Federal contractors who require employees to sign confidentiality agreements—including those selling only commercial products or in small quantities—need to examine their agreements closely. For the last two years, the government has sought to prohibit confidentiality agreements that restrict employees’ ability to report fraud, waste, or abuse to “designated investigative or law enforcement representative[s]” for federal agencies authorized to receive that information.”[1] Most recently, the Department of Defense issued a new class deviation on November 14, 2016 prohibiting DoD from using funds from recent appropriations to contract with companies using overbroad confidentiality agreements.[2] While these restrictions may not be new, the deviation’s broad application and significant consequences mean that contractors should give close scrutiny to ensure any agreements with employees comply with the prohibition.
Continue Reading Confidentiality Agreements Continue To Pose Potential Compliance Trap for Contractors
Confidentiality Agreements
SEC and State OIG Allege that Contractors’ Policies, Procedures, and Agreements Suppress Whistleblowing
In a span of two days, two separate agencies took action against contractor policies and agreements that may discourage whistleblowers. On March 30, 2015, the U.S. Department of State Office of Inspector General (“State OIG”) issued a report contending that certain contractor policies and agreements have a “chilling effect” on whistleblowers. On April 1, 2015, the Securities and Exchange Commission (“SEC”) imposed a fine of $130,000 on a contractor for requiring confidentiality agreements that allegedly impede individuals from disclosing securities law violations. Given recent scrutiny, contractors should consider reviewing policies, procedures, forms, agreements, or practices that may impede employees’ ability to report instances of fraud, waste, and abuse.
As we discussed recently, the SEC’s April 1 order was based on a violation of SEC Rule 21F-17, which prohibits “imped[ing] an individual from communicating directly with [the SEC] about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement. . . .” The contractor that received the fine required employees to sign a confidentiality agreement after discussions in internal investigations. Specifically, the confidentiality agreement prohibited employees from “discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department.” The SEC found that this provision, coupled with a statement that such impermissible disclosures may be grounds for termination, violated Rule 21F-17, even though it was not aware of any evidence that the provision had been enforced.
State OIG similarly took issue with certain contractor confidentiality agreements and policies. State OIG, in analyzing the practices of the 30 largest State Department contractors, faulted 13 contractors for having policies that have “a chilling effect on employees who wish to report fraud, waste, or abuse. . . .” Specifically, State OIG criticized policies instructing employees to “consult with the Legal Department” or their supervisor before answering government investigators’ questions or handing over documents, or requiring consultants receiving subpoenas or other judicial demands for contractor confidential information to provide “prompt written notice” to the contractor in order to permit the contractor from seeking a protective order. State OIG also flagged separation and employment agreements that may have the same “chilling effect”—citing agreements prohibiting statements that could be “derogatory or detrimental to the good name or business reputation” of a contractor.…