Workplace secrecy agreements appear to violate federal whistleblower laws

In November 2012, the U.S. Department of Energy asked contract employees at the Hanford plutonium processing plant in Washington state to take an unusual oath.

The DOE wanted them to sign nondisclosure agreements that prevented them from reporting wrongdoing at the nation’s most contaminated nuclear facility without getting approval from an agency supervisor. The agreements also barred them from using any information for financial gain, a possible violation of federal whistleblower laws, which allow employees to collect reward money for reporting wrongdoing.

Donna Busche reluctantly signed the agreement.

“It was a gag order,” said Busche, 51, who served as the manager of environmental and nuclear safety at the Hanford waste treatment facility for a federal contractor until she was fired in February after raising safety concerns. “The message was pretty clear: ‘Don’t say anything to anyone, or else.’ ”

The company that fired Busche, URS, has said her termination was unrelated to her whistleblowing. Busche and another employee testified before Congress in March at a hearing called by Sen. Claire McCaskill (D-Mo.) to examine the handling of whistleblowers at Hanford.

An Energy spokesman denied that the nondisclosure agreements violated federal law.

“The DOE fully complies with the law,” Brendan Daly said. “We not only encourage but require contractors to report waste, fraud and abuse, with no retaliation.”

Lawyers who represent whistleblowers like Busche say they are seeing a rise in the use of overly restrictive nondisclosure agreements, which prevent employees from reporting fraud, even to government investigators. The agreements incorporate language that goes beyond those that had traditionally protected proprietary information, the attorneys said. In recent months, agreements criticized as overly restrictive have surfaced at Kellogg, Brown and Root, one of the nation’s largest defense contractors, and International Relief and Development, a nonprofit organization in Arlington County, Va. The nonprofit collected more than $1 billion in tax dollars for war-related projects funded by the U.S. Agency for International Development.

The Securities and Exchange Commission is investigating the agreements at KBR, and the Special Inspector General for Afghanistan Reconstruction is examining the agreements used by IRD. Both companies have denied wrongdoing, and IRD changed the wording of its agreements after they were written about in The Washington Post.

Fear of retaliation for reporting fraud in the workplace is on the rise, according to surveys of federal employees and workers on Wall Street. The U.S. Office of Special Counsel is investigating reports that the Department of Veterans Affairs retaliated against 37 workers who had come forward with allegations of wrongdoing. Some of those employees had tried to report problems with the VA’s medical appointment scheduling system, which is now the subject of a growing national controversy.

The federal government has been encouraging whistleblowers to come forward and trying to protect them since the Civil War, when Congress passed the False Claims Act to punish war profiteers. Under the act, whistleblowers are entitled to collect a percentage of the fraud they uncover. In one of the largest such cases, American banker Bradley Birkenfeld reported secret deposits by U.S. citizens in the Swiss bank UBS. In 2012, he collected a $104 million bounty.

Other famous whistleblowers include Daniel Ellsberg, who leaked the Pentagon’s secret history of the Vietnam War to the New York Times; Karen Silkwood, who reported safety issues at a nuclear facility run by Kerr-McKee and died in a mysterious car crash; and A. Ernest Fitzgerald, an Air Force official during the Nixon administration who blew the whistle on widespread fraud at the Pentagon, including $400 hammers and $600 toilet seats.

Pressure to bolster whistleblower laws and provide more protection for those who come forward mounted after reports of fraud in the banking and financial services industries that led to the Great Recession of 2007-09. In 2010, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which established the Office of the Whistleblower at the SEC. The law also created a bounty program at the SEC to pay whistleblowers.

On June 16, the new SEC whistleblower office announced that it had filed its first civil case, involving a whistleblower who accused a hedge fund of retaliation after the whistleblower reported improper trading activity. The hedge fund settled by paying a $2.2 million fine.

Nondisclosure agreements traditionally have been used to prevent employees from going to competitors and taking trade secrets with them. But lawyers for whistleblowers say they are seeing a dramatic increase in the number of potentially illegal agreements employees are being asked to sign since the Dodd-Frank law went into effect.

“Corporate America is becoming far more sophisticated and aggressive in its efforts to discourage people from coming forward and reporting externally,” said Jordan A. Thomas, who helped to establish the SEC’s whistleblower office as an assistant director there and now works for a New York law firm, Labaton Sucharow. One of his clients is the hedge-fund whistleblower.

Thomas said he has other clients who work for Wall Street firms that are under investigation by the SEC and were asked to sign overly restrictive nondisclosure agreements that prohibit or discourage them from cooperating with federal investigators.

Whistleblower experts say corporations are trying to shield themselves after the Dodd-Frank law by creating rigid internal reporting rules, such as requiring people to report wrongdoing to their supervisors at work before going to outside investigators. Companies are also asking workers to sign agreements that bar them from speaking out or benefiting from the bounty program.

