Confidentiality Clauses in Settlement Agreements are Under Increasing Scrutiny by Regulators

In 2014 regulators increased their focus on the content of employee confidentiality, settlement and separation agreements.  In particular, these regulators have expressed concern about clauses in agreements that may be construed as preventing an individual from cooperating or communicating with an investigatory agency.  

The issue first arose in February 2014, when the Equal Employment Opportunity Commission (EEOC) filed a lawsuit against CVS Pharmacy, Inc.  This suit claimed that CVS’ severance agreement violated Title VII because it allegedly interfered with employees’ rights to file charges, communicate voluntarily and participate in investigations with the EEOC and other government agencies.  The lawsuit was dismissed in October on procedural grounds, but the EEOC has stated that it remains focused on this issue. 

The Securities and Exchange Commission (SEC) entered the fray in March.  The head of the SEC’s Office of the Whistleblower, Sean McKessy, stated that the Commission is “actively looking for examples” of companies using language in confidentiality or separation agreements that discourage an employee from going to the SEC.  Mr. McKessy warned that the SEC would not only go after companies that used such clauses in employee agreements, it would also “go after the lawyers who drafted it,” by “eliminating the ability of lawyers to practice before the Commission.” 

Likewise, in October, the Financial Industry Regulatory Authority (FINRA) – the non-governmental organization that oversees securities firms – issued a Regulatory Notice regarding confidentiality provisions in settlement agreements.  The Regulatory Notice makes clear that confidentiality clauses “cannot be used to prohibit or restrict an individual from initiating communications directly with FINRA or other securities regulators.”  Moreover, FINRA states that confidentiality clauses “should be written to expressly authorize, without restriction or condition, a customer or other person to initiate direct communications with, or respond to any inquiry from, FINRA or other regulatory authorities.” 

The issue has also captured the attention of Congress.  On October 27, 2014, eight members of the House Committees on Financial Services and Oversight and Government Reform sent a letter to the SEC, “to strongly encourage the Commission to enforce its regulations protecting corporate whistleblowers.”  In particular, the Representatives stated that confidentiality agreements “should be structured as narrowly as possible, and that employees “should also be clearly informed that these agreements in no way restrict their right to voluntarily report securities law violations to the Commission.”      

Given this intensifying scrutiny that regulators and lawmakers are placing on settlement agreements, employers should consider reviewing the confidentiality provisions of their employment contracts, separation agreements and releases to ensure that they allow individuals to communicate with regulators and government agencies.

Information contained in this publication is intended for informational purposes only and does not constitute legal advice or opinion, nor is it a substitute for the professional judgment of an attorney.