Employment Agreements That Try to Bar Whistleblowing
Confidentiality terms, severance releases and award-waiver clauses are drafted to protect information. Where they operate to keep a person from telling a federal agency about a violation, the drafting itself becomes the violation.
The rule in short
Rule 21F-17 provides that no person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including by enforcing or threatening to enforce a confidentiality agreement. The commodities rules contain a parallel prohibition. Section 3730(h) separately entitles an employee, contractor or agent who suffers retaliation to reinstatement, double back pay with interest and special damages.
Companies restrict what departing employees may say, and they should. The problem arises when a clause written to protect commercial information also operates to keep a person from telling a federal agency about a violation. Several regimes treat that operation as unlawful regardless of intent, and enforcement has focused on the language of the document rather than on whether anyone was actually silenced.
The rule against impeding a report
Rule 21F-17 under the Securities Exchange Act is the central provision. It states that no person may take any action to impede an individual from communicating directly with Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement with respect to such communications.
Two features make the rule unusually broad. It applies to any person, not only to a registrant or an employer. And it reaches the act of drafting and maintaining a restrictive agreement, so a violation can be established without proof that any employee wanted to report anything. The commodities whistleblower rules contain a parallel provision preserving the right to report and prohibiting interference with it.
The clauses that draw enforcement
Enforcement has clustered around a handful of drafting patterns that appear in ordinary agreements. Each looks reasonable in isolation and each has the same effect in operation.
| Clause | Why it is a problem | Safer form |
|---|---|---|
| Broad confidentiality with no agency carve-out | On its face covers reports to a regulator | Express statement that reporting to a government agency is not restricted |
| Notice to the employer before contacting an agency | Conditions the report on the employer's knowledge of it | No notice condition of any kind |
| Waiver of the right to receive an award | Removes the incentive the statute creates | Preserve the right to an award expressly |
| Certification that no complaint has been filed anywhere | Forces a false statement or a disclosure of a sealed case | Limit the representation to the employee's own claims for relief |
| Blanket return and destruction of all company material | Strips a potential reporter of evidence | Carve out material provided or to be provided to an agency |
A relator with a case under seal cannot sign a certification that no proceeding has been commenced without either lying or breaking the seal. Employers do not know this because they cannot know the case exists, and the clause is usually boilerplate rather than a trap. The relator's answer is to have counsel negotiate the representation down to something truthful, which is possible without revealing anything, and never to sign the clause as written. What may not be said while a case is sealed is covered in the seal period and its extensions.
Releases and prefiling waivers of a qui tam claim
Severance agreements routinely release all claims the employee has against the company. Whether that release reaches a False Claims Act qui tam claim is a separate question, because the claim belongs to the United States rather than to the employee.
Courts have generally declined to enforce a prefiling release against a later qui tam action where the government did not know the underlying facts at the time of the release. The reasoning is that a private party cannot bargain away the government's claim behind its back. Where the government already knew the facts through its own investigation, the public policy objection weakens considerably, and some releases have been enforced on that basis. A release signed after the government has learned everything protects the employer far better than one signed in ignorance.
Retaliation relief under the False Claims Act
Section 3730(h) protects an employee, contractor or agent who is discharged, demoted, suspended, threatened, harassed, or otherwise discriminated against in the terms and conditions of employment because of lawful acts done in furtherance of an action under the section or other efforts to stop one or more violations.
The relief is specified: reinstatement with the same seniority status the person would have had, two times the amount of back pay, interest on the back pay, and compensation for any special damages sustained, including litigation costs and reasonable attorney fees. The claim is brought in the appropriate district court and is subject to its own limitations period, separate from the one governing the underlying fraud claim discussed in the sealed filing procedure.
Protected activity does not require a filed case. Efforts to stop a violation, including internal complaints, can qualify, though courts differ on how clearly the employee must have connected the conduct to fraud on the government rather than to ordinary regulatory noncompliance.
Causation is where these claims are usually won or lost. The employer must have known of the protected activity, which is difficult to establish where the employee never complained internally and the case remains sealed. Employees who reported only to the government, and were then dismissed for reasons the employer documented independently, frequently lose on that point. The strongest records involve a contemporaneous internal complaint, a documented response, and an adverse action that followed closely enough to invite the inference.
The immunity for disclosures to the government
Federal law provides that an individual is not liable under any federal or state trade secret law for disclosing a trade secret in confidence to a federal, state or local government official, directly or indirectly, or to an attorney, solely for the purpose of reporting or investigating a suspected violation of law. The same provision covers disclosure in a complaint or other document filed under seal.
