Confidentiality Agreements Create Challenges

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Federal contractors who require employees to sign confidentiality agreements — including those selling only commercial products or in small quantities — need to examine their agreements closely.

The Defense Department issued a new class deviation Nov. 14 prohibiting it from using funds from recent appropriations to contract with companies using overbroad confidentiality agreements. It implements Section 743 of the Consolidated Appropriations Act, 2016 (Pub. L. 114-113) and successor provisions carried forward into subsequent continuing resolutions, including the most recent version.  

While these restrictions may not be new, the deviation’s broad application and significant consequences mean that contractors should give close scrutiny to ensure all agreements with employees comply with the prohibition.

For the last two years, the government has sought to prohibit confidentiality agreements that restrict employees’ ability to report fraud, waste or abuse to appropriate officials within federal agencies. The Defense Department previously issued a similar class deviation in February 2015 and the Department of Veterans Affairs issued its own class deviation in April 2015. In addition, the Federal Acquisition Regulation Council released a proposed rule Jan. 22, 2016 that, if adopted, would impose a government-wide prohibition on contracting with companies that limit the ability of employees or subcontractors to lawfully report fraud, waste and abuse to the government.

Meanwhile, other federal agencies, such as the Securities & Exchange Commission and Department of Labor, have taken steps within their own spheres of influence to crack down on agreements that, in their view, potentially stifle whistleblower activity.

The DoD’s recent class deviation prohibits its agencies from using appropriated funds to contract with an entity whose confidentiality agreement prevents employees from reporting fraud, waste or abuse through the appropriate channels.

The deviation does not provide a clear explanation of what constitutes an offending agreement; instead it makes the broad statement that DoD cannot contract with an entity that requires employees or contractors of such entity seeking to report fraud, waste or abuse to sign internal confidentiality agreements or statements prohibiting or otherwise restricting such employees or contractors from lawfully reporting such waste, fraud or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information.

Given the potential for a government agency enforcing this restriction to adopt an expansive interpretation to what types of provisions “otherwise restrict” lawful reports of fraud, waste or abuse and may therefore have the potential effect of stifling whistleblower reporting, the safest course of action for contractors may be to include a safe harbor provision in any confidentiality agreement that explicitly mirrors the prohibition discussed in the deviation.

The class deviation further requires contracting officers to include two new Federal Acquisition Regulation System clauses in any contract or solicitation using these appropriated funds: DFARS 252.203-7994, Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements – Representation, DEVIATION 2017-O0001, Nov. 2016; and DFARS 252.203-7995, Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements, DEVIATION 2017-O0001, Nov. 2016.  

For existing contracts, it requires contracting officers to modify the contracts to incorporate these provisions. This includes all contracts regardless of the contractor’s size, the commercial status of the products or services or the dollar value.

These new clauses contain a number of significant provisions. First, the mere submission of an offer constitutes a representation that the contractor does not require its employees to sign agreements preventing the employee to report waste, fraud or abuse.

Second, contractors must notify their employees that any prohibitions and restrictions covered by this clause are no longer in effect.

Finally, agreements required to protect classified information are exempted from these requirements.

The consequences of noncompliance with the new class deviation are significant: a contractor in violation of the rule’s requirements would be, in effect, immediately debarred and disqualified from receiving a federal contract award — no matter how well-positioned it might be to perform the contract.

Further, the deviation raises the risk of False Claims Act liability because the mere submission of an offer constitutes an affirmative representation that the contractor does not prevent or otherwise restrict whistleblowing to the government. If that representation is subsequently determined to be untrue, some government regulators, federal prosecutors or qui tam relators could assert that the contractor secured the contract by “fraudulent inducement.”

This risk is exacerbated by the immediate effective date of this class deviation.  Thus, it is important that contractors carefully assess their compliance with the class deviation and appropriately caveat any proposals that are submitted before full compliance is achieved.

The class deviation’s broad application compounds these issues. The class deviation is not limited to large, sophisticated contractors. It applies to any contractor doing business with the Department of Defense — commercial contractors, small businesses, and small-dollar value contractors alike.

All defense contractors should be prepared to confirm that their employment, intellectual property, non-disclosure and similar agreements with employees and subcontractors clearly state an exception to the standard requirements to keep sensitive commercial information confidential that allows for reports of fraud, waste or abuse to relevant agencies.  

Lindsay Burke is vice chair of the employment practice and Kevin T. Barnett is an associate in the government contracts practice group at Covington & Burling LLP.

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