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Whistleblowers Win in Defend Trade Secrets Act

Washington DC State Capitol

It’s not very often these days that a bill receives widespread bipartisan support in both the House and the Senate, particularly one that is favorable to whistleblowers. However, that’s what happened at the end of April when Congress passed the Defend Trade Secrets Act. The House passed the bill by a whopping 410-2 margin on April 27, and President Obama signed the bill into law today, repeating a common line he uses at bill signing ceremonies: “I’m always happy when we pass bills.”

Whistleblowers and those interested in preserving whistleblower protections also have reason to be pleased. Suing whistleblowers for allegedly “stealing” company trade secrets has become a common tactic used by employers to deter whistleblowing. Take the recent case involving J-M Manufacturing Co., Inc. and Formosa Plastics Corp. USA (J-M’s former owner) as an example:

J-M and Formosa Plastics supplied PVC pipes to the government for water and sewage systems. Former J-M employee John Hendrix filed a whistleblower lawsuit against his former employer back in 2005, claiming J-M and Formosa Plastics knew that the PVC pipes they manufactured and sold to the government did not meet the standards outlined in the contract. The companies allegedly lied about the quality of the pipes and failed to make improvements to them despite knowing that their products were below government standards. Hendrix further alleged that the defective PVC pipes were likely to rupture substantially earlier than expected due to the poor quality.

Eight years after the whistleblower lawsuit was filed, Formosa Plastics settled the suit for a reported $23 million. The same year, a California federal jury found that J-M knowingly misrepresented the quality of PVC pipes it built and sold the government.

Despite the settlement and the California jury holding J-M liable for failing to accurately represent the quality of its PVC pipes, J-M and Formosa Plastics sued Hendrix over misappropriating confidential company documents. According to the complaint against Hendrix, after he signed J-M’s Employee Secrecy Agreement, he was fully aware that his “acts of purloining J-M’s confidential and trade secret documents and information” for his case were “unlawful and in clear contravention of his ESA with J-M.”

Just a quick aside on the subject of stealing trade secrets: of course there need to be safeguards to protect businesses from individuals or other competitors trying to steal ideas for new technology, services, and goods, among other things. According to the Commission on the Theft of American Intellectual Property, stolen trade secrets cost the U.S. economy more than $300 billion a year, which is comparable to our country’s annual exports to Asia.

That said, businesses shouldn’t be able to use the safeguarding of trade secrets as a means to intimidate would-be whistleblowers from coming forward if they have legitimate concerns about possible fraud. With the passing of the Defend Trade Secrets Act, the use of this tactic by J-M and many others to intimidate whistleblowers has been discouraged.

The Defend Trade Secrets Act—and specifically its whistleblower amendment—provides immunity to those who disclose trade secrets in confidence to their attorney or a government official pursuant to reporting or investigating potential fraud, provided the disclosure is made in a specific way.

According to the amendment, if a whistleblower discloses a “trade secret” in confidence to an attorney or a government official solely in the interest of reporting or investigating fraud allegations, the whistleblower can’t be held liable under any federal or state trade secret law.

Furthermore, if a whistleblower does reveal a trade secret in connection with a qui tam complaint filed under seal, the whistleblower can’t be held liable. Documents revealing trade secrets may also be used in anti-retaliation lawsuits, as long as they are filed under seal and remain undisclosed outside of the matter pursuant to a court order. The Defend Trade Secrets Act also requires employers to inform their employees of the rights outlined in the whistleblower amendment.

The bill was offered by Senator Patrick Leahy (D-VT) and Senator Charles Grassley (R-IA). The National Whistleblower Center has long supported the Leahy-Grassley whistleblower amendment outlined in the Defend Trade Secrets Act. “After this bill is signed into law, corporations will not be able to hide behind the trade secrets privilege to cover-up their wrongdoing,” says Stephen M. Kohn, the executive director of the National Whistleblower Center.

“Whistleblowers who follow the clear and reasonable procedures set forth in the law will not need to fear retaliatory counter-lawsuits, which were becoming a favorite tool used by companies to silence whistleblowers.”

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