Defend Trade Secrets Act Immunization for Whistleblowers: More Effective Than the Average Flu Shot?

07 May 2018 Labor & Employment Law Perspectives Blog
Authors: John F. Zabriskie

A unique feature of the Defend Trade Secrets Act (DTSA)—the federal statute opening federal courthouse doors to civil claims for trade secret misappropriation—is that it gives immunity from civil or criminal liability to whistleblowers under federal or state trade secret laws for disclosing a trade secret in confidence to a government official or an attorney “solely for the purpose of reporting or investigating a suspected violation of law.”

Although the overall purpose of the DTSA was to enhance trade secret protection, Congress also did not want that protection to deter informants from tipping off law enforcement to illegal activity. When the DTSA was enacted two years ago, employers were deluged with advice to update their employee Nondisclosure Agreements (or policy handbooks) to include notice of this immunity, particularly because Congress conditioned the availability of exemplary damages and attorneys’ fees for a successful DTSA misappropriation claim against an employee on having given that notice.

With all that hubbub at the time, employers and employees might well be wondering how effective that DTSA whistleblower immunity has been? The short answer is that it’s a lot like this year’s flu shot: It might be effective for some folks, but certainly not for everybody. That’s because, to date, there have been only two reported cases squarely involving the DTSA’s whistleblower immunity provisions, and they come out differently. First, in a 2016 decision, Unum Group v. Loftus, which was filed in the U.S. District Court for the District of Massachusetts, an employer brought a DTSA claim against a former employee who was caught on video leaving the employer’s building with boxes of documents, just a few days after having been interviewed in an internal investigation into claims practices. The former employee tried to get the DTSA claim thrown out by invoking the DTSA’s whistleblower immunity provision, claiming that he simply turned the documents over to his attorney to pursue a case against the employer for alleged unlawful activities. The court refused to dismiss the employer’s DTSA claim, noting that the former employee had not yet filed a whistleblower suit and thus had not validated his professed intent to do that.

On March 29 of this year, however, a different federal court dismissed on the pleadings a DTSA claim against a former employee, holding that the DTSA immunity shielded the former employee from having to defend against that claim. This apparently is the first successful invocation of that immunity (ironically coming in a decision at the end of an unusually bad flu season).

In that case, Christian v. Lannett Co., Inc., which was pending in the U.S. District Court for the Eastern District of Massachusetts, the plaintiff was terminated in 2015, and then filed suit against her former employer for gender and disability discrimination in violation of federal law.  She also retained a trove of company documents she was obligated to return. Before enactment of the DTSA, she disclosed some of these to her spouse. In addition, during discovery on her discrimination claims—which, critically, took place after the DTSA had gone into effect in May 2016, the former employee turned over to her counsel more than 22,000 pages of the employer’s documents, which her counsel then produced. The employer responded aggressively, filing a counterclaim asserting, among other claims, that the documents contained its trade secrets and that the former employee’s disclosure of them to her counsel in the case constituted trade secret misappropriation in violation of the DTSA. The former employee moved to dismiss, arguing that she was entitled to DTSA whistleblower immunity because the disclosure to her counsel was done in confidence and to comply with discovery obligations in a federal case.

The court agreed that the former employee fell within the scope of the DTSA’s immunity provision and dismissed that counterclaim. Although the former employee was not “blowing the whistle” on fraudulent billing to the government under the False Claims Act or on financial fraud under Dodd-Frank, the court had no trouble holding that the former employee’s individual discrimination claims under federal law fit within the DTSA immunity requirement that a disclosure be in connection with a “suspected violation of law.” Nor did the court hesitate in finding that turning documents over to one’s counsel to comply with a discovery order of the court satisfied the DTSA immunity requirement that the disclosure be “solely for the purpose of reporting or investigating” the suspected violation of law.

With a sample of just two cases, it’s hard to make confident predictions about how broadly other courts will apply the DTSA whistleblower immunity. That’s particularly true as those two cases, while having different outcomes for the employees involved, don’t necessarily reflect different judicial approaches.

In the Unum Group case, the outcome might have been different had the former employee filed an answer and moved for judgment on the pleadings, as opposed to filing a motion to dismiss that limited the court to deciding the motion solely on the basis of the employer’s allegations—which, needless to say, did not include reference to the required elements of DTSA immunity.

And in the recent Christian case, the employer might have been better advised not to argue that complying with a judicial discovery order constituted trade secret misappropriation. Nonetheless, the Christian court’s willingness to apply the DTSA immunity to an employee simply prosecuting garden variety individual employment discrimination claims—as opposed to a whistleblower alerting law enforcement to misbehavior by government contractors or fraudulent financial operations—suggests that courts may apply DTSA immunity broadly.  But just as we have to wait for the next flu season to see how much immunity that year’s flu shot provides, we’ll have to wait for the next case applying this immunity provision to know for sure.

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