Katz Banks Kumin partner Debra Katz and associate Aaron Blacksberg published an article in Law360 entitled, "Whistleblower Protections vs. Confidentiality Obligations." In the article, Ms. Katz and Mr. Blacksberg analyzed where existing law stands on whether whistleblowers can use confidential or privileged material as supporting evidence for retaliation claims. They note, "In Wadler v. Bio–Rad Labs Inc. and Erhart v. BofI Holding Inc. both courts ruled that plaintiffs could use confidential, proprietary and even privileged information to the extent reasonably necessary to support their whistleblower claims." In Wadler, the court ruled that while an attorney has professional responsibilities and ethical obligations to protect privileged information, existing legal standards allow attorneys to use confidential or privileged information as "reasonably necessary" to support whistleblower claims. In Erhart, the court balanced employer confidentiality agreements with whistleblower protections by taking into consideration the specific facts of the case when applying the "reasonably necessary" standard. Combined, "[t]hese two cases demonstrate that courts are willing to apply a proper balancing of interests when issues of confidentiality obligations arise in whistleblower retaliation cases."
Ms. Katz and Mr. Blacksberg concluded that while plaintiffs may be able to use confidential or privileged information in support of a whistleblower claim, "whistleblowers must be mindful of the risks they face when taking possession of employer documents and information relevant to their claims, and it is important that employees be counseled about those perils. However, as these decisions show, whistleblowers can use such information to bring retaliation claims when their actions are reasonable and when whistleblowers are appropriately careful in the use of that information." Check out the full article below.
Whistleblower Protections Vs. Confidentiality Obligations
Employment and whistleblower attorneys often face situations where clients possess confidential, proprietary or potentially privileged information that supports their legal claims, but where the mere possession or use of that information might run afoul of confidentiality agreements or other obligations to their current or former employer. In-house attorneys have ethical and professional obligations that can create even thornier situations when they possess or attempt to use such information.
While the case law is not uniform in this area, there is a long and growing line of cases in a number of whistleblower contexts — from various state and federal anti-retaliation laws to qui tam claims under the federal False Claims Act — that permit the use of this material when necessary to assert whistleblower claims. The rationale underlying these decisions and the two recent district court decisions discussed below is that the legislative intent and indeed the text of such laws warrants such a result.
In Wadler v. Bio–Rad Labs Inc. and Erhart v. BofI Holding Inc. both courts ruled that plaintiffs could use confidential, proprietary and even privileged information to the extent reasonably necessary to support their whistleblower claims.
Wadler v. Bio–Rad Labs
In Wadler v. Bio–Rad Labs, Sanford Wadler, the former general counsel of Bio-Rad Laboratories, asserted that the company terminated him in retaliation for investigating and reporting suspected company violations of the Foreign Corrupt Practices Act to Bio-Rad’s Audit Committee, in violation of the Sarbanes-Oxley Act, 18 U.S.C. § 1514A. Bio-Rad argued that Wadler could not prove his claim without using the company’s confidential business information and the communications and advice of Bio-Rad’s in-house and outside counsel, which it argued were “inextricable [sic] intertwined with Bio-Rad’s privileged and confidential information ...” given his role as general counsel.
The court rejected this argument, and provided several bases for its ruling allowing Wadler to use confidential and privileged information to prove his wrongful termination claim. The court noted that at various points in administrative proceedings and the litigation, Bio-Rad waived privilege and had, in essence, attempted to file an untimely dispositive motion in the form of a motion to exclude. Most relevant here, the court’s application of federal common law and whistleblower protections in reaching its conclusion that those rules supersede state law and rules of professional conduct are notable and will undoubtedly embolden other in-house counsel to assert claims against their companies when they face retaliation.
The court first reasoned that had Wadler brought his claim under state whistleblower laws in California state court, state legal precedent would likely have barred him from using privileged information in support of such a claim. Because Wadler brought state and federal claims in federal court, however, the more permissive rules of federal common law applied instead; Federal Rule of Evidence 501 provides for federal courts to apply that common law when dealing with privilege issues.
