OpenAI finds itself in the crosshairs of controversy yet again. 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. Are these employee agreements legally problematic? Could they even be held illegal, and if so, under which laws? We examine 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 follows hot on the heels of another recent public relations crisis at OpenAI, one that arose from a Vox article highlighting how OpenAI made its departing employees sign highly restrictive non-disparagement and non-disclosure clauses as part of the off-boarding process, under threat of having their vested stock options clawed back (an unusually severe remedy by Silicon Valley standards). In other words, OpenAI employees effectively had to choose between signing restrictive exit documents (that forbade the employees from disclosing their terms or even that they’d signed them) or forfeiting their valuable vested equity.
The controversy led to the usual practiced public apology from CEO Sam Altman, who smoothly reassured everyone that while there had been a provision for potential equity cancellation in previous agreements, it had never been enforced, and that the offending clauses would be removed from exit paperwork going forward. He expressed embarrassment and took responsibility for the oversight.
An internal memo, corroborated by CNBC, stated that OpenAI would not enforce non-disparagement clauses or cancel vested equity.
THE WHISTLEBLOWER COMPLAINT
On July 1, 2024, anonymous whistleblowers wrote to SEC Chair Gary Gensler, alleging that OpenAI’s employment, severance, non-disparagement, and NDAs violated SEC Rule 21F-17(a) and the Dodd-Frank Act. They claimed these agreements unlawfully restricted employees and investors from reporting securities law violations to the SEC without prior company consent, imposed non-disparagement clauses that did not exempt whistleblowing activities, and 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, undermining legal protections for whistleblowers.
OPENAI’S DEFENSE
In response to these allegations, Sam Altman publicly defended the company’s use of NDAs, asserting that they were standard practice within the industry and necessary to protect proprietary information and intellectual property. Altman emphasised that OpenAI is committed to ethical standards and transparency and that any adjustments required to their NDA practices would be promptly addressed.
WHISTLEBLOWER PROTECTIONS UNDER THE LAW
Two key pieces of legislation 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 in response to the 2008 financial crisis, the Dodd-Frank Act offers whistleblowers who report potential securities violations to the SEC a suite of protections, including:
- Keeping a whistleblower’s identity confidential.
- Protection from retaliation, such as termination, demotion, or salary reduction.
- Financial incentives ranging from 10% to 30% of monetary sanctions exceeding $1 million for information leading to successful SEC enforcement actions.
The Dodd-Frank Act specifically addresses the issue of non-disclosure agreements (NDAs) through SEC Rule 21F-17(a), which explicitly prohibits companies from using confidentiality agreements or other means to impede whistleblowers from reporting potential violations to the SEC. Enacted in 2002 following the Enron and WorldCom accounting scandals, the SOX protects whistleblowers who report violations of accounting and corporate governance rules to the SEC or internally within their companies. SOX provides protections similar to the Dodd-Frank Act. It encourages companies to establish anonymous reporting mechanisms for employees to report concerns about accounting irregularities or corporate governance issues. SOX also prohibits companies from retaliating against employees who report potential violations. Furthermore, SOX allows whistleblowers who experience retaliation to seek reinstatement, back pay, and other remedies through legal action. In addition to federal legislation, many states have enacted their own whistleblower protection laws. These laws extend protections to whistleblowers who report violations of state laws,[1] including environmental regulations,[2] consumer protection laws,[3] and healthcare regulations.[4] Some states tackle the issue of NDAs directly through legislation. For example, New Jersey prohibits the use of NDAs in settlements related to the concealment of harassment or discrimination claims.[5]
IMPLICATIONS FOR THE TECH INDUSTRY
While the SEC hasn’t yet launched a formal investigation against OpenAI, the accusations in this complaint find their echoes in previous SEC actions taken against other corporates. For example, the SEC took action against Forest Laboratories in 2014 for employing overly broad non-disclosure agreements (NDAs) to suppress whistleblower disclosures regarding off-label marketing practices. Furthermore, in 2015, KBR, Inc. faced penalties for imposing confidentiality agreements that could potentially hinder employees from reporting potential SEC violations. These precedents underscore the SEC’s commitment to safeguarding whistleblower rights and preventing the misuse of NDAs to obstruct regulatory oversight.
If the SEC finds OpenAI’s employee agreements in violation of whistleblower protection laws, this could compel companies to draft NDAs that balance protecting proprietary information against respecting employees’ rights to report unethical or illegal activities. For instance, NDAs might be required to explicitly include whistleblower protections, ensuring employees are aware of their rights under laws like the Dodd-Frank Act.
[1] California Labor Code § 1102.5
[2] California Health and Safety Code § 41140
[3] California False Advertising Law, Bus. & Prof. Code § 17500
[4] California Health & Safety Code § 1250
[5] New Jersey Law Against Discrimination, NJ Rev Stat § 10:5-12.8 (2023)
Authors: Alan Baiju, Shantanu Mukherjee
