A federal court decision related to claims brought under the Defend Trade Secrets Act of 2016 indicates that it will be difficult to end litigation in its early stages using the act’s whistleblower provision, attorneys say.
The case involved an employee who had removed a number of documents from his workplace without authorization. In opposing the plaintiff employer’s preliminary injunction request seeking the documents’ return, the employee argued that his actions were exempted under 18 U.S.C. §1833. The statute provides immunity for those who disclose trade secrets in confidence to an attorney “solely for the purpose of reporting or investigating a suspected violation of law.”
The defendant employee also moved to dismiss his employer’s complaint for misappropriation of trade secrets and conversion on the same basis.
However, U.S. District Court Judge Timothy S. Hillman found that the record lacked facts “to support or reject his affirmative defense at this stage of the litigation.”
Hillman noted that there had been no discovery to determine the significance of the documents taken or their contents, and that the employee had not filed a suit that could be supported by information in those documents.
“Further, it is not ascertainable from the complaint whether [the employee] turned over all of [the company’s] documents to his attorney, which documents he took and what information they contained, or whether he used, is using, or plans to use, those documents for any purpose other than investigating a potential violation of law,” the judge wrote.
The eight-page decision is Unum Group v. Loftus.
Two attorneys needed?
The defendant’s attorney, Roy A. Bourgeois of Worcester, Massachusetts, said he was dismayed by one aspect of the decision.
“We’re dealing with a new statute that has a specific defense and exception for the transmission of documents to legal counsel. It’s very troublesome to make the transmission of documents to legal counsel a question of fact to be determined by trial or motion, because that ruling directly runs afoul of the issue of confidentiality related to legal consultation,” he said.
One way to read Hillman’s ruling is that a whistleblower essentially needs two attorneys: one to receive the documents and a different one to litigate, given that the attorney receiving the documents will become a witness when, as in Unum, a company is permitted to inquire about its employee’s intent in giving the documents to counsel.
The plaintiff’s attorneys, Jonathan R. Sigel and Amanda M. Baer of Westborough, Massachusetts, declined to comment, citing the ongoing litigation.
According to Boston attorney Jeffrey E. Francis, the whistleblower provision was an important component of getting the DTSA through Congress, given that there are certain violations that government agencies will have a hard time determining absent the cooperation of a whistleblower.
“The thought was you didn’t want to chill the longstanding tradition of encouraging whistleblowers to come forward,” he said.
The tradeoff for businesses is that they have gained a new federal cause of action with which to help safeguard their trade secrets, Francis said. But it makes sense that, as with any immunity, it will not be enough to merely plead the defense to establish it, he added.
On a limited record at an early stage in the litigation, the judge was not willing to grant the immunity, “nor should it be,” Francis said, noting that if the bar were set that low, it would thwart the purpose of the statute.
Offering evidence of “here’s the [EPA or FTC] agent to whom I conveyed the information” would be a good start to establishing the defense, Francis said.
To gain the benefit of the whistleblower protection under the DTSA, the disclosure of trade secrets must be made “in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney”; and “solely for the purpose of reporting or investigating a suspected violation of law.”
Perhaps the trickiest bit of statutory interpretation will involve the word “solely,” Boston attorney Russell Beck said, adding that the words “very clearly” suggest whistleblower immunity is meant to be a “limited exception.”
Both Francis and Beck noted that the defendant might still be able to prevail at the summary judgment stage, but he will need to beef up the record with evidence with which to establish that immunity is warranted.
If he were counseling a client considering cloaking himself in whistleblower immunity, Beck said his advice would be: “Make sure there is a clear chain of evidence showing that any evidence taken from the company was given directly to a lawyer,” and that there was no opportunity for the information to be copied or for it to “go elsewhere.”
Secondly, Beck said he would advise the client to make sure the information in fact was used to prepare a complaint for whistleblower activity.
Unum is just among the first of what is likely to be many decisions as the contours of the DTSA are defined, Beck added.
