Update on Whistleblower Immunity in DTSA

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Close up of books - False Claims Act

Last year, we applauded the carve-out for whistleblowers in the Defend Trade Secrets Act of 2016 (DTSA). However, a recent opinion of a U.S. District Court in the First Circuit undermined the protections afforded whistleblowers under the law. Instead of receiving immunity from the lawsuit, it became a sword to gut a potential whistleblower action.

The facts at issue in Unum Group v. Loftus in the District of Massachusetts are straightforward. The employee was caught removing documents from the corporate office on multiple occasions. The company filed a lawsuit seeking return of their property, which it claims has confidential customer information, employee information, trade secrets, and protected health information.

The employee claimed immunity as a whistleblower. The law protects individuals from federal or state liability if they make a disclosure to an attorney solely for the purpose of reporting or investigating a suspected violation. However, the court refused to grant the motion to dismiss based on the whistleblower immunity provision because of an insufficient record to support or reject the affirmative defense at the early stage of the litigation. There was no record of a lawsuit at this point and it was not clear that the employee turned over all documents to his attorney, according to the court.

This is a fairly standard situation involving counterclaims against whistleblowers. The record needs to be developed in order to convince the court that an individual has only acted within their rights and is entitled to dismissal due to one or more defenses.

Perhaps the biggest problem is the preliminary injunction issued by the court. The defendant and his attorney are both ordered to deliver any documents or electronics to the company and destroy all copies of any documents taken. If the employee has not already provided those documents to the government, he will be unable to do so. If they proved fraud, it may go on unchecked now that the company has put them back in the box.

Furthermore, the public manner of the lawsuit destroys numerous aspects of current whistleblower law. If a qui tam lawsuit was filed, the False Claims Act requires that it be kept under seal. If both lawsuits are filed around the same time, the government won’t have much time to investigate before the company becomes aware of the investigation.

It also raises concerns about anonymous reporting with the SEC. If an individual is required to assert the defense and demonstrate proof, will this not become a manner to impede future communications with the SEC? The possibility is concerning.

Ultimately, the decision is the first interpreting the provision of the law. Hopefully, future courts will clarify its provisions to be more whistleblower-friendly.