In the 1980s, a journeyman electrician, Joseph J. Mackal, changed whistleblower law forever. He stood up to the multinational construction company Brown & Root. He challenged their practice of paying money to workers in exchange for nondisclosure agreements (“NDAs) designed to hide safety flaws. In a legal showdown that lasted 7-years, Macktal prevailed and set the first precedent completely voiding restrictive NDAs intended to silence whistleblowers. Years later, Harry Barko exposed similar NDAs used by Kellogg Brown & Root to hide fraud in taxpayer spending in the War in Iraq. Barko took his case to the Securities and Exchange Commission and won the precedent outlawing all such agreements in the publicly traded economy. Together, Macktal and Barko set the legal precedent that today benefits all whistleblowers and changed the face of modern whistleblower law.
Joseph J. Macktal worked as a journeyman electrician for Brown & Root during the construction of the Comanche Peak nuclear plant near Dallas, Texas. He reported safety concerns to his bosses and was fired. After he filed a whistleblower lawsuit, Brown & Root pressured him into signing a settlement agreement that contained a highly restrictive nondisclosure agreement (“NDA”). The NDA was described in a decision written by U.S. Court of Appeals Judge John Minor Wisdom: “Macktal agreed not to appear voluntarily as a witness in any administrative or judicial proceeding concerning the safe operation of the Comanche Peak plant. He also agreed to take reasonable steps to resist a subpoena requiring his testimony at such proceeding. In addition, his original counsel agreed not to call Macktal as a witness, and not to do or say anything that might encourage another to call Macktal as a witness, in such proceedings.”
Mr. Macktal was extremely troubled by the NDA but was explicitly warned that Brown and Root would “follow him to the ends of the earth,” and ruin his family financially if he opened his mouth about his safety concerns. Under the terms of the NDA, if Macktal reported any safety concerns, he would be required to return the money he obtained from the settlement and pay Brown and Root all of its attorney fees. Breaching the agreement would result in his bankruptcy. Those threats and fears bought his silence for about one year. Then things changed.
In 1988 Macktal learned that the lawyers who had recently established the whistleblower law firm of Kohn, Kohn & Colapinto had raised concerns about the payment of hush money in the nuclear industry. Macktal contacted the firm and agreed to willfully violate his NDA and publicly expose the money-for-silence practices at Commanche Peak. So commenced a seven-year legal battle, the played out at the Nuclear Regulatory Commission (NRC), the United States Senate, the U.S. Department of Labor (DOL) and the U.S. Court of Appeals for the Fifth Circuit. Initially, things took a turn for the worse for Mr. Macktal. Lawyers representing both plaintiffs and defendants in civil lawsuits endorsed the practice of using NDAs as an essential method to reach settlements in whistleblower cases. The NRC initially refused to find the agreement void, and the Department of Labor tried to “split the baby” and strike down the gag requirements, but leave Macktal open to a breach of contract lawsuit. In 1989, the U.S. Senate held a hearing on the Macktal Agreement, and things started to change. The Chairman and Ranking Member of the U.S. Senate Committee on Nuclear Safety both attacked that agreement and demanded that the NRC take regulatory action. Thereafter the NRC issued a new ruling finding that the Macktal agreement NDA did raise serious safety issues. The NRC issued an order to every nuclear power plant in the United States, requiring them to produce all such restrictive NDAs and inform all employees who signed such agreements that they were void. After that, the NRC approved a formal rule that restrictive NDAs were grounds for fines, penalties, and theoretically the revocation or suspension of a license to operate a nuclear plant.
The DOL followed suit. In a series of decisions the Labor Department fully voided the entire settlement agreement, permitted Mr. Macktal to continue to pursue his whistleblower case (that had been dismissed as part of the controversial settlement) and rejected Brown and Roots demand that Macktal at a minimum be required to return the monies paid in settlement.
Thus, under the Macktal precedent, NDAs that restricted a whistleblower’s right to report regulatory violations to the government or restricted his or her right to testify in court or administrative proceedings were wholly void. A whistleblower could sign a restrictive NDA, take the money, cash the check and then file a new complaint. Furthermore, under the NRC rule, the utility that entered into the NDA could be subjected to major regulatory sanctions. A complete victory for the whistleblower, and the first national precedent that unequivocally outlawed restrictive NDA, at least within the nuclear industry.