“The DTSA is probably the most significant thing to happen to trade secrets law in decades,” he said. “This is just the tip of the iceberg.”
“It’s very troublesome to make the transmission of documents to legal counsel a question of fact to be determined by trial or motion, because that ruling directly runs afoul of the issue of confidentiality related to legal consultation.”
— Roy A. Bourgeois, defense counsel
Off-hours activities arouse suspicion
In 1985, defendant Timothy P. Loftus began working for Unum Group, a provider of financial protection benefits, including disability benefits, life insurance and accident coverage.
In 2004, he was promoted to director of individual disability insurance, or IDI, benefits, a role that granted him access to confidential information regarding Unum’s employees and customers, including customer health information, and various trade secrets related to Unum’s business.
Throughout his tenure, Loftus had signed numerous confidentiality agreements, and Unum apparently also protected its trade secrets and confidential information through policies, employee training and data protection.
On Sept. 21, 2016, Unum’s in-house counsel interviewed Loftus as part of an internal investigation into claims practices. The following Sunday, Loftus was captured on surveillance video leaving Unum’s Worcester facility with two boxes and a briefcase.
Two days later, after leaving work in the afternoon, Loftus returned to Unum’s offices around 7:45 p.m. and exited the building an hour later with a shopping bag full of documents, video showed.
On Sept. 29, Loftus refused to respond to questions over the phone from a Unum officer investigating his printing and removal of documents from the office. Shortly thereafter, he was seen leaving Unum’s office toting his company laptop along with another full shopping bag.
Less than an hour later, Unum employee-relations representatives asked him to return the laptop, which Loftus said he would do by day’s end but failed to follow through.
Weeks went by as Unum unsuccessfully tried to retrieve the laptop and documents. Loftus returned the laptop on Oct. 24, but he retained the documents and had his attorney make copies of them.
Unum’s concern involved not just the potential disclosure of its trade secrets but its customers’ private health information, which Unum noted might force it, under the Health Insurance Portability and Accountability Act, to notify customers of the breach.
Unum filed claims in U.S. District Court for misappropriation of trade secrets under the DTSA and the Massachusetts Trade Secrets Act, as well as for conversion.
It also filed a motion for injunctive relief, seeking to prevent Loftus from copying the documents, compel him and his attorney to return all the documents and any of the company’s other trade secret or other confidential information in his possession, and enjoin him from receiving a mirrored copy of the hard drive of his company laptop until Unum had removed or redacted files containing trade secrets or confidential information.
Loftus opposed the preliminary injunction and also moved to dismiss the state and federal trade secrets claims, citing the DTSA’s whistleblower protection.
He argued that if the trade secrets claims were in fact dismissed, the rationale for the federal court’s jurisdiction would be extinguished, requiring the dismissal of the state-law conversion claim as well.
Injunction an easy call
In addition to dispatching with Loftus’ motion to dismiss, Hillman determined that Unum had easily established that a preliminary injunction was warranted.
Given that he allegedly could be seen on surveillance video removing documents after hours without authorization, Loftus had little choice but to concede that Unum had “stated a colorable claim for conversion,” thereby meeting the first prong of the preliminary injunction test: a likelihood of success on the merits.
As Hillman had declined to dismiss the federal claim, Loftus’ jurisdictional argument offered little help in objecting to the motion for the preliminary injunction, Hillman said.
The remaining preliminary injunction factors “all weigh in favor of Unum,” he added.
The potential for irreparable harm, not just to Unum but to its customers, was clear, as was the hardship to Unum, which was facing “substantial business risk” by not being able to assure customers or employees that their confidential information was secure, the judge said.
Meanwhile, Loftus could return the documents and request them anew as part of whatever collateral action he pursued against Unum, Hillman said.
Finally, the public interest also was on Unum’s side, according to the judge.
“Confidential health information should not be held hostage to an unfiled lawsuit, and Unum’s customers who are not yet on notice that their health information could have been compromised will be well served by Unum’s efforts to contain this information breach,” Hillman wrote.