Whistleblowers Suffer Setback in Ruling Involving Trade Secret Law

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Legal experts, however, say court interpretation of the Defend Trade Secrets Act is still in very early stages.

The misuse of trade secrets is estimated to cost U.S. companies between $160 billion and $480 billion a year, but a new law meant to stem that abuse is still very open to interpretation.

This is especially true when it comes to whistleblowers, as one Massachusetts man found out last month.

Timothy Loftus unsuccessfully attempted to claim immunity in his employer’s lawsuit, Unum v. Loftus, filed under the Defend Trade Secrets Act of 2016 (DTSA), but one intellectual property expert argued that the court “misconstrued” the immunity defense claimed by the defendant.

“This is precisely the murky situation that Congress expressly corrected when it immunized employees and contractors,” according to a Jan. 3 Columbia Law School blog penned by Peter Menell, a law professor at the University of California at Berkeley School of Law.

Menell, who helped draft the DTSA’s immunity provision writes that part of the goal of the legislation was to address companies’ “misuse of nondisclosure agreements (NDAs) to discourage reporting of illegal activity,” after the last few decades saw “devastating government contracting abuses, regulatory violations, and deceptive financial schemes that have hurt the public and cost taxpayers and investors billions of dollars.”

Other experts say time—and future court decisions—will help shape the DTSA and determine what it may mean for whistleblower employees going forward.

Pearlman predicted it could take a couple of years and a few more cases to reach a clearer understanding of what this law will mean for whistleblowers.

One thing is clear, however, and that’s trade secrets theft is a huge problem. The aforementioned staggering annual loss estimate that American companies suffer from the misappropriation of such secrets was provided by lawmakers and included in a white paper published by law firm Morgan, Lewis & Bockius.

Congress enacted the DTSA last May to expand intellectual property protections for companies. The law is designed to give trade secret owners the option of suing in federal court, but contains a “safe harbor” protecting whistleblower employees from disclosing a trade secret to an attorney or a government official “solely for the purpose of reporting or investigating a suspected violation of law,” according to Business Law Today, a publication of the American Bar Association.

Enter Loftus, an employee of Unum Group, a Worcester, Mass.-based provider of insurance and disability benefits, who in September was captured on video on several occasions leaving work with boxes filled with documents, a shopping bag with documents and a company laptop—which he turned over to his attorney. Loftus had started taking the documents a few days after he was interviewed by a company lawyer in connection with an internal investigation.

After Unum tried unsuccessfully to recover the documents and laptop, the company sued Loftus under the DTSA in the U.S. District Court for the District of Massachusetts in Worcester on Oct. 25.

But Loftus, who was director of individual disability insurance benefits at Unum, invoked the whistleblower immunity defense of the DTSA, claiming the documents were meant to help his attorney investigate a violation of law.

On Dec. 6, Judge Timothy Hillman denied Loftus’ motion on the grounds that it was an “affirmative defense,” meaning that Loftus had to prove he had removed the documents to investigate a violation of law.
“There has been no discovery to determine the significance of the documents taken or their contents, and Loftus has not filed any potential lawsuit that could be supported by information in those documents,” Hillman opined. (Loftus, who is identified in some court papers as a “former employee,”was terminated shortly before Unum filed the lawsuit, according to his lawyer.)

Menell argues that the court’s decision “ignores the vaccine and subjects Loftus to the very disease that Congress cured: the imposition of substantial costs and adverse career repercussions by sharing, in confidence, company documents with counsel,” as well as undermining activities specifically authorized by other whistleblower laws.

The ruling didn’t surprise Proskauer’s Pearlman. “The court is saying, ‘too soon,’” he explained. “You need to prove up your immunity defense with evidence.”

He went on to assert that the DTSA’s immunity defense “presents some cause for concern.”

“The very purpose of the law is to protect trade secrets,” he said. “Yet it provides a very wide avenue for whistleblowers to take a company’s trade secrets and give them to the government, or give them to their attorneys.”

But placing the “burden of proof” on the defendant—as the court did in this case— essentially means the case moves on to the discovery phase and the defendant will need to shoulder a heavier financial burden, according to Eric Goldman, a law professor at Santa Clara University School of Law.

Goldman said it is still unclear what Congress intended by drafting the law as it did—and by not making it more favorable to whistleblowers.

“It’s really hard for Congress to define proper immunity and safe harbors,” he said.

However, in his reading of the law, he said he believes “[lawmakers]really were talking about a very narrow set of circumstances.”

This is just an early test of the DTSA’s immunity defense, Goldman added, but “it’s certainly not the last word.”

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