Non-Disclosure Agreements And Whistleblowing

Attreyi Mukherjee Aug 14, 2024

What is the scope and effectiveness of employee Non-Disclosure Agreements? Can Non-Disclosure Agreements prevent whistleblowing?

The innocuous looking Non-disclosure Agreement which an employee signs as part of the joining formalities in the company, is for all good intents, designed to protect proprietary and business information of the company from making its way to the market or worse, to competitors. It is part of standard practice worldwide for companies to have their employees to sign up to the ‘joining kit’. A colleague from the HR department helpfully informs the new employee that this is ‘standard documentation’ signed by all employees at the time of joining. For one, there is no scope for negotiation, and for most employees, it is very often too much legalese to digest.

No doubt these agreements play a vital role in preserving integrity of an organisations’ proprietary and confidential information. They also ensure that statutory stipulations around price sensitive information and personal data are adhered to. However, the sage intentions are questioned, when this seemingly harmless piece of legal document, is attempted to be used as a shield for corporate wrongdoing and for creating what is called a “chilling effect” for whistleblowers.

In a recent development in the world of Artificial Intelligence, whistleblowers from OpenAI, sent a letter to the United States’ Securities and Exchange Commission (SEC), asking the regulator to examine the company's contracts with its employees. The whistleblowers have claimed that the employment, severance, non-disparagement, and non-disclosure agreements violated SEC Rules and that the agreements prohibited and discouraged both employees and investors from communicating their concerns with the SEC. A key violation pointed out in the letter is that the NDAs required the employees to take prior consent from the company to disclose confidential information to federal authorities. The letter urges the SEC to approve investigations into these contracts.

Admittedly, there have not been many occasions for Indian courts to rule on issues regarding employee NDAs. However, courts in India have consistently taken a dim view of restrictive provisions which continue post the term of employment, especially where they limit prospective employment opportunities. These rulings have mostly been in context of non-compete provisions, but they set the stage for legal battles on employee NDAs.

It is pertinent to review the matter from the point of view of corporate governance. Transparency and accountability are the twin pillars which uphold good corporate governance. India’s legal and regulatory regime is incrementally embracing leading standards of disclosure, technology adoption and increased focus on investor protection. This approach is reflected in more recent amendments by the Securities and Exchange Board of India to the disclosure requirements for listed companies. The Companies Act, 2013 also mandates listed companies and certain other categories of companies to have a vigil mechanism and to adopt a ‘Whistleblower Policy’. The Whistleblower Policy provides the employees with a channel for reporting their genuine concerns. These disclosures are known as ‘protected disclosures’, meaning the identity of the whistleblower and her communication are kept confidential. This is because the Whistleblower Policy is required to provide adequate safeguards to whistleblowers from victimisation. Tellingly, the law on whistleblowing in India is called the Whistle Blowers Protection Act, 2014. This law applies to public servants and public sector and emphasises safeguarding of whistleblowers. The protection afforded to whistleblowers is irrespective of the motivation of the whistleblowers, be it in public interest or for claiming amnesty for self.

Over the years, these ‘standard’ employee agreements have evolved, lockstep with business sophistication. With proliferation of social media, the ‘non-disparagement clause’ has steadily found its way into employee NDAs. The non-disparagement clause prevents an employee from publicly making negative comments about the organisation and management. These restrictive provisions survive beyond the term of employment. This is a key reason why we often hear polite obfuscation regarding reasons for quitting a job. However, when it come to enforceability, the courts would weigh the potential harm to the organisation against the fundamental right of freedom of speech and expression of an employee.

With regards public disclosures, the employee NDAs would not be effective against reports of unethical conduct, sexual harassment or any other forms of financial or workplace related misconduct, which amount to a crime and/or constitute infringement of fundamental rights of the employee. Take the example of disclosures that went viral during the MeToo movement, which started in the US around 2018 and then snowballed. The NDAs could not contain the damage and reputation loss which many organisations suffered in the face of the allegations of sexual harassment made by employees and ex-employees. Courts in the US have also frowned upon the non-disclosure provisions in Settlement Agreements. These are contracts which companies sign with their employees or ex-employees to settle workplace related claims, including sexual harassment claims. This practice came to light in the wake of MeToo, when it was found that corporates regularly settled sexual harassment claims and then gagged the complainant using non-disclosure clauses. In fact, such non-disclosure clauses prevent the employee from disclosing even the existence of the Settlement Agreement.

As regards the technology companies which are engaged in a near arms race to develop Artificial Intelligence (AI) systems, they may consider it beneficial to avoid a Luddite reaction to AI development and proliferation by proactively and transparently informing stakeholders of the risks of the systems. Long-term risk management perspective would go a long way towards building confidence in users and developing key partnership with government and multilateral organisations for formulating appropriate guardrails and governance policies.

In this backdrop, it is easily understood that an employee NDA cannot be weaponised against a whistleblower. Disclosures to a court of law or any law enforcement agency cannot be contractually prevented. Provisions which reek to restrain an employee’s right to exercise her fundamental rights, pursue prospective employment opportunities, make disclosures of any concerns or wrongdoing, and seek any form of legal recourse, would find little favour in court. This is true for India and most other parts of the world. A contract which offends the law is itself void. Therefore, responsible corporates, committed to high standards of governance and workplace practices, are expected to be mindful about balancing the business and legal requirements of confidentiality with employees’ rights and agency, when entering into NDAs and employment agreements.

Authored by: Ms. Attreyi Mukherjee, a Corporate and Technology Lawyer