Earlier in 2014, Sean McKessy, Chief of the Office of the
Whistleblower of the United States Securities and Exchange
Commission (the "SEC" or "Commission"), warned
lawyers against using private contracts such as employment
agreements to discourage potential whistleblowers from reporting
alleged corporate misconduct to the SEC and other regulators. In
particular, McKessy's comments cautioned against drafting and
enforcing confidentiality agreements, separation agreements and
employment agreements that condition eligibility for certain
benefits or payments on not reporting company activities to
Those Canadian companies which are under the jurisdiction of
U.S. securities law, and thus subject to the SEC's regulatory
oversight, must be careful when drafting and enforcing
confidentiality agreements and other similar restrictive covenants
in their agreements.
Whistleblower Protection Under the Dodd-Frank Act
The Dodd-Frank Wall Street Financial Reform and Consumer
Protection Act ("Dodd-Frank Act"), which was enacted
in July 2010 in the wake of the financial crisis, made important
changes to the law on whistleblower protection. The Act created
financial incentives for whistleblowers who report securities law
violations to the SEC. More importantly, the legislation enhanced
anti-retaliation protection for whistleblowers.
The Dodd-Frank Act expressly prohibits employers from punishing
an employee for engaging in protected whistleblowing activity. The
Office of the Whistleblower of the SEC has adopted further
whistleblower-protection rules, which prohibit "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
McKessy's comments clarified the SEC's broad
interpretation of whistleblower protection rules under the
Dodd-Frank Act. McKessy warned it would be improper and unlawful to
draft contracts that discourage employees from reporting potential
securities law violations to the SEC.
McKessy has also noted that not only would organizations be
liable for violation of the new anti-retaliation rules, lawyers who
draft the offending provisions may possibly be personally liable
and be barred from practising before the SEC as well.
The SEC has taken an expansive view of who is a whistleblower
and the Dodd-Frank Act's anti-retaliation provisions more
generally. The SEC publicly stated that whistleblowers are entitled
to protection under the Dodd-Frank Act rules regardless of whether
or not they report wrongdoings directly to their employer or
separately to the SEC.
The Office of the Whistleblower and other relevant regulators
are likely to increasingly scrutinize how organizations deal with
confidentiality agreements and similar restrictive covenants. The
stated purpose is likely to be that those provisions do not violate
the broad whistleblower protection rules or weaken the incentive
structure for reporting violation created by the Dodd-Frank Act or
Given the SEC's expansive approach to whistleblower
protection, Canadian companies under the regulatory oversight of
the SEC should review their codes of conduct and existing
agreements. Contracts with current and former employees that
contain confidentiality and non-disparagement provisions could be
an issue, and organizations should ensure that those agreements are
not so broadly worded as to be interpreted as impeding an aspiring
whistleblower's ability or incentive to report wrongdoing.
Companies may wish to confer with counsel about the propriety of
express exclusions for regulatory reporting in restrictive
covenants and employment agreements.
It is uncertain whether broad confidentiality clauses
(prohibiting disclosure to third parties in general) and
non-disparagement clauses (prohibiting the making of disparaging
remarks about the company to third-parties in general) would run
afoul of the anti-retaliation rules. Therefore, organizations must
be particularly cautious about drafting or attempting to enforce
broad confidentiality clauses and non-disparagement clauses that do
not contain an express exclusion for regulatory reporting. The goal
is to ensure that these agreements or clauses will not be construed
as attempts to impede the ability to report proper concerns to
regulators without the threat of retaliation.
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
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