De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank's Whistleblower Provisions

ABA J. Labor & Employment Law, Vol. 30, No. 1, 2014

34 Pages Posted: 20 Sep 2014 Last revised: 3 Apr 2015

See all articles by Richard Moberly

Richard Moberly

University of Nebraska College of Law

Jordan Thomas

Labaton Sucharow LLP

Jason Zuckerman

Zuckerman Law

Date Written: August 1, 2014

Abstract

In 2010, in the wake of the Financial Crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established a new whistleblower program for the U.S. Securities and Exchange Commission to more effectively detect, investigate and prosecute the kind of financial misconduct that has caused repeated and substantial harm to securities investors. At their core, Dodd-Frank’s whistleblower provisions implement three incentives designed to encourage whistleblowers to report securities fraud to the SEC: the opportunity for whistleblowers to receive substantial monetary awards after they report; the ability to remain anonymous when they report to the SEC; and broad protection from employment retaliation. The basic idea behind this incentive structure is simple: rewarding and protecting whistleblowers will motivate more individuals to report potentially relevant information about securities violations. In response, some companies now appear to be seeking to “counter-act” Dodd-Frank by drafting and enforcing a variety of agreements with their employees that significantly reduce or eliminate the incentives created by Congress to promote SEC whistleblowing. These agreements – which seek to alter the statutory risks and rewards of whistleblowing – have profound potential consequences not only for current and prospective whistleblowers, but also for the success of the Dodd-Frank whistleblower program itself, which depends heavily on the willingness of employees to come forward with information about their current or former employers. The stakes are just as high for employers, who may find themselves facing civil – or in extreme cases, even criminal – liability if they are too aggressive in their attempts to shield information from government authorities. This Article will discuss the enforceability of these increasingly prevalent contractual restrictions on whistleblowing, which we label “de facto gag clauses.” While no court has yet opined on the legality of de facto gag clauses in the Dodd-Frank whistleblower context (at least as of July 2014), this Article argues that SEC rules and key principles of contract, qui tam, employment and securities law strongly suggest that courts will, and should, refuse to enforce agreements that preclude voluntary cooperation with the SEC or materially diminish the incentives created by Congress to promote SEC whistleblowing.

Keywords: whistleblower, Dodd-Frank, whistleblowing, confidentiality agreement, gag clause, SEC, bounty

JEL Classification: K12, K22, K31, K42

Suggested Citation

Moberly, Richard and Thomas, Jordan and Zuckerman, Jason, De Facto Gag Clauses: The Legality of Employment Agreements That Undermine Dodd-Frank's Whistleblower Provisions (August 1, 2014). ABA J. Labor & Employment Law, Vol. 30, No. 1, 2014. Available at SSRN: https://ssrn.com/abstract=2495525

Richard Moberly (Contact Author)

University of Nebraska College of Law ( email )

103 McCollum Hall
P.O. Box 830902
Lincoln, NE 68583-0902
United States
402-472-1256 (Phone)

Jordan Thomas

Labaton Sucharow LLP ( email )

140 Broadway
New York, NY 10005
United States

Jason Zuckerman

Zuckerman Law ( email )

1629 K Street
Suite 300
Washington, DC 20006
United States

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