In analyzing what federal common law rules apply to the use of privileged information, the court noted that the Ninth Circuit, along with three other federal circuit courts of appeals, have allowed for attorneys to use privileged information in whistleblower claims, under the right circumstances. The court relied on Rule 1.6(b) of the Model Rules of Professional Conduct, which allows disclosure of privileged or confidential information “to the extent the lawyer reasonably believes necessary ... to establish a claim or defense on behalf of the lawyer in a controversy between the lawyer and the client ...” The court further explained that the parties could maintain appropriate confidentiality through the use of court procedures, such as filing evidence under seal, when necessary to strike a balance between the plaintiff’s ability to present his case and the defendant’s business interests.
Separately but relatedly, the court ruled that a regulation by the U.S. Securities and Exchange Commission promulgated pursuant to the Sarbanes Oxley Act, 17 C.F.R. § 205, preempts the state rules that would have barred Wadler’s use of privileged evidence. In relevant part, this rule allows attorneys to use “any report under [SOX] ... or any response there to ... in connection with any investigation, proceeding or litigation in which the attorney’s compliance with [SOX] is at issue.” The court noted that the SEC has viewed that rule as comparable with the standards of state and Model Rules of Professional Conduct, specifically Rule 1.6(b).
The court navigated seemingly competing obligations and whistleblower protections for in-house attorneys, and came out on the side of the attorney plaintiff. After a trial that lasted almost three weeks, and after only three hours of deliberation, the jury concluded that Wadler’s reports about FCPA violations led to his firing in violation of SOX and awarded him $8 million. Undoubtedly, the evidence of Bio-Rad business information, as well as Wadler’s and the company’s communications with company in-house and outside counsel — all of which the court allowed Wadler to introduce as necessary — was critical to this outcome.
Erhart v. BofI Holding
In Erhart v. BofI Holding, Charles Matthew Erhart filed several whistleblower retaliation claims against BofI Federal Bank, where Erhart had worked as an auditor. Erhart alleged that the bank had docked his bonus and was preparing to terminate his employment, prior to his taking medical leave, in retaliation for attempting to stop illegal auditing practices and reporting company activities to relevant government agencies. To prove his claims, Erhart downloaded, and sought to use as evidence, “BofI files, including ... audit findings, draft audit committee meeting minutes, wire transfer details and bank account information.” Erhart also sent a file to his mother “for safekeeping,” and he used his girlfriend’s computer at their home to access company information.
After Erhart filed suit, BofI asserted counterclaims against Erhart, including breach of contract, conversion, breach of the duty of loyalty, fraud and related state statutory claims centering on Erhart’s appropriation and use of BofI documents. BofI alleged that, by taking these actions with BofI files, Erhart had violated a confidentiality agreement barring his unauthorized use of “trade secrets and/or confidential information in any matter whatsoever.” In addition, BofI alleged that Erhart had breached his confidentiality agreement by failing to return all such information and data upon termination of his employment. Erhart asserted several affirmative defenses, each stating that a different state or federal whistleblower retaliation protection rendered his confidentiality agreement unenforceable as material used to support his retaliation claims, and provided a privileged justification as a shield against tort liability.
BofI filed a motion for summary judgment, seeking an order barring the plaintiff’s affirmative defenses as a matter of law. Erhart countered that the record contained sufficient facts to support his defenses as applied to his actions. The posture of this case was different from Wadler, but the basic issue was the same: the court considered the issue of when whistleblower protections supersede confidentiality and related obligations. In Erhart, the court weighed BofI’s “significant interest” in enforcing its employee confidentiality agreement and protecting its trade secrets against the “strong public policy favor of whistleblowing and protecting whistleblowers from retaliation.”
The court analyzed this balancing of interests in the actions Erhart took that BofI argued constituted misappropriation or misuse of confidential information. This analysis is especially helpful as it demonstrates how this balancing and the relevant factors can vary depending on the nature and object of the disclosure of information. The court looked at five separate instances of Erhart’s conduct:
(1) providing information to the government; (2) appropriating BofI's files; (3) sending BofI's information to his mother and placing BofI's information on his live-in girlfriend's computer; (4) purportedly providing information to the press; and (5) disclosing information in his publicly filed whistleblower retaliation complaint.
