Monthly Archives: June 2016

Defend Trade Secrets Act + Uniform Trade Secrets Act = Potent Defense for Whistleblowers

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Courts have reached nuanced decisions on the question of whether a whistleblower who takes protected employer documents can face liability under confidentiality agreements or common-law theories, like trade secret misappropriation, conversion, or breach of the loyalty duty.

Courts have generally rejected attempts to prevent whistleblower suits, including under the False Claims Act, based on such theories. X Corp. v. Doe, 805 F. Supp. 1298 (E.D. Va. 1992) (no injunction ordering return of documents possibly demonstrating fraud). They have also rejected counterclaims brought by employers against employees for taking documents that supported such claims. United States v. Cancer Treatment Centers of Am., 350 F. Supp. 2d 765, 773 (N.D. Ill. 2004) (rejecting various claims against relator); U.S. ex rel. Head v. Kane Co., 668 F. Supp. 2d 146, 152 (D.D.C. 2009)Lachman v. Sperry-Sun Well Surveying Co., 457 F.2d 850, 851 (10th Cir. 1972) (rejecting suit brought under confidentiality agreement for employee exposing company’s wrongdoing); Stephen M. Payne, Let’s be Reasonable: Controlling Self–Help Discovery in False Claims Act Suits, 81 U. Chi. L.Rev. 1297, 1298–99 (2014) (“The first and largest group of courts holds that public policy voids confidentiality agreements in the context of the FCA.”).

However, courts have also allowed claims against employees for abusing the right to use employer documents to support whistleblower suits, such as where the employee indiscriminately takes confidential documents, including some unrelated to possible fraud against the government. United States ex rel. Mossey v. Pal–Tech, Inc., 231 F. Supp. 2d 94 (D.D.C. 2002)United States ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc.,637 F.3d 1047, 1061–62 (9th Cir. 2011).

These cases show that courts carefully balance the need for whistleblowers to have access to the documents supporting their fraud-against-the-government claims against the legitimate need for businesses to protect their confidential information.

In a post on his blog, Jason Zuckerman writes about a recent order in a federal case in which the court rejected the defendant’s request to exclude documents allegedly taken in violation of a confidentiality agreement from the court’s review of a motion to dismiss. The court again reaffirmed the basic rule that such agreements cannot prevent a relator from using such documents to support a qui tam claim.

Into the fray steps the Defend Trade Secrets Act, which includes protections for whistleblowers from suits under state trade secrets acts. The Act provides immunity from civil or criminal liability under “any Federal or State trade secret law for the disclosure of a trade secret that” is

(A) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.

But the kicker is how this immunity may interact with existing state trade secret laws. Forty-seven states have adopted some version of the Uniform Trade Secrets Act, which includes an important preemption provision. UTSA

displaces conflicting tort, restitutionary, and other law of this State providing civil remedies for misappropriation of a trade secret.

Although UTSA’s preemption provision has an exception for contractual obligations, UTSA provides that the sole tort remedy for taking confidential employer information is an action for misappropriation of trade secrets. Thus, it preempts claims for conversion, unfair business practices, and intentional and negligent misrepresentation, for example. Indeed, some courts have gone so far as to hold that UTSA “precludes common-law claims even where it is expressly alleged that the information taken does not meet the statutory definition of a trade secret.”

The combined effect of UTSA’s preemption and the Defend Trade Secrets Act’s immunity from liability under UTSA for whistleblowers is to effectively immunize whistleblowers from all tort-based countersuits. Thus, the last line of defense for employers are confidentiality agreements–the one remedy that UTSA does not preempt. Even then, as the discussion above demonstrates, courts have taken a very careful approach when considering the effect of confidentiality agreements on False Claims Act suits.