Then came the Dodd-Frank Act. Shortly after that law was passed the Chief of Staff for the Chairman of the U.S. Securities and Exchange Commission (“SEC”) met with a partner from Kohn, Kohn and Colapinto and staff from the National Whistleblower Center to get advice as to the new rules the SEC was going to issue when implementing the Dodd-Frank Act whistleblower reward provisions. KKC immediately explained to the Commission staff that restrictive NDAs could undermine the Dodd-Frank Act whistleblower program, urged the SEC to follow the Macktal precedent. Both the SEC and the Commodity Futures Trading Commission adopted rules consistent with the Macktal precedent.
Next came Harry Barko. Barko had worked as a contract administrator in Iraq for Kellogg Brown & Root (“KBR”), which by coincidence was directly related to the same company that Macktal had worked for years earlier. Like Macktal, Barko had raised serious issues of federal contracting fraud and had filed a False Claims Act lawsuit. As part of his case, Barko learned that numerous KBR employees were forced to file restrictive NDAs as part of the company’s alleged “compliance” program. These employees, most of whom had witnessed contracting frauds, were required to sign agreements not to reveal any of the information they were reporting to KBR to anyone (including the government) without the express consent of KBR’s lawyers. Like Macktal, the KBR employees were threatened with termination or other actions if they violated the NDAs.
“When you’re in danger, you need someone you can trust, who isn’t afraid, and who knows how to fight. KKC always has my back.”
“Nobody wants to fight, but someone has to know how. KKC does.”
“Mike Kohn’s passion for fighting for his clients is simply remarkable.”
Barko filed a complaint against KBR to the SEC, alleging that the KBR NDAs violated the Dodd-Frank Act whistleblower law and regulations, and requested that the SEC take regulatory action against KBR. The SEC agreed. In a landmark decision, the SEC held KBR accountable and required KBR to pay a $130,000 fine, even though the NDAs had been signed prior to the enactment of the Dodd-Frank Act. KBR also had to amend its NDAs and inform employees of their right to report wrongdoing to federal authorities. KBR agreed to amend its NDAs to include the following language:
“Nothing in this Confidentiality Statement prohibits me from reporting possible violations of federal law or regulation to any governmental agency or entity, including but not limited to the Department of Justice, the Securities and Exchange Commission, the Congress, and any agency Inspector General, or making other disclosures that are protected under the whistleblower provisions of federal law or regulation. I do not need the prior authorization of the Law Department to make any such reports or disclosures and I am not required to notify the company that I have made such reports or disclosures.”
Described in the Washington Post as a “landmark decision,” the SEC’s KBR decision set the precedent that has been widely followed thereafter. Thereafter the SEC sanctioned numerous other companies based on the Barko-initiated enforcement action.
SEC v. Collector’s Coffee, Inc. (d/b/a Collectors Cafe), and Mykalai Kontilai, 19-cv-04355 (November 4, 2019)
In the Matter of Homestreet, Inc. and Darrell Van Amen, File No. 3-17801 (January 19, 2017)
In the Matter of Blackrock, Inc., File No. 3-17786 (January 17, 2017)
In the Matter of SandRidge Energy, Inc., File No. 3-17739 (December 20, 2016)
In the Matter of NeuStar, Inc., File No. 3-17736 (December 19, 2016)
In the Matter of Anheuser-Busch InBev SA/NV, File No. 3-17586 (September 28, 2016)
In the Matter of Health Net, Inc., File No. 3-17396 (August 16, 2016)
In the Matter of BlueLinx Holdings Inc., File No. 3-17371 (August 10, 2016)
In the Matter of Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Professional Clearing Corp., File No. 3-17312 (June 23, 2016)
The ability of employees to file Dodd-Frank Act reward claims, even if they signed highly restrictive NDAs, is a major breakthrough for law enforcement and accountability. If an employee refuses to sign a restrictive NDA, either as part of a settlement, a severance agreement, or an employment agreement, they can mark-themselves as a whistleblower or potential rat-fink. By permitting employees to sign NDAs, and still blow the whistle to the SEC or other law enforcement agencies, the ability of whistleblowers to remain anonymous and confidential was radically enhanced.