The New Whistleblower's Handbook
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• Restricts an employee’s “ability to provide information to the government, participate in investigations, file a complaint, or testify in proceedings”;
• Requires an employee “to notify his or her employer before filing a complaint or voluntarily communicating with the government”;
• Requires an employee “to affirm that he or she has not previously provided information to the government or engaged in other protected activity, or to disclaim any knowledge that the employer has violated the law”;
• Requires an employee “to waive his or her right to receive a monetary award from a government-administered whistleblower award program for providing information to a government agency.”
The SEC Follows Macktal
On August 12, 2010, just weeks after the president signed the Dodd-Frank Act, representatives of the Securities and Exchange Commission met with the National Whistleblower Center (NWC) to discuss whistleblower rules being drafted by the Commission. The NWC explained how the Commission had the legal authority to ban retaliation against whistleblowers and prohibit restrictive nondisclosure agreements. At the heart of the NWC’s argument was legal precedent that treated retaliation not simply as an employment matter, but as a major regulatory concern. If companies could restrict or intimidate employees from providing information to regulatory authorities like the SEC, the government would not be able to do its job: protecting the public.
The SEC agreed. In its final rules it affirmed its authority to police corporations that tried to use their economic power to threaten or punish whistleblowers. One of the key SEC rules outlawed restrictive nondisclosure agreements. The SEC adopted the Macktal rule. Known as Title 17 C.F.R. § 240.21F-17, the rule 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.”
The Commission put teeth into this regulation. On April 1, 2015, the SEC ruled that any publicly traded company that requires employees to sign nondisclosure agreements in violation of Rule 240.21F-17 is also in violation of the Securities and Exchange Act and is subject to fines and penalties. In a paradox of history, Kellogg Brown & Root (or KBR), the same company that had forced Mr. Macktal to sign a restrictive settlement agreement back in the 1980s, had once again resorted to using illegal nondisclosure agreements. This time the company compelled employees who had information that KBR was cheating on its Iraq war contracts to sign restrictive nondisclosure agreements, prohibiting employees from discussing their concerns about bribery and fraud in its lucrative war contracts with “anyone” without the approval of corporate attorneys. When a whistleblower asked the SEC to protect employees from these types of abusive contracts, the Commission did not hesitate to strike down the KBR agreement. The Commission not only ruled that the agreement was illegal but also fined KBR $130,000 for making an employee sign it. KBR paid the fine. This precedent triggered numerous companies to change their severance and settlement agreement terms to specifically permit communications to the SEC and other government agencies. Companies that fail to follow the KBR ruling have been subsequently fined.
Restrictive Settlements and Public Policy
The Macktal rulings remain good law and based on the actions of the Securities and Exchange Commission, among other government agencies; it is now widely accepted. However, in the past, some courts have not been as aggressive in policing settlement abuses. Employees have been targeted with countersuits for settlement violations, and companies have gone into court for injunctions prohibiting employees from releasing embarrassing information.
For example, the Brown & Williamson Tobacco Corporation used a confidentiality agreement signed by its former vice president for research and development, Jeffrey Wigand, to file lawsuits against him in a pro-Tobacco local circuit court in Kentucky. Brown & Williamson “legally” harassed Wigand through this lawsuit and threatened him with ruin in order to stop his truthful disclosures. The company wanted to stop Wigand from talking to the news media and testifying in court concerning his former employer’s misconduct in adding dangerous chemicals to tobacco and then lying about the health risks of its products.
The Wigand agreement was not unique. There are numerous other instances where wrongdoers hid serious abuses from the public eye, sometimes for years, through the misuse of secrecy agreements, including “sexual abuse by Catholic priests, Bridgestone/Firestone tires failing on Ford SUVs, health risks from the Dalkon Shield and silicone breast implants, exploding fuel tanks on General Motors pickup trucks, and hazardous chemical spills.”
Whether a restrictive settlement agreement is enforceable requires a court to determine if the agreement violates “public policy.” The U.S. Supreme Court, in Town of Newton v. Rumery, held that a contract may be “unenforceable if the interest in its enforcement is outweighed” by “public policy.” Precisely what restrictions may violate “public policy” is an open question in most jurisdictions. However, the precedent in federal court weighs heavily against enforcing overly restrictive employment contracts, or settlements that restrict the ability of an employee to provide information to federal regulatory or law enforcement agencies.
Under the False Claims Act, a number of courts have prevented (or limited) companies from using private agreements to interfere with the ability of the government to learn about contracting fraud. As one court explained:
It is in the Government’s best interest to gain full information from the relator. To enforce the release . . . would ignore the public policy objectives spelled out by Congress in the FCA and would provide disincentives to future relators. . . . [E]nforcing the release and indemnification clauses would encourage individuals guilty of defrauding the United States to insulate themselves from the reach of the FCA by simply forcing potential relators to sign general agreements invoking release and indemnification from future suit.