The court first concluded that the confidentiality agreement was unenforceable as to Erhart’s disclosure of information to the SEC and the U.S. Office of the Comptroller of the Currency. The court cited state and federal law, as well as an SEC rule, 17 C.F.R. § 240.21F-17, as specifically prohibiting enforcement of confidentiality agreements to prevent an employee from providing information to the SEC.
Second, the court set forth limited public policy grounds to protect Erhart’s appropriation of company documents in violation of his agreement with BofI. In denying summary judgment, the court stated that Erhart would have the burden “to justify why removal of the documents was reasonably necessary to support the allegations of wrongdoing.” The court applied a similar standard to deny summary judgment on Erhart’s affirmative defense regarding sending company documents to his mother for safekeeping, and for accessing company information on his girlfriend’s computer at their home. Erhart contended that he sent the information to his mother out of a reasonable fear that the company would destroy the crucial evidence, and his mother “did not print it, forward it or otherwise provide it to anyone.” Erhart used his girlfriend’s computer in the home they shared, but according to declarations, she never accessed the information or sent it to anyone else. The court found that, crediting declarations from Erhart, his mother and his girlfriend, a jury could reasonably believe that Erhart had acted in a reasonably necessary manner to protect relevant information from destruction and took proper steps to limit his mother’s and girlfriend’s access to that information.
In contrast to these disclosures, the court ruled that any disclosure of confidential information to the press was not protected. The court still denied summary judgment, noting that BofI had only shown Erhart and his attorney spoke with a New York Times reporter, and “not that they disclosed confidential information to the reporter.”
Next, the court again applied a “reasonably necessary” standard to protect Erhart’s disclosures in his public whistleblower retaliation complaint. The court relied on precedent in False Claims Act cases, and also cited the above-discussed December 2016 decision in Wadler v. Bio–Rad Labs as a basis for holding that Erhart could properly assert confidential information in a public complaint as “reasonably necessary to his claims and defenses in his whistleblower retaliation action.”
Finally, as to BofI’s noncontract claims, the court agreed with Erhart that whistleblower protections provided justification as a defense to tort liability, based on the same “public policy considerations underpinning the court’s contract analysis.” The court concluded that whistleblower protections allowed Erhart to provide to the government documents and other information regarding misconduct, and “the employer cannot then seek to impose tort liability on the employee for the same conduct.”
These two cases demonstrate that courts are willing to apply a proper balancing of interests when issues of confidentiality obligations arise in whistleblower retaliation cases. As the court in Wadler wrote, an attorney’s professional responsibilities and ethical obligations are important interests. At the same time, existing legal standards allowing attorneys to use confidential or privileged information as “reasonably necessary” in claims, along with court confidentiality procedures, appropriately protect those interests while allowing plaintiffs to vindicate their rights as whistleblowers. Similarly in Erhart, the court analyzed how to balance employer confidentiality agreements with whistleblower protections, and what facts are relevant determining what kinds of appropriation and disclosure of employer information are “reasonably necessary” in whistleblower retaliation cases.
These cases, particularly Erhart, also demonstrate that specific facts are critical to these determinations, even when courts apply this “reasonably necessary” standard. As the court noted, Erhart took great care at every step along the way in how he limited disclosure of employer information and his legal claims justified each disclosure. Furthermore, that legal standard differs depending on state and jurisdiction; the court in Wadler highlighted how California state law would have likely barred Wadler from using the same confidential and privileged evidence in state court.
Whistleblowers must be mindful of the risks they face when taking possession of employer documents and information relevant to their claims, and it is important that employees be counseled about those perils. However, as these decisions show, whistleblowers can use such information to bring retaliation claims when their actions are reasonable and when whistleblowers are appropriately careful in the use of that information. Quoting an American Bar Association ethics opinion, the court in Wadler made clear that when seeking to use confidential or privileged information, “The lawyer must take reasonable affirmative steps, however, to avoid unnecessary disclosure and limit the information revealed.” Whistleblowers, attorneys and nonattorneys alike, should heed these words.