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On January 13, 2017, the FAR Council released a final rule (available here) that: (1) prohibits agencies from contracting with entities that require employees/subs to sign internal confidentiality agreements or statements that restrict the lawful reporting of waste, fraud, or abuse; and (2) requires bidders on federal contracts to certify that they do not utilize such agreements. Starting on January 19, 2017, the rule will apply to all solicitations and contracts using fiscal year 2015 funds and subsequent fiscal year funds, unless the solicitation or contract already contains a comparable provision/clause.

The final rule originated in 2014 when Congress began to focus on internal confidentiality agreements in response to increased media attention sparked by allegations that government contractors were asking employees to sign confidentiality agreements or severance agreements that could have a chilling effect on employees wishing to report fraud, waste, or abuse. Congress took action in December 2014 by adding a restriction on the use of funds to the 2015 Appropriations Act. Section 743 of Title VII of the Appropriations Act prohibited funds from going to any contractor that requires its employees or contractors to sign restrictive internal confidentiality agreements.
The FAR Council began the rulemaking process to implement the requirements set forth in Section 743—and in successor provisions in subsequent appropriations acts—by publishing a proposed rule on January 22, 2016. Pending issuance of the rule, agencies were authorized to issue a class deviation. The Environmental Protection Agency, the General Services Administration, the Department of Veterans Affairs, the Department of the Treasury and the Department of Defense were among the agencies to issue deviations to allow them to immediately incorporate the requirements of Section 743. Accordingly, the requirements of Section 743 may be familiar to contractors that have received work from the agencies that sought deviations, but the final rule has the effect of imposing the requirements across all federal agencies.

Applicability and Key Definitions

Starting on January 19, 2017, contracting officers at all federal agencies will be required to include the following solicitation provisions and contract clauses in resulting contracts:
• 52.203–18 (Prohibition on Contracting with Entities that Require Certain Internal Confidentiality Agreements or Statements—Representation); and
• 52.203–19 (Prohibition on Requiring Certain Internal Confidentiality Agreements or Statements).

To be eligible for a contract award under 52.203–18, an offeror must represent by submission of its offer that it does not require employees or subcontractors to sign internal confidentiality agreements that could restrict them from lawfully reporting waste, fraud, or abuse. The final rule applies to all federal contracts, except personal services contracts with individual workers, regardless of amount, including ones below the simplified acquisition threshold. Contracts for the purchase of commercial items, both special order and off the shelf (COTS) are subject to the final rule, and COs must modify existing contracts to include the new FAR clause before obligating FY 2015 or subsequent FY funds that are subject to the same prohibition on confidentiality agreements. Pursuant to 52.203–19(f), contractors must flow down the clause to subcontracts.

Pursuant to 52.203–19(a), “internal confidentiality agreement or statement” is defined as a “confidentiality agreement or any other written statement that the contractor requires any of its employees or subcontractors to sign regarding nondisclosure of contractor information.” This broad definition could be interpreted to cover a range of documents including: employment agreements, nondisclosure agreements, intellectual property protection agreements, severance agreements with confidentiality and non-disparagement clauses, and confidentiality agreements signed as part of an internal investigation conducted by the contractor.

52.203–19(a) states that the rule does not cover confidentiality agreements arising out of civil litigation, and 52.203–19(d) clarifies that the prohibition against restrictive confidentiality agreements does not contravene requirements applicable to Standard Form 312 (Classified Information Nondisclosure Agreement), Form 4414 (Sensitive Compartmented Information Nondisclosure Agreement), or any other form issued by a Federal department or agency governing the nondisclosure of classified information. Thus, contractors can continue to utilize these forms and remain in compliance with the final rule.

In an important clarification from the proposed rule, the final rule makes clear that the rule only requires contractors to make a prospective, and not retrospective, representation. When the proposed rule was published, there was some concern that contractors would need to locate and review all existing agreements to see if existing agreements were compliant. The final rule clarifies that no retrospective representation is required. Rather, pursuant to 52.203–19(c), contractors can make a blanket notice of non-enforcement—i.e., contractors can inform employees that any prohibitions or restrictions in preexisting confidentiality agreements are no longer in effect to the extent that they are in conflict with the final rule.

Mitigating Risk

During the comments period, one respondent requested that the FAR Council provide examples of “Safe Harbor” language that contractors could use to comply with the rule. The respondent proposed the following language:

Neither the confidentiality provision contained in the [insert title of agreement, statement, policy], nor confidentiality provisions contained in any existing employment or contract with [insert name of contractor] shall be construed to prohibit or otherwise restrict you, as an employee or {sub}contractor of [insert name of contractor] from lawfully reporting waste, fraud, or abuse to a designated investigative or law enforcement representative of a federal department or agency authorized to receive such information under the procurement.

Although the FAR Council declined to prescribe specific language, it acknowledged that the sample language included in the respondent’s comments contained “appropriate language that could be included in an internal confidentiality agreement or statement.” Going forward, contractors might consider using this language in a wide array of documents from nondisclosure agreement to severance agreements as a way to mitigate risk.

Next-Steps for Contractors

Contractors with overly restrictive confidentiality agreements could face several consequences under the final rule. For example, if a contract awardee is in violation of the final rule, it could lose the award in a bid protest if a protester discovers the awardee’s noncompliance and asserts that funds cannot be used on the contract. If the restrictive confidentially agreement comes to light during contract performance, it could be grounds for contract termination. Moreover, by submitting an offer, the contractor is making a representation and expressly certifying that its confidentiality agreements do not restrict whistleblower reporting and if found to be false, such a representation could expose the contractor to False Claims Act liability under the implied certification theory of liability.

Moreover, in recent years, there has been increased scrutiny of internal confidentiality agreements from investigative and enforcement agencies. For example, both the State Department Inspector General and the Special Inspector General for Afghanistan Reconstruction (SIGAR) have investigated the issue, and in 2015, the Securities and Exchange Commission announced its first-ever enforcement action against a company for having confidentiality agreements with restrictive provisions in violation of SEC Rule 21F-17.

Given these risks, contractors would be well served to take a hard look at the internal confidentiality agreements that they ask employees, subcontractors, separated employees, and independent contractors to sign. Lastly, contractors may also want to consult with counsel to ensure that internal confidentiality agreements comply with the final rule because contractors could be signing up for a lot of headaches if their employees or subcontractors are signing overly restrictive confidentiality agreements.