But even in the context of the FCA, courts have upheld broad general releases that have prohibited employees from filing qui tam cases. These courts have ruled that if the government had prior knowledge of the frauds, and did not need the information from the relator, private contractual releases of FCA claims could be enforced. Although this rule appears fair on its face, how can the United States or a court ever be sure that the employee has in fact provided all of his or her information to the government before such materials are actually provided to the United States?
Mandatory Arbitration Agreements
The use of settlement agreements to directly prevent employees from testifying or blowing the whistle to government agencies has been severely criticized; and based on the sustained legal attack on this process, the ability of a corporation to enforce such agreements is in doubt. But less obvious methods of using private contractual agreements to restrict employee rights are still widely used, and some with great success.
The most common such contracts are preemployment arbitration agreements. These agreements are, on their face, neutral. They do not require employees to waive rights, but they do require employees to utilize arbitration procedures to litigate their claims. Mandatory arbitration agreements can block employee access to courts, requiring employees to forgo litigation in favor of arbitration proceedings. Many employers require prospective employees to sign mandatory arbitration agreements as a condition of employment.
If a claim is subjected to arbitration, many basic due process rights available in court proceedings simply do not exist. There is never a jury, and an employee does not have his or her case heard by a professional judge. Instead, only an arbitrator decides the case, and the proceedings are often conducted under confidentiality rules. The rules of procedure are also determined by the terms of the private contract and can be extremely tilted in favor of the employer. These agreements are very hard on whistleblowers, as corporate arbitrators may not be sympathetic to the very notion that employees should be blowing the whistle.
Congress has recently responded to the abusive use of arbitration agreements and employment contracts. The Dodd-Frank Wall Street Reform and Consumer Protection Act contains a number of provisions that prohibit the use of contracts to undermine whistleblower rights, and it specifically prevents companies from using preemployment arbitration agreements to block court access. Both the commodities whistleblower law and the Sarbanes-Oxley Act make it crystal clear that abusive private contracts, including mandatory arbitration agreements, cannot be used to thwart an employee’s right to blow the whistle: “The rights and remedies provided for in this section [the securities whistle-blower law] may not be waived by any agreement, policy, form, or condition of employment, including a predispute arbitration agreement.”
If an employee whistleblower signed a mandatory arbitration agreement, it is imperative that he or she carefully review the terms of the agreement to determine what causes of action are required to be arbitrated and whether or not his or her whistleblower claim is covered. Also, the employee should do a careful check of the language of the federal laws to see if they contain provisions, such as those found in the Dodd-Frank Act and the Sarbanes-Oxley Act, that prohibit employers from enforcing mandatory arbitration agreements.
Mandatory arbitration agreements do not work in the context of qui tam filings. If an employee files an IRS, securities, or commodities qui tam, the employer may never even learn the identity of the employee, and there is simply no court proceeding for the company to block. Even the Supreme Court recognized that private arbitration agreements cannot be used to prevent federal agencies from filing lawsuits in U.S. district court to benefit the public interest, even if an employee will directly benefit financially from that lawsuit.
What Is the Best Response to Restrictive Employment Contracts or Settlement Proposals?
In weighing whether or not to blow the whistle, it is imperative not only to review the laws that provide protection, but also any signed agreements that may restrict these rights. These contractual agreements may require arbitration of disputes and contain other restrictions on the use of corporate property or the confidentiality of “trade secrets.” Employment agreements that may impact a whistleblower case are typically contained in the following document groups:
• Agreements and waivers contained in an employee’s application packet or in the materials companies request new employees to sign as a condition of being hired;
• Special confidentiality agreements or agreements to protect trade secrets (Note: Under the Protect Trade Secrets Act, Congress created specific procedures permitting employees to blow the whistle on trade secret information. This law is explained in Rule 4.);
• Employee handbooks;
• Company compliance materials and ethics handbooks;
• Waivers contained in a severance agreement;
• An agreement to arbitrate employment disputes;
• The terms set forth in a settlement agreement.
Agreements between the employee and the employer must be carefully weighed in deciding the best forum to use in trying to vindicate the employee’s rights. Some of these agreements may be enforceable, others not. Some of these agreements may actually violate federal law. Under the new SEC rule, employees can file a formal charge against publicly traded companies that require employees to sign restrictive agreements. The safest approach is to understand how the employer may use these agreements to undermine a whistleblower’s case and how best to defend (or avoid) against any such attack long before it is launched.
