment, severance, or other types of agreements that may silence whistleblowers before they can reach out to the SEC. We will vigorously enforce this provision.”
Following the KBR case, the SEC issued sanctions regarding violations of Rule 21F-17 and other attempts to block whistleblower communications against BlackRock Inc., an investment management firm interfering with whistleblower rewards, SandRidge Energy, an oil & gas company that used illegal severance agreements and retaliated against a whistleblower, and Merrill Lynch, a wealth management firm for prohibiting employees from disclosing confidential information, among others.
Prior Precedents
Nearly two decades before the KBR enforcement, in 1986, Joe Macktal, a journeyman electrician working for Halliburton Brown & Root (HB&R), reported on safety problems at the Comanche Peak nuclear power plant. Subsequently, HB&R dismissed Macktal, leading him to file a complaint with the Department of Labor.
In order to settle his complaint, Macktal signed a restrictive “hush money” settlement non-disclosure agreement under duress from HB&R lawyers. This agreement barred him from reporting his concerns to the Nuclear Regulatory Commission (NRC), as well as restricted his right to testify to the NRC.
Trapped in such an agreement, Macktal challenged the illegal NDA in court in September 1988. The court found in his favor and rendered such agreements illegal under federal whistleblower law. Macktal’s case banned restrictive settlements in nuclear and environmental cases nation-wide.
Years later, in 2015, the precedents set in Macktal’s case were relied upon in the case of Harry Barko against KBR, culminating in the SEC’s historic enforcement action that prohibited non-disclosure agreements in corporate America.
“Hush Money” Payments and Gag Orders
“Hush money” payments, like the payments made to Joe Macktal for his cooperation, are coercive and illegal agreements aimed to silence whistleblowers under emotional and financial distress due to their attempt to disclose misconduct at their respective company or organization. As a result of Macktal’s successful case, settlement agreements require government approval in order to protect a whistleblower’s rights to come forward and safely report evidence of fraud, waste, or abuse.
Following this case, further hush money cases have been successfully litigated in the Fourth, Fifth, and Ninth Circuit courts. In these cases, whistleblowers who came forward with misconduct were dismissed, demoted, or transferred and, after filing complaints with the Department of Labor for illegal whistleblower retaliation, entered into settlement agreements that unlawfully restricted protected communications. The courts found such “hush money” agreements are in violation of whistleblower protections.
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