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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.

Background
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.

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Photo of Kris D. Meade Kris D. Meade

Kris D. Meade is co-chair of Crowell & Moring’s Labor & Employment Group. He is also a member of the firm’s Management Board and Executive Committee. He counsels and represents employers in the full range of employment and traditional labor law matters, including…

Kris D. Meade is co-chair of Crowell & Moring’s Labor & Employment Group. He is also a member of the firm’s Management Board and Executive Committee. He counsels and represents employers in the full range of employment and traditional labor law matters, including individual and class action lawsuits filed under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, ERISA, and companion state statutes. Kris represents employers in connection with union organizing campaigns, collective bargaining, labor arbitrations, and unfair labor practice litigation. In 2020, Chambers USA recognized Kris as a leading labor and employment lawyer.

Photo of Christine B. Hawes Christine B. Hawes

Christine B. Hawes is a counsel in Crowell & Moring’s Labor & Employment Group. Christine’s practice focuses on litigation of individual and class actions arising in all areas of labor and employment law, including:

  • Wage-and-hour laws, including the Fair Labor Standards Act, the

Christine B. Hawes is a counsel in Crowell & Moring’s Labor & Employment Group. Christine’s practice focuses on litigation of individual and class actions arising in all areas of labor and employment law, including:

  • Wage-and-hour laws, including the Fair Labor Standards Act, the Service Contract Act, and state and local laws
  • Title VII and state anti-discrimination laws
  • Americans with Disabilities Act
  • Family and Medical Leave Act and related state statutes
  • Federal and state whistleblower statutes, including the False Claims Act
  • Alleged wrongful termination
  • Non-competition agreements and other employee contracts
  • Misappropriation of trade secrets claims

Christine also provides counseling to clients on a wide variety of employment issues, including personnel policies, non-competition/non-solicitation agreements, employee discipline, contract disputes, and alleged retaliation under the False Claims Act, Title VII, the FLSA, and state whistleblower statutes. Christine frequently advises clients on and conducts internal investigations that frequently address employment, ethics, and compliance issues.  Additionally, Christine assists clients with affirmative action compliance, preparing affirmative action plans, analyzing compensation practices, and providing counseling in connection with Office of Federal Contract Compliance Programs audits.

Photo of Charles Baek Charles Baek

Charles Baek is a counsel in Crowell & Moring’s Washington, D.C. office, where he practices in the Government Contracts Group.

Charles represents government contractors in both litigation and counseling matters. His practice focuses on contract claims/disputes under the Contract Disputes Act (CDA), litigation…

Charles Baek is a counsel in Crowell & Moring’s Washington, D.C. office, where he practices in the Government Contracts Group.

Charles represents government contractors in both litigation and counseling matters. His practice focuses on contract claims/disputes under the Contract Disputes Act (CDA), litigation before the Armed Services Board of Contract Appeals (ASBCA), federal regulatory and ethics compliance and due diligence, bid protests before the Government Accountability Office (GAO), and False Claims Act (FCA) investigations. His practice also includes state contracting due diligence and litigation before the Court of Federal Claims.

Photo of Jillian Ambrose Jillian Ambrose

Jillian Ambrose is a Labor & Employment Group associate in Crowell & Moring’s Washington, D.C. office. Prior to joining the firm, Jillian served as a law clerk to Judge Anthony Epstein and then to Judge Steven M. Wellner, both of the D.C. Superior…

Jillian Ambrose is a Labor & Employment Group associate in Crowell & Moring’s Washington, D.C. office. Prior to joining the firm, Jillian served as a law clerk to Judge Anthony Epstein and then to Judge Steven M. Wellner, both of the D.C. Superior Court. Before law school, Jillian was an analyst in the human capital practice of an international consulting firm, where she provided management consulting services to a portfolio of federal agency clients.

Jillian’s practice focuses on litigation of individual and class actions arising in all areas of labor and employment law. She provides counseling to clients on a variety of employment issues, including non-competition/non-solicitation agreements and contract disputes. She also assists clients with affirmative action compliance, preparing affirmative action plans, analyzing compensation practices, and providing counseling in connection with Office of Federal Contract Compliance Programs audits. Jillian has substantial experience in representing employers in wage & hour litigation and in conducting audits and compliance review of employer wage & hour policies and procedures.