In House - The FindLaw Corporate Counsel Blog

Your Company's Confidentiality Agreements Might be 'Pretaliation'

KBR Inc., a Texas tech and engineering company, has settled the first SEC "pretaliation" enforcement action under Dodd-Frank, Inside Counsel reported yesterday. KBR's standard confidentiality agreement, used in internal investigations, forbids employees from "discussing any particulars" about the investigation without prior authorization from the law department. That's illegal pretaliation, according to the SEC.

In-house counsel, get ready to spend your weekend reviewing your company's confidentiality policies!

What in the World is Pretaliation?

As one of the many changes enacted by the Dodd-Frank Wall Street Reform and Consumer Protection Act, covered companies are prohibited from taking actions which "impede an individual from communicating directly" with the SEC about securities violations. The rule, Rule 21F-17, specifically warns about confidentiality agreements. Apparently, KBR missed that memo -- er, rule.

According to the SEC's enforcement action, a confidentiality agreement doesn't have to have actually impeded communication with the Commission for there to be a Rule 21F-17 violation. The existence of the agreement is enough. KBR agreed to pay a $130,000 fine, amend its confidentiality agreement,s and contact those who have signed such agreements since the pretaliation rule was adopted.

The Cruel Mistress That Is the Confidentiality Agreement

Confidentiality agreements are a necessary part of most businesses' regular practices. They keep internal information internal and secret information secret. But as easily as they can prevent one problem from developing, they can cause another. In March, for example, the NLRB found that T-Mobile's confidentiality agreements were so broad they violated employee's rights to engage in protected activities.

The SEC's action against KBR, like the NLRB's against T-Mobile, should remind in-house lawyers to always consider the potentially unintended effects their confidentiality agreements can have. The stated purpose of KBR's confidentiality agreement was to "protect the integrity of the review." It was used, presumably, in all internal company investigations, not simply those tied to potential securities violations. Yet, should the investigation have touched on a securities law issue, the confidentiality agreement could be seen as prohibiting whistleblowing.

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