Is It Time to Switch Gears? Enforceability of Automotive Company Employee Confidentiality Restrictions

Given the large workforces and importance of intellectual property and trade secrets in the automotive industry, automotive companies rely heavily on confidentiality provisions in employment agreements and employee handbooks. Thanks to a recent enforcement action brought by the U.S. Securities and Exchange Commission (SEC), it may be time to review and revise these confidentiality provisions.

What Happened?

As part of its regular compliance program, an employer routinely conducted internal investigations in response to allegations of potential illegal or unethical conduct. The SEC discovered that the employer conducted interviews with employees as part of the internal investigations and, in connection with the interviews, asked employees to sign form confidentiality agreements that:

(i) prohibited the employee from discussing the interview without prior authorization from the legal department; and

(ii) made it clear that unauthorized disclosures may result in disciplinary action, including termination of employment.

The SEC determined that these confidentiality agreements violated whistleblower protections under federal securities laws and required the company to revise the confidentiality agreements as part of its settlement with the SEC to make it clear that nothing in the agreements would interfere with the employees’ ability to exercise their rights under whistleblower provisions of any federal law or regulations (what we’ll call a “whistleblower carve out”).

Is This a Special Case?

Maybe, maybe not. The facts in this scenario may be distinguishable from the circumstances in which your company typically enters into confidentiality agreements. For example, requiring employees to enter into a confidentiality agreement directly in connection with an investigation following an allegation of wrongdoing may be seen as more egregious than requiring employees to enter into a form confidentiality agreement as a pre-requisite to employment. However, it is possible that the SEC or other enforcement agency could take a similar approach in more “benign” circumstances, bringing into question any confidentiality provision that could be interpreted as interfering with the employees’ ability to exercise their rights under whistleblower provisions.

Is This Relevant if My Company is Not Publicly Traded?

Most likely. The federal securities laws are not the only laws that include whistleblower protections. For example, the Affordable Care Act (ACA) includes whistleblower protections that prohibit employers from retaliating against employees for reporting alleged violations of the ACA’s coverage reforms and tax credit provisions. Because retaliation can include intimidating employees, it is possible that a confidentiality provision that does not include a whistleblower carve out could be interpreted as intimidation (especially if it is clear that the employee could be fired for violating such provision). OSHA has provided further information about the ACA (and other) whistleblower rules.

What Should We Do Next?

• Automotive employers may want to take this opportunity to work with legal counsel to review any confidentiality provisions in their employment agreements, severance agreements, employee handbooks, and other similar material and determine whether the material could be interpreted as interfering with the employees’ ability to exercise their rights under whistleblower provisions of any applicable law or regulations.

Practical Point: Remember that certain whistleblower laws apply different standards to executives and non-executives, so it is possible that the form agreements provided to all employees will have to be amended, but the executive agreements will not.

• If necessary, amend or clarify the materials as appropriate under the circumstances.

Practical Point: In order to ease the administrative burden, consider adopting a blanket amendment instead of amending each individual agreement (if possible). Because the modification lessens the employee’s confidentiality obligations, the employee’s consent to the modification typically is not required.

• Decide how to communicate this change to the affected employees.

Practical Point: Consider explaining that you are simply “clarifying” the materials in response to the SEC.