Seven Steps to Address Trade Secret Misappropriation by Whistleblowers

By Callan Stein & William Taylor
January 22, 2020

“The immunity provision of the Defend Trade Secrets Act creates serious risk for companies: A whistleblower could expose a company to civil and criminal penalties stemming from the company’s alleged misconduct and simultaneously reveal valuable trade secrets, and the company would have no recourse.”

trade secret - https://depositphotos.com/107462850/stock-photo-red-whistle-with-a-closed.htmlThe primary purpose of the Defend Trade Secrets Act (DTSA) is to provide federal remedies to individuals and companies that have had their trade secrets misappropriated. That is not, however, its sole purpose. One of the DTSA’s more controversial provisions actually protects certain alleged misappropriators by precluding DTSA liability when an individual discloses trade secrets in the context of “whistleblowing” activity. Indeed, the DTSA’s immunity provision dictates that a whistleblower may not be held criminally or civilly liable for disclosing a trade secret, provided that the disclosure satisfies certain requirements. 18 U.S.C. § 1833.

This immunity provision creates serious risk for companies: A whistleblower could expose a company to civil and criminal penalties stemming from the company’s alleged misconduct and simultaneously reveal valuable trade secrets, and the company would have no recourse. Fortunately, the immunity provision itself and the applicable case law, which is still in its infancy, can be used to develop a strategy for trade secret holders to avoid and/or mitigate this risk. The critical steps of the strategy are identified below.

  1. Limit access. The best way to avoid the immunity provision’s risks is to prevent your trade secrets from getting into the hands of would-be whistleblowers in the first place. Unfortunately, actual and potential whistleblowers are not easily identified within a company. Therefore, companies should implement detailed policies and protocols that identify and protect trade secrets, and sharply limit access to them.
  2. Notify. The DTSA requires companies to notify their employees regarding the specific terms of the immunity provision. 18 U.S.C. § 1833(b)(3). There are penalties for noncompliance with this notice requirement; an employer that fails to provide notice may not be awarded the exemplary damages or attorneys’ fees that are available under the DTSA in an action against an employee to whom notice was not provided. 18 U.S.C. § 1833(b)(3)(C). In Xoran Holdings LLC v. Luick, No. 16-13703, 2017 U.S. Dist. LEXIS 147868, at *19 (E.D. Mich. Sept. 13, 2017), the court held that the failure of the trade secret owner plaintiffs to provide notice of the immunity provision precluded them from recovering attorneys’ fees and exemplary damages from the alleged misappropriators.
  3. Analyze how the whistleblower acquired the trade secrets. If a whistleblower discloses a trade secret, the company should immediately determine whether the whistleblower had authority to acquire the information. The immunity provision does not protect a whistleblower from liability that may arise from unlawfully acquiring the subject trade secrets. 18 U.S.C. § 1833(b)(5). In one recent case, the court found that a company was likely to succeed on its conversion claim that was based on an employee’s unauthorized taking of documents. Unum Group v. Loftus, 220 F. Supp. 3d 143, 148 (D. Mass. 2016). In another case, a company’s claim under the Computer Fraud and Abuse Act survived the employee’s motion to dismiss where the employee took a laptop without authorization and forwarded confidential and proprietary information to her personal email address. 1-800 Remodel, Inc. v. Bodor, 2018 U.S. Dist. LEXIS 2250000, *17-21 (C.D. Cal. 2018).
  4. Examine how the whistleblower disclosed the secrets. To be eligible for immunity, a whistleblower must disclose the trade secrets in confidence to either law enforcement authorities or to an attorney. 18 U.S.C. § 1833(b)(1)(A)(i). Similarly, if the disclosure is made in a complaint or other document, the filing must be made under seal. 18 U.S.C. § 1833(b)(1)(B). Failure to do so will provide the trade secret holder with a strong argument that DTSA immunity does not apply as a matter of law.
  5. Be first to court. When a trade secret is stolen, the trade secret owner should always endeavor to tell its story first. Doing so allows the company to set the narrative in its complaint, which, in turn, sets limits on what the court can consider at the motion to dismiss stage. This becomes even more important in cases that implicate the DTSA immunity provision. In four cases that analyzed the applicability of the immunity provision, the only case in which the court found an employee established her immunity defense from the outset was the one in which the employee got to the court first and established the grounds for why she had taken the information, which, in turn, supported her immunity defense. Christian v. Lannett Co., 2018 U.S. Dist. LEXIS 52793, at *12-13 (E.D. Pa. 2018). In the other three cases, the companies got to court first, and were able to plead their complaints carefully enough to prevent the judges from finding (at the pleadings stage) that there were sufficient allegations to support the employees’ immunity defense, including that the misappropriations were exclusively linked to any whistleblowing activity. Argos USA LLC v. Young, 2019 U.S. Dist. LEXIS 150755, at *16 (N.D. Georgia June 28, 2019); Bodor, 2018 U.S. Dist. LEXIS 2250000, at *16-17; Unum, 220 F. Supp. 3d at 147.
  6. Protect the trade secrets during the litigation. Companies can use the DTSA to protect their trade secrets during the litigation, including by seeking court orders or injunctions and through ex parte seizure of the trade secrets. 18 U.S.C. § 1836(b)(3)(A). In one recent case, a court entered an order requiring the employee to take several steps to protect the secrets during the case proceedings, including delivering to the court all documents he had taken, destroying all copies of all documents he had taken, and providing an affidavit stating the circumstances under which he had provided documents to any third party. Unum, 220 F. Supp. 3d at 149.
  7. Do not concede that whistleblower immunity applies. The DTSA immunity provision will not apply unless the whistleblower satisfies each of its requirements. 18 U.S.C. § 1833. For example, a whistleblower can only qualify for immunity if he or she disclosed the trade secrets to a government official or attorney for the “sole purpose” of making a report based on his or her suspicion that the law was broken. 18 U.S.C. 1833(b)(1)(A)(ii). This can be challenging to establish at the outset of a case, especially if the trade secret owner sets the narrative in its complaint. Indeed, on at least two occasions, courts refused to immunize defendant employees because the pleadings lacked sufficient allegations to establish immunity. Bodor, 2018 U.S. Dist. LEXIS 2250000, at *16-17; Unum, 220 F. Supp. 3d at 147.

While companies will have to adapt their strategies based on the facts of the case, these steps  support a proactive approach to addressing potential trade secret misappropriation by a purported whistleblower.

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The Author

Callan Stein

Callan Stein is a partner in the Health Sciences Department and the White Collar Litigation and Investigations Practice Group of Pepper Hamilton LLP.

For more information or to contact Cal, please visit his Firm Profile Page.

Callan Stein

William Taylor is a partner in the Trial and Dispute Resolution Practice Group of Pepper Hamilton LLP.

For more information or to contact Will, please visit his Firm Profile Page.

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