Scalia Argues SEC Rule 21F-17 Enforcement Action Imperil Corporate Trade Secrets

Eugene Scalia, a well-respected attorney at the esteemed Gibson, Dunn & Crutcher law firm, has penned an interesting and thought-provoking Op-Ed piece in Monday’s Wall Street Journal.  The piece, linked below and titled “Blowing the Whistle on the SEC’s Latest Power Move”, argues that the SEC’s interpretation of Dodd-Frank generated SEC Rule 21F-17 generates a slippery slope where corporate trade secrets could be transmitted to the government en masse by a self-proclaimed whistle-blower.  This, argues Mr. Scalia, represents an unacceptable risk to corporate secrets.

According to the SEC, KBR (the large Houston-based technology and engineering firm)  apparently required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR’s legal department.  Although Mr. Scalia’s piece didn’t particularize what the KBR agreement provided, this was the commitment KBR required of its employees involved in investigations:

“I understand that in order to protect the integrity of this review I am prohibited from discussing any particulars regarding this interview and the subject matter discussed during the interview, without the prior authorization of the Law Department. I understand that the unauthorized disclosure of information may be grounds for disciplinary action up to and including termination of employment.”

While I would generally agree with Mr. Scalia that there is a risk of agency over-reach and clear abuse were the SEC just to treat whistle-blowers as corporate moles able to tap, without limitation, the proverbial corporate secrets database whenever tasked by their government master – that’s not what appears to have been going on at KBR nor was it implied in the SEC’s enforcement action against KBR.  No – the feature of the KBR confidentiality agreement that generated the SEC umbrage was that the employee needed prior approval of KBR’s legal department before discussing “the subject matter” with anyone outside the company.  And this, the SEC apparently reasoned, sent an impermissible in terrorem message to employees that they could not discuss the “subject matter” with the SEC or the DOJ or other investigative entities.  

The following language is how KBR solved its drafting problem with the SEC through amending and supplementing the above-referenced language that originally required “prior authorization of the Law Department”:

“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”

Anyone who has ever represented or advised a company being investigated by the government is sympathetic with the arguments made and implied by Mr. Scalia that government investigators are not as mindful of the “due” part of “due process” while investigating what is alleged to be a legal violation.   However, in this particular instance, I’ll admit that I don’t agree  the KBR situation and solution should leave corporations shaking in their proverbial boots.  If an investigation is underway and the company wants to keep a lid on its efforts and the matters discussed, it can generate agreements that require that as long as those same agreements are clear what employees are NOT prohibited from disclosing to the government.  My take on this is pretty simple – what was formerly implied in this scenario must now be expressed.