An anonymous whistleblower letter to the Securities and Exchange Commission (SEC) alleges that OpenAI’s employment, severance, non-disparagement, and non-disclosure agreements (‘NDAs’) violate laws designed for whistleblower protection.
Ronin Legal examines the legal issues involved and the broader implications for NDAs and similar agreements in the corporate world if this complaint is found to have merit.
OpenAI’s Clawback Controversy
The whistleblower letter comes after another public relations crisis at OpenAI. This earlier issue began when Vox reported that OpenAI made departing employees sign highly restrictive non-disparagement and non-disclosure clauses during the off-boarding process.
In the event of refusal, they faced the threat of having their vested stock options clawed back, an unusually severe move by Silicon Valley standards.
In other words, employees had to choose between signing restrictive exit documents or forfeiting their valuable vested equity. The documents also forbade employees from disclosing their terms or even the fact that they had signed them.
As a result, the controversy grew quickly. CEO Sam Altman issued a public apology. He explained that while there had been a provision for equity cancellation in earlier agreements, it had never been enforced. He promised the clauses would be removed from future exit paperwork.
An internal memo, confirmed by CNBC, stated that OpenAI would not enforce non-disparagement clauses or cancel vested equity. Legal experts, including those from an Artificial Intelligence Law Firm, note that this case raises important questions about balancing intellectual property protection with employee rights.
The Whistleblower Complaint
On July 1, 2024, anonymous whistleblowers wrote to SEC Chair Gary Gensler, alleging that OpenAI’s agreements violated SEC Rule 21F-17(a) and the Dodd-Frank Act. According to the letter, these agreements unlawfully restricted employees and investors from reporting securities law violations to the SEC without prior company consent.
They also imposed non-disparagement clauses that did not exempt whistleblowing activities. In addition, the agreements required employees to waive their rights to whistleblower incentives and compensation.
The whistleblowers argued that these practices discouraged and prohibited necessary communications with the SEC. As a result, they said, OpenAI undermined legal protections for whistleblowers.
OpenAI’s Defence
In response, Sam Altman publicly defended the company’s use of NDAs. He said they were standard practice in the industry and necessary to protect proprietary information and intellectual property.
Altman emphasised that OpenAI is committed to ethical standards and transparency. He added that any adjustments required to NDA practices would be promptly addressed.
Whistleblower Protections Under the Law
Two major laws form the foundation of whistleblower protections in the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) and the Sarbanes-Oxley Act (SOX).
Enacted after the 2008 financial crisis, the Dodd-Frank Act offers whistleblowers several protections when they report potential securities violations to the SEC.
These include maintaining confidentiality of the whistleblower’s identity, protection from retaliation, such as termination, demotion, or pay cuts and offering financial incentives of 10% to 30% of monetary sanctions exceeding $1 million, if their information leads to successful SEC enforcement.
The Dodd-Frank Act addresses NDAs directly through SEC Rule 21F-17(a). This rule prohibits companies from using confidentiality agreements or other means to block whistleblowers from reporting potential violations to the SEC.
SOX, enacted in 2002 after the Enron and WorldCom scandals, also protects whistleblowers. It covers reports of accounting and corporate governance violations, whether made to the SEC or internally.
SOX provides protections similar to Dodd-Frank and encourages companies to create anonymous reporting systems. It also prohibits retaliation and allows whistleblowers who face retaliation to seek reinstatement, back pay, and other remedies.
In addition to federal laws, many states have their own whistleblower protection laws. These often cover violations of environmental regulations, consumer protection laws, and healthcare regulations[1].
Some states also address NDAs directly. For example, New Jersey bans NDAs in settlements involving the concealment of harassment or discrimination claims. A Corporate Law Firm’s Lawyer would often advise companies to update compliance policies to ensure these state and federal protections are fully respected.
Implications For the Tech Industry
The SEC has not yet launched a formal investigation into OpenAI. However, the accusations echo past SEC enforcement actions.
For example, in 2014, the SEC acted against Forest Laboratories for using overly broad NDAs to suppress whistleblower disclosures about off-label marketing. In 2015, KBR, Inc. faced penalties for confidentiality agreements that could hinder employees from reporting SEC violations.
These cases highlight the SEC’s commitment to protecting whistleblower rights and stopping the misuse of NDAs to obstruct oversight. If the SEC finds OpenAI’s agreements violate whistleblower laws, companies may need to rewrite NDAs.
Future agreements might need to explicitly preserve whistleblower rights under laws like Dodd-Frank. As a result, the tech industry could see a shift toward NDAs that both protect proprietary information and respect the legal rights of employees to report wrongdoing.