“We are seeing a marked increase in an effort by employers to prevent their employees from speaking to regulators,” said David J. Marshall, a partner at Katz, Marshall & Banks, a whistleblower law firm in Washington. “As these whistleblower programs have grown more prominent, we have seen a growth in the number of types of agreements. They have a truly chilling effect on employees coming forward.”

SEC officials say they are taking the reports seriously.

“I’m very concerned about these kinds of agreements,” said Stephen L. Cohen, associate director of the Division of Enforcement at the SEC. “It is likely that a lot of people are not coming to us because of these agreements. Anything that inhibits a person’s desire to come forward to tell us about violations of the law is deeply troubling.”

The SEC prohibits corporations from preventing workers from communicating with the agency about possible securities-law violations, “including enforcing, or threatening to enforce, a confidentiality agreement,” according to agency regulations.

Sen. Charles E. Grassley, (R-Iowa), a leading advocate for whistleblowers, said he has discovered that most federal agencies have been failing to comply with anti-gag provisions of the Whistleblower Protection Enhancement Act. Under the 2012 act, federal agencies are required to notify employees that they are obligated to report fraud allegations, even if they have signed nondisclosure agreements.

Grassley’s office surveyed 15 Cabinet-level departments covering much of the federal workforce and found that most have not made that message clear to their workers.

“More than ever I’m hearing from whistleblowers about nondisclosure agreements being forced upon them by federal agencies.” Grassley said. “It’s a disturbing trend because federal law protects their right to make protected disclosures to Congress and inspectors general, among others. These agreements only serve to silence whistleblowers for fear of retribution.”

After the passage of Dodd-Frank and an earlier reform bill, the Sarbanes-Oxley Act of 2002, which imposed strict financial disclosure requirements on companies and improved protections for whistleblowers, U.S. corporations found themselves in uncharted legal territory, employment law experts say.

Many corporate executives say the Dodd-Frank legislation will discourage employees from reporting problems within their own companies to cash in on the SEC bounty program. And it could inspire employees to concoct fraudulent allegations, the executives say.

Employment lawyers say those fears may be unfounded.

“What we’ve seen is a siege mentality at corporations, where there is a fear that there will be a rush of people running to the authorities,” said Donna Boehme, the former chief compliance officer for BP who is now a leading national expert in the corporate compliance field. “Companies that care, they want people to come forward and they want people to feel safe. Companies that don’t care, they intentionally create a chilling effect.”

Boehme cited the nondisclosure agreements at KBR as a significant case study for corporate compliance officers and whistleblower lawyers.

In 2005, KBR contract employee Harry Barko, who was based in central Iraq, came forward to say he had witnessed fraud in a multibillion-dollar program awarded to the company to provide support services on U.S. military bases in Iraq. After Barko complained internally, he said his computer was confiscated at the request of the company’s legal department in Houston. He said KBR then tried to transfer him from the Al Asad Air Base to Baghdad.

“I was in the cross hairs,” Barko said in a recent interview.

He said he left Iraq, contacted a Washington law firm that specializes in whistleblower cases and filed a lawsuit against KBR and its parent company at the time, Halliburton. The companies are no longer affiliated. KBR has denied wrongdoing and is seeking to have Barko’s lawsuit dismissed.

Earlier this year, during a deposition in the lawsuit, KBR’s vice president of legal affairs disclosed the existence of a three-paragraph nondisclosure agreement the company had been using for internal fraud investigations.

The agreements prohibited employees seeking to report fraud from discussing their allegations without authorization from KBR’s general counsel. Employees also were warned that violations of the agreements could result in “termination of employment.”

KBR officials said the agreements were designed to protect the integrity of the internal review process, not to cover up wrongdoing. They also noted that KBR employees are encouraged to report allegations of fraud.

Since the agreements surfaced in February, Barko’s lawyer, Stephen M. Kohn, has been trying to force KBR to disclose all reports of fraud the company received relating to the logistics contract. KBR attorneys argued that those reports were protected by attorney-client privilege and should not be released.

A federal judge ruled earlier this year that the agreements were not protected, but a three-judge appellate court panel on Friday sided with KBR. Kohn said he plans to appeal.

While the KBR agreements use direct language, others that have been surfacing in the workplace are more subtle, whistleblower lawyers say. Some instruct employees to report wrongdoing to the company before alerting an outside agency. Others tell employees that they cannot collect monetary awards for fraud they uncover.

“There has been a shift from the traditional, sweeping gag orders to more disingenuous variations of these agreements,” said Tom Devine, legal director of the Government Accountability Project, which represents numerous whistleblowers, including former National Security Agency contractor Edward Snowden. “The techniques are becoming much more sophisticated, but they have the same chilling effect.”

Cohen, the SEC enforcement official, said his agency is paying attention to the kinds of nondisclosure agreements employees are being asked to sign.

“We have our eyes wide open,” Cohen said.

Belval is a fellow at the Investigative Reporting Workshop at American University.