It also carries a notice requirement. An employer must include notice of the immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information, and an employer that fails to do so may not recover exemplary damages or attorney fees under the trade secret statute against that employee. Whether particular material is protected by privilege rather than by confidentiality is a separate question governed by the rules on privileges and waiver. How the various federal award programs treat confidentiality and anonymity is compared in the securities, commodities and tax award programs compared.
Points to carry away
- Rule 21F-17 prohibits any action that impedes direct communication with Commission staff about a possible violation.
- The prohibition reaches enforcing or threatening to enforce a confidentiality agreement against such communications.
- The commodities whistleblower rules contain a parallel prohibition on impeding reports.
- Clauses requiring notice to the employer before contacting an agency draw enforcement.
- A prefiling release of a qui tam claim is often unenforceable where the government did not know the facts.
- Federal law immunizes confidential disclosure of a trade secret to a government official for reporting a suspected violation.
Questions readers ask
Does a company have to volunteer that employees may go to the government?
There is no general obligation to include a carve-out in every document, but agreements that restrict disclosure of company information are read as a whole. Where a confidentiality or severance clause is broad enough on its face to cover a report to an agency, the absence of a carve-out is what makes it an impediment. That is why well-drafted agreements now say expressly that nothing in them limits the right to report possible violations to a government agency or to receive an award for doing so.
Can an employer require an employee to return or destroy documents on departure?
It can ask, and the request becomes a problem when it operates to strip a potential reporter of evidence. Employers have legitimate interests in the return of property and in protecting genuine trade secrets. The safer approach is to preserve the return obligation while excluding material the person has already provided or intends to provide to a government agency, and to avoid representations that the person has retained nothing. Blanket certifications of destruction are the clause that most often causes trouble.
Does an arbitration clause keep a whistleblower claim out of court?
It depends which claim. A qui tam action is brought in the name of the United States, and courts have generally held that an employee cannot commit the government's claim to arbitration by private agreement. A retaliation claim belongs to the employee personally, and arbitration clauses have been enforced against those claims in many settings. The distinction means a single dispute can be split, with the fraud allegations litigated in federal court and the employment claim heard privately.
Sources
- Cornell Legal Information Institute — 17 CFR 240.21F-17, Staff Communications With Individuals Reporting Possible Securities Law ViolationsThe prohibition on impeding communications, including through confidentiality agreements.
- Cornell Legal Information Institute — 17 CFR 165.19, Rights Retained by WhistleblowersThe parallel commodities provision preserving the right to report and barring interference.
- Cornell Legal Information Institute — 31 U.S.C. 3730, Civil Actions for False ClaimsSubsection (h), the retaliation remedy and the relief available to a prevailing employee.
- Cornell Legal Information Institute — 15 U.S.C. 78u-6, Securities Whistleblower Incentives and ProtectionThe statutory award program and the retaliation protection the rule implements.
- Cornell Legal Information Institute — 18 U.S.C. 1833, Exceptions to ProhibitionsImmunity for confidential disclosure of a trade secret to a government official and the employer notice provision.
- United States Department of Justice — The False Claims ActThe government's overview of the statute under which a retaliation claim is brought.
Liberty Law Library is a publication, not a law firm. This article states general rules and cites its sources; it is not advice about any particular case, and the law differs by state and changes over time.
More in Whistleblower Law
Filing a Qui Tam Complaint Under Seal
Under 31 U.S.C. 3730(b) a private relator may sue in the name of the United States. The complaint is filed in camera, remains under seal for at least sixty days, and is not served on the defendant until the court orders it. A copy of the complaint and a written disclosure of substantially all material evidence and information the relator possesses must be served on the government. The United States is the real party in interest throughout.
The Seal Period, Extensions and What May Not Be Said
Section 3730(b)(3) allows the government to move for extensions of the sixty-day seal for good cause, and those motions are made in camera. The seal binds the relator as well as the government: the existence of the action, its contents and the identity of the defendant are not to be disclosed. Breaking the seal does not automatically end the case, and courts weigh the harm to the government, the severity of the violation and evidence of bad faith.
Damages, Trebling and Per-Claim Penalties
Section 3729(a)(1) makes a violator liable for three times the damages the government sustains because of the act, plus a civil penalty for each false claim within a statutory range that is adjusted for inflation under the Federal Civil Penalties Inflation Adjustment Act. Single damages are usually the difference between what the government paid and the value of what it received. Credits for amounts already recovered are applied after the multiplier rather than before it.