Have the Courts Gone Too Far in Protecting Whistleblowers?
On January 26, 2018, Charles Matthew Erhart struck a blow for all would-be whistleblowers when he achieved a significant win on a critical challenge that nearly all corporate whistleblowers often face – whether they can use confidential company documents to expose fraud and other illegality. District Court Judge Cynthia Bashant’s decision in Erhart v. BofI Holdings clarifies that employer confidentiality agreements do not supersede federal whistleblower rights, and signals that retaliatory lawsuits against whistleblowers are unlikely to succeed. The decision also provides important guidance to corporate whistleblowers concerning precautions to take in using company documents to blow the whistle.
Erhart worked for BofI Federal Bank (BofI) as an internal auditor and sued BofI under the Sarbanes-Oxley Act and other whistleblower protection laws. Erhart alleged that BofI terminated his employment in retaliation for disclosing to the bank and federal regulators numerous violations of federal and state law. In particular, Erhart’s whistleblower retaliation complaint alleged that he opposed the bank’s decision to withhold information that was clearly responsive to an SEC subpoena and disclosed improprieties in the CEO’s personal accounts and potential violations of bank rules.
Shortly after Erhart filed his retaliation claim, BofI further retaliated against him by suing him for alleged theft and dissemination of BofI’s confidential information. In particular, BofI brought claims for (1) breach of contract; (2) conversion; (3) breach of the duty of loyalty; (4) negligence; (5) fraud; (6) violation of the Computer Fraud and Abuse Act; (8) unfair business practices; and (9) other violations of federal and state law.
The key aspects of the decision follow.
Confidentiality Agreements Do Not Trump Whistleblower Rights
The public policy protecting whistleblowers from retaliation, which is reflected in the Dodd-Frank Financial Reform Act and Sarbanes-Oxley, precludes companies from interfering with or preventing whistleblowing. In particular, an SEC rule implementing the Dodd-Frank whistleblower reward program bars companies from “enforcing, or threatening to enforce, a confidentiality agreement” to impede communicating with the SEC. Judge Bashant held that the “public policy in favor of whistleblower protection clearly outweighs the interest in the enforcement of [BofI’s confidentiality] agreement, and the agreement is unenforceable.”
Appropriating Company Documents is Protected Whistleblowing in Certain Circumstances
Judge Bashant held that whistleblowers are permitted to take company documents to disclose fraud to the government for two reasons. First, “whistleblowers often need documentary evidence to substantiate their allegations.” Second, “[a]llowing a whistleblower to appropriate documents supporting believed wrongdoing also mitigates the possibility that evidence of the wrongdoing will be destroyed before an investigation can be conducted.”
However, Judge Bashant also held that if a whistleblower engages in wholesale stripping of confidential documents or where the appropriation of confidential documents is “vast and indiscriminate,” the public policy in favor of whistleblower might not immunize the whistleblower from potential liability. Here, Judge Bashant declined to reject Erhart’s whistleblower defense to the appropriation claims because (1) Erhart testified in a declaration that he “was very careful in [selecting] the information [he] accessed and turned over. Each document was specifically related to one of the allegations of wrongdoing [he] had discussed with [his supervisor] and then reported to federal law enforcement”; and (2) Erhart states that “every document” he used was one he “had properly accessed in the course of performing [his] work as an internal auditor.”
Disclosure of Confidential Information in a Retaliation Complaint Should Be Limited to What is Reasonably Necessary to Pursue the Claim
Judge Bashant rejected BofI’s position that its confidentiality agreement barred Erhart from using any confidential information to pursue his retaliation claims. But she also noted that Erhart should be permitted to disclose BofI’s information in his complaint if doing so was “reasonably necessary” to pursue his retaliation claim.
The BofI ruling is likely to have ramifications far and wide. As I have previously blogged, the U.S. Supreme Court ruled on February 21, 2018, in Digital Realty Trust, Inc. v. Somers that employees who claim retaliation under the Dodd-Frank must inform the SEC while the difference of opinion with the employer is unfolding to be eligible for Dodd-Frank protections. This means an employee can go straight to the SEC even before using internal channels to resolve the matter. Taken together these two rulings seek to protect whistleblowers at the cost of harming employer interests. It remains to be seen whether these rulings result in more whistleblower activity against employers and increased involvement of the SEC at an earlier stage to shut down financial wrongdoing sooner rather than later.
Blog posted by Steven Mintz, aka Ethics Sage, on March 20, 2018. Dr. Mintz is a Professor Emeritus from Cal Poly San Luis Obispo. Visit his website and sign up for the newsletter.