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Protections for whistleblowers from overly expansive non-disclosure agreements (NDAs) aimed at preventing whistleblowers from providing information to law enforcement and regulators have been expanding exponentially in the past year. The Securities and Exchange Commission’s (SEC) enforcement of Rule 21F-17(a) has gained teeth by increasing the monetary sanctions for enforcement. The Commodity Futures Trading Commission (CFTC) took its first enforcement of Regulation 165.19(b) against Trafigura for the use of NDAs meant to silence whistleblowers. The latest agency to take action against overly expansive NDAs is the Consumer Financial Protection Bureau (CFPB), which has announced that their employee protection regulation applies to NDAs that seek to silence whistleblowers.
Section 1057 of the Consumer Financial Protection Act (Section 1057) says that:
No covered person or service provider shall terminate or in any other way discriminate against, or cause to be terminated or discriminated against, any covered employee or any authorized representative of covered employees by reason of the fact that such employee or representative, whether at the initiative of the employee or in the ordinary course of the duties of the employee (or any person acting pursuant to a request of the employee), has—
(1) provided, caused to be provided, or is about to provide or cause to be provided, information to the employer, the Bureau, or any other State, local, or Federal, government authority or law enforcement agency relating to any violation of, or any act or omission that the employee reasonably believes to be a violation of, any provision of this title [1] or any other provision of law that is subject to the jurisdiction of the Bureau or any rule, order, standard, or prohibition prescribed by the Bureau; [or]
. . .
(3) filed, instituted, or caused to be filed or instituted any proceeding under any Federal consumer financial law.
Section 1057 further says that “the rights and remedies provided for in this section may not be waived by any agreement, policy, form, or condition of employment, including by any pre-dispute arbitration agreement.” Section 1057 has wide jurisdiction, applying to “any person that engages in offering or providing a consumer financial product or service” and any person who “provides a material service” to such person.
The CFPB released Circular 2024-04 on July 24, 2024, which determined Section 1057 can apply to confidentiality agreements that “could lead an employee to reasonably believe that they would be sued or subject to other adverse actions if they disclosed information related to suspected violations of federal consumer financial law to government investigators.”
The CFPB makes clear the importance of preventing the use of confidentiality agreements from silencing whistleblowers:
Confidentiality agreements hold the potential to frustrate the efforts of government enforcement agencies—including the CFPB—to investigate violations of law. In particular, confidentiality agreements entered into in certain circumstances may impede such efforts when they are so broadly worded as to forbid or otherwise dissuade employees from reporting suspected violations of law to the government or cooperating with a government investigation.
The analysis in the Circular looks to the CFTC’s Regulation 165.19(b) and SEC’s Rule 21F-17 to determine that the word “discrimination” in Section 1057 includes taking actions to “prevent or dissuade employees from whistleblowing.” The Circular finds that a violation is especially likely to be found where the timing suggests that the employer requires the NDA as a retaliation or a threat against the employee, such as after the employee uncovers wrongdoing, reports wrongdoing internally, in connection with an internal investigation, or after an embarrassing incident for the company. The CFPB understands and makes perfectly clear that the threat of the NDA itself is discrimination and is, therefore, a violation of Section 2057 “regardless of whether or not the employer acts upon them or a court actually would enforce a confidentiality agreement with respect to whistleblowing.”
Section 1057 can be enforced through the filing of a complaint to the Secretary of Labor, who is required to investigate. The Department of Labor website states that complaints are confidential and “[t]he name of the complainant, the nature of the complaint, and whether a complaint exists may not be disclosed.” The penalties available for violations of Section 1057 are compensatory damages, reimbursement for all costs involved in bringing the complaint, reinstatement for the employee, and abatement of the violation.
This system of penalties has a different structure than the system in place for violations of SEC Rule 21F-17 which bases the amount of a monetary sanction upon the scale of the violation rather than the damage suffered by the Complainant due to the confidentiality agreement. The SEC recently sanctioned J.P. Morgan $18 million for violations of Rule 21F-17 stemming from confidential release agreements that JP Morgan regularly asked retail clients to sign between 2020 and 2023. The CFPB’s penalty structure may provide less deterrence to companies that seek to silence whistleblowers through illegal confidentiality agreements. However, it does provide employees with an additional route to challenge their illegal confidentiality agreements. Employees can file parallel complaints regarding illegal confidentiality agreements with the CFPB, SEC, and CFTC as they have significant overlapping jurisdiction, especially since the SEC has shown that Rule 21F-17 applies fully to private companies.
The CFPB’s Circular, taking a stance against illegally broad confidentiality agreements meant to silence whistleblowers, is an important step in expanding the protection of whistleblowers from being silenced due to illegally broad NDAs. By clearly stating that these agreements can be viewed as discrimination under Section 1057, the CFPB joins the stand that the SEC and CFTC have taken through their actions, especially in the past year, to ensure that NDAs are not used to silence whistleblowers.
Benjamin Calitri is an Associate at Kohn, Kohn & Colapinto LLP.
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