Many companies require their employees to sign confidentiality agreements that prohibit the employees from disclosing non-public information about the company to outsiders. In general, these confidentiality agreements aim to protect a company’s proprietary information that gives it an advantage over its competitors; things like trade secrets, inventions, customer lists and strategic plans.

Recently, however, a growing number of companies have included language in their confidentiality agreements that prohibit employees from blowing the whistle on fraud or assisting government agencies investigating the misconduct. These newer agreements include things like non-disparagement provisions prohibiting employees from saying anything negative about the company and other provisions threatening disciplinary action if employees discuss any aspect of a company’s internal investigation of fraud and abuse.

Now, the federal government is fighting back, using its enforcement powers and its spending powers to protect employees who uncover fraud in the workplace.

Late in 2014, Congress passed and President Obama signed a spending bill for Fiscal Year 2015. This legislation, known as the Consolidated and Further Continuing Appropriations Act of 2015, included a provision that bans federal funding to contractors and subcontractors that use confidentiality agreements that prohibit employees from reporting fraud, waste or abuse to investigating government agencies or law enforcement officials. The same provision is included in the appropriations bill for Fiscal Year 2016.

To implement this provision, several federal agencies including the Department of Defense, the Environmental Protection Agency, the General Services Administration and the Department of Veterans Affairs, issued public notices that they cannot and will not contract with any company that restricts employees from reporting fraud, waste or abuse to investigative or law enforcement officials. The Defense Department went one step further. It now requires companies to affirmatively state in their bids that they do not require employees to sign such restrictive confidentiality agreements.

This is a very important addition by the Defense Department, as any company that falsely certifies to the department that it does not require these kinds of agreements could find itself on the wrong side of the False Claims Act. Under the False Claims Act, an individual with evidence that a private company knowingly submitted a false claim to the U.S. government can sue that company on behalf of the government. Those who violate the False Claims Act are on the hook for treble damages and penalties.  Courts have held that payments made by the federal government pursuant to a contract obtained through fraud can give rise to a claim under the False Claims Act.

The False Claims Act isn’t the only federal statute that encourages whistleblowers to come forward.

In response to the financial crises that brought on the Great Recession in 2008, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. The Dodd-Frank Act regulated and imposed reforms on the financial infrastructure of the American economy — banks, investment banks, financial services companies, hedge funds, mortgage lenders, brokers, commodity traders, and public-traded companies.

The Securities and Exchange Commission is the federal agency charged with enforcing federal securities laws like Dodd-Frank. But the SEC cannot enforce the law unless it develops or obtains information that a person or company is violating the law. That’s where whistleblowers come in. 

And that’s why the Dodd-Frank Act created incentives for whistleblowers to come forward with information about financial wrongdoing and to protect whistleblowers from retaliation by those who had engaged in the illegal conduct or wanted to cover it up. To enforce those Dodd-Frank provisions, the SEC enacted Rule 21F-17, which states:

No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement . . . with respect to such communications.

Last April, the SEC flexed its regulatory muscles by pursuing an enforcement action against a publicly-traded company that required employees to sign such restrictive confidentiality agreements. Houston-based Kellogg, Brown & Root, a global technology and engineering firm, agreed to pay a $130,000 fine to the SEC and amend its confidentiality agreements to expressly state that employees are not prohibited from reporting possible violations of federal law to the SEC and other investigatory and law enforcement agencies.

The SEC enforced Rule 21F-17 against Kellogg, Brown & Root even when there was no evidence that the company had used the offending confidentiality agreements to discourage or discipline employees. KBR violated the rule simply by having its employees sign away their rights to cooperate with the government. The SEC was tipped off to the KBR confidentiality agreement by a pre-trial deposition (sworn testimony) in a False Claims Act case filed against the company.

The KBR case also highlights how interconnected these laws are; an order in a False Claims Act lawsuit created precedent to protected future whistleblowers working for companies governed by the Dodd-Frank Act and SEC enforcement rules.