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Another Court Provides Strong Support for Whistleblower Use of Confidential Employer Documents to Expose Alleged Fraud

By Susan Schneider Thomas

One of the ways in which companies attempt to discourage whistleblowing or to punish actual whistleblowers is by asserting legal claims against them for using company documents, sometimes in violation of employment agreements or other company employee policies or under various tort laws.[1]  In one recent case, for example, the corporate employer brought a whole host of claims against an employee it had just terminated. Erhart v. BOFI Holding, Inc., Case No. 15-cv-02287-BAS-NLS, Order Granting in Part and Denying in Part BOFI Federal Bank’s Motion for Summary Adjudication, S.D.Cal. 2/14/2017.

This can be a powerful silencing device, since employees are worried about possible liability, or even just the notion of having to defend their conduct.  Especially when an employer asserts claims like this in conjunction with having terminated the employee, the risks and costs to the now-unemployed employee can be daunting.  And the intimidation against other employees considering similar reporting can be very strong.

In an effort to encourage whistleblowing activities so as to cut back on corporate fraud on the government, a number of statutes and regulations provide specific protection against these types of retaliatory suits by employers.  See, e.g,, Defend Trade Secrets Act of 2016, Pub. L. No. 114-153, 130 Stat. 376 (2016) (amending 18 U.S.C. § 1833(b) and providing immunity from civil and criminal liability for individual who discloses a trade secret either to a government official or attorney in confidence to report a violation of law, or in a legal complaint filed under seal); An Act To enhance whistleblower protection for contractor and grantee employees, Pub. L. No. 114- 261, 130 Stat 1362 (2016), (extending protections from retaliation for employees of federal contractors, subcontractors, grantees, and sub-grantees who report a host of problems relating to federal contracts and funds); see also Press Release, Off. of Rep. Mike Coffman, Reps. Coffman, Rice, Speier and Blum Create House Whistleblower Protection Caucus (Apr. 26, 2016), (House Whistleblower Protection Caucus “will work to build bipartisan support for strong whistleblower protections [and] raise awareness about retaliation against whistleblowers.”).

On an even broader basis, however, courts have dismissed these types of claims by employers on general public policy grounds.  A recent opinion from the United States District Court for the Southern District of California relied on both statutory and public policy grounds in severely cabining the intimidating claims of the whistleblower’s former employer.  The court ruled that employer confidentiality agreements do not supersede federal whistleblower rights and warned that retaliatory lawsuits against whistleblowers are unlikely to succeed. Significantly, the court also provided concrete guidance to potential whistleblowers in terms of evaluating their risks and taking certain precautions so as to maximize the likelihood that their conduct will be deemed protected.

Erhart’s Whistleblower Claims

Charles Erhart worked as an internal auditor for BofI Federal Bank (BofI) and observed conduct that he believed was illegal in connection with the Bank’s decision to withhold responsive information to an SEC subpoena.  He sued BofI under the Sarbanes-Oxley Act and other whistleblower protection laws when he was fired in retaliation for his disclosing the alleged misconduct to federal regulators.  He also disclosed information to The New York Times, which resulted in a substantial decline in BofI’s stock price and general adverse publicity.

In response to Erhart’s retaliation suit, BofI further retaliated against him by suing him for alleged theft and dissemination of BofI’s confidential information, specifically 1) breach of contract; (2) conversion; (3) breach of the duty of loyalty; (4) negligence; (5) fraud; (6) violation of California Penal Code Section 502; (7) violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(5); and (8) unfair business practices ….   BofI sought a ruling that Erhart’s whistleblowing activities were not a defense to BofI’s claims.

Key Provisions of Court Decision

  • Overall, the court held that “both federal and state law reflect a strong public policy in favor of whistleblowing and protecting whistleblowers from retaliation.” Slip op. at 19.  More specifically, the court concluded that “there is merit to a public policy exception to confidentiality agreements to protect whistleblowers who appropriate company documents. As discussed above, the Court recognizes the strong interest in the enforcement of confidentiality agreements like the one signed by Erhart. But at the same time, whistleblowers often need documentary evidence to substantiate their allegations.”  at 23.
  • Importantly, the court concluded that “if an employee is permitted to provide information regarding believed wrongdoing to the government, including documents, the employer cannot then seek to impose … liability on the employee for the same conduct.” at 33.
  • The court specifically recognized the importance of allowing documents to be taken or copied because of a concern that the documents might otherwise be destroyed before any investigation is commenced. Id. at 23.
  • In order to achieve a proper balancing between legitimate rights of employers to protect the confidentiality of their documents and the need of the government for private parties to report suspected fraud, the court reiterated the position taken by most courts that the whistleblower has to justify the need to have taken the documents. Hence the burden is on the party seeking to invoke the public policy exception “to justify why removal of the documents was reasonably necessary to support the allegations of wrongdoing.” Id. at 24 (internal quotations omitted).
  • Further, the court essentially set out guidelines for employees to follow to gain maximum protection for their activities. For example, if an employee is contemplating transmitting information to another’s computer or server, the employee should be prepared to demonstrate that the information taken was relevant to the reported wrongdoing, the information was transmitted out because there was a concern that the information would have been destroyed and the motivation for sending the information to another person was to support the allegations of wrongdoing. at 27-28.  Overall, the whistleblower should be careful to restrict copying of documents to only those closely related to the allegations of wrongdoing and to documents that the employee had appropriately accessed in the first instance. Id. at 26.

This is a welcome ruling providing support for whistleblowers who need to take company documents in order to support their allegations of corporate fraud on the government.

[1] See, e.g., Scott R. Grubman et al., Fighting Back: Asserting Counterclaims Against False Claims Act Relators, 27 THE HEALTH LAWYER 4, at 14 (Apr. 2015) (“Until recently, FCA Relators seldom, if ever, faced repercussions for taking and sharing what might otherwise be considered proprietary and confidential information to support their qui tam complaint. Recently, however, as more FCA cases work their way through litigation (particularly where the government declines to intervene and the Relator is left to pursue the case on behalf of the government), healthcare providers and their attorneys have become more willing to assert counterclaims against FCA Relators who appropriate confidential information to support an FCA qui tam.”).

 

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