Beware of Waivers
The reasons an employee accepts a settlement agreement, signs a mandatory arbitration agreement, or enters into other contractual agreements with his or her employer are simply too complex to evaluate in any general analysis. Employees often have good reasons for entering into agreements that, on their face, appear very restrictive. Without a doubt, reaching a fair settlement in a whistleblower case should be a major goal of any reasonable employee advocate. Even if an employee accepts a highly restrictive agreement, the odds are it may not be enforceable if the employee needed to provide law enforcement authorities additional information on wrongdoing. Settlements are normally very good and bring to a close a very painful episode in an employee’s life. But employers will use their superior economic bargaining position to try to gain whatever short-term benefits they can. When companies overreach, it is up to the courts, the Department of Labor, or the SEC to do their job and protect the public interest.
But there is good news concerning restrictive employment agreements. Any employer who requires an employee to sign an agreement not to disclose potential crimes to the government is in violation of numerous laws, including the Securities Exchange Act and the federal obstruction of justice laws. Paradoxically, if an employer asks you to sign away your rights to blow the whistle to the government, such an offer (or agreement) may actually strengthen your whistleblower claims. Restrictive waivers will be an eye-opener for federal investigators and could result in sanctions against the company that offered the hush money deal.
PRACTICE TIPS
The following are key cases on enforcement of settlement and arbitration agreements:
• Town of Newton v. Rumery, 480 U.S. 386 (1987) (defining “public policy”)
• EEOC v. Astra, 94 F.3d 738 (1st Cir. 1996) (agreement cannot bar filing charge)
• CL&P v. SOL, 85 F.3d 89 (2nd Cir. 1996) (restrictive agreement as adverse action)
• Macktal v. Brown & Root, U.S. Department of Labor Case File 86-ERA-23
• U.S. v. Purdue Pharma, 600 F.3d 319 (2010) (releases under False Claims Act)
• Gilmer v. Interstate, 500 U.S. 20 (1991) (leading case requiring mandatory arbitration of employment claims)
• In the Matter of KBR, Inc., Securities and Exchange Commission File No. 3-16466 (April 1, 2015) (SEC decision sanctioning company for restrictive nondisclosure agreement)
• Federal Acquisition Regulation prohibiting use of federal funds for restrictive NDAs. 82 Federal Register 4717 (January 13, 2017)
• Rules prohibiting restrictions on the right of federal employees to communicate with Congress or file whistleblower claims. Public Law No. 114-113 § 713 (2015); Public Law No. 112-199 § 115(a)(1) (2012)
RULE 29Politics Is Poisonous
Whistleblower cases are politically charged. Allegations raised by employees often embarrass elected officials, political appointees, or well-connected special interests. Whistleblowers are individuals who lack the influence or financial resources comparable to those to whom they are reporting. When evaluating laws that protect whistleblowers, it is critical to ask whether the available procedures are sufficient to mitigate the potential adverse consequences of political interference.
Whistleblowers need to identify and use laws that are as independent as possible. Some of the early whistleblower statutes, such as the Occupational Health and Safety Act (1970), the six environmental whistleblower laws (passed between 1971 and 1980), and the Civil Service Reform Act (1978) are susceptible to political pressure. These laws are administered by executive agencies and ultimately report to either a Cabinet Secretary or a Board appointed by the President. The right to judicial review is limited, and none of these laws allow whistleblowers to file a case in federal district court. Their deficiencies gave federal whistleblower protection a bad name. Cases were delayed within hostile agencies for years, and prosecutors refused to file claims on behalf of the employees they were supposed to defend. In some cases, the officials responsible for “protecting” whistleblowers turned against th
em and used their positions to retaliate.
Given that politicians and special interests often view whistleblowers as a threat, it is important for whistleblowers to determine which laws are best shielded from political pressure. The following is an overview of potential traps for whistleblowers and laws that provide maximum independence.
Executive Agencies
Under U.S. law, various agencies are required to appoint persons whose job it is to implement whistleblower protections. By definition, these executive-appointed employees can be biased or political. Some of these appointed officials have done a good job protecting employees; others have disgraced their positions.
Office of Special Counsel. This is the most controversial whistleblowerwatchdog position. The Special Counsel is appointed by the president for a five-year term and has authority to enforce the Whistleblower Protection Act (the law covering most federal employees). The Counsel can prosecute federal agencies that retaliate against employees. The Special Counsel has the discretion to do nothing to help a whistleblower, and some persons who have held this office have used it to undermine the law. The most notorious case concerned Mr. Peter Bloch, the Special Counsel appointed by President George W. Bush. He was criminally indicted and convicted of contempt of Congress and destroying evidence concerning his misconduct as Special Counsel. The criminal destruction of documents occurred after Mr. Bloch, was accused of engaging in retaliation.
President Obama’s appointment as Special Counsel took steps to rehabilitate the reputation of the office and initiated various actions to protect whistleblowers. President Trump will appoint the next Special Counsel, subject to confirmation by the Senate.