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Blowing the whistle on the “whistleblower” notice

January 14, 2021 by in "Two Minute Takeaway"

The law sometimes works in strange ways.  One example is the “whistleblower immunity” provision of the federal Defend Trade Secrets Act of 2016 (the “DTSA”). 

Employees recently signing employment agreements likely noticed an odd provision notifying them of their immunity if they disclose trade secrets as part of certain whistleblower activity.  This provision sounds benign, but as explained below it exposes employees to claims for attorneys fees and punitive damages.  

The DTSA

President Obama signed the DTSA into law in 2016 and thereby created new federal claims for trade secret misappropriation.  The DTSA largely mirrors the Uniform Trade Secrets Act and therefore does not substantively change trade secret law.  Rather, Congress intended the DTSA to create a uniform federal law of trade secrets similar to other areas of intellectual property such as patent, copyright, and trademark.

The DTSA’s Whistleblower Immunity Provision and its Legislative History

The DTSA, however, contains an anomalous provision providing immunity to “whistleblowers” who reveal trade secrets when reporting corporate wrongdoing.  The drafters of the DTSA were concerned that corporations had abused trade secret litigation to deter employees from disclosing corporate misconduct.  For example, the famous whistleblower Jeffrey Wigand long refrained from disclosing what he knew about big tobacco’s wrongdoing because his employer Brown & Williamson threatened to sue him for disclosing trade secrets.

Consequently, Senators Patrick Leahy and Charles Grassly sponsored a provision of the DTSA clarifying that defendants engaged in bona fide whistleblower activity could not be held liable for trade secret violations.  The provision became DTSA section 1833(b) which provides that no party shall be liable for trade secret disclosures (1) made confidentially to an attorney or government official for the purpose of reporting a violation of law; or (2) made in a complaint or other document filed under seal in a lawsuit.  See 18 U.S.C. 1833.   This article by Berkeley law professor Peter Menell provides an excellent summary of the legislative history of the whistleblower immunity provision of the DTSA.  

The DTSA’s Whistleblower Notice Provision 

The drafters of the DTSA, however, were concerned that whistleblower immunity would be illusory if employees did not know about it.  Non-disclosure agreements impose blanket prohibitions and likely few employees would know that they could disclose trade secrets if acting as a whistleblower.  The DTSA therefore created an incentive for employers to notify employees of their whistleblower immunity by including notice of that immunity in employment agreements.

The DTSA mandates that employers notify employees of their whistleblower immunity in employment agreements.  18 U.S.C. 1833(b)(3)(A).  The DTSA incentivizes employers to provide this notice by conditioning an employer’s right to recover punitive damages and attorneys fees upon provision of the notice.  “If an employer does not [provide notice of whistleblower immunity] the employer may not be awarded exemplary damages or attorneys fees…”  18 U.S.C. 1833(b).  If an employment agreement fails to provide notice of whistleblower immunity, therefore, the employer may not seek to recover punitive damages and attorneys fees in any later litigation with that employee. 

Employers Include Notice of Immunity to Secure their Right to Punitive Damages and Attorneys Fees 

In response to enactment of the DTSA, employers quickly incorporated notice of the DTSA’s whistleblower immunity provision into employment agreements to secure their right to obtain punitive damages and attorneys fees in trade secret litigation with employees.  Therefore, despite the pro-employee intent of the DTSA’s whistleblower provisions, the practical effect of the notice provision is anti-employee.  A provision assuring employees of whistleblower rights should actually read: “Employee hereby agrees that in any trade secret litigation between employer and employee the employer may seek and recover punitive damages and attorneys fees against the employee as provided in the Defend Trade Secrets Act of 2016.”  

Employees Should Strike the DTSA’s Notice Provisions from any Employment Agreement

Employees, therefore, should strike the whistleblower notice provision from their employment agreements.  The provision exposes employees to significant liability.  Trade secret litigation is very common, the law is not well defined, and significant legal fees can rapidly accrue.  Consequently, agreeing to incur personal liability for an employer’s attorneys fees is something an employee should do knowingly, not based on a misunderstanding of apparent contractual boilerplate.

Conclusion      

The DTSA notice provision presents a case of legal schizophrenia.  Acting with admirable pro-employee intent, Congress codified a new legal immunity so corporations could no longer intimidate whistleblowers through threats of trade secret litigation.  But in doing so, Congress set a trap for employees exposing them to new claims for punitive damages and attorneys fees, which claims often have their own significant in terrorem effect upon employees involved in trade secret disputes.  Ironically, astute employees negotiating employment agreements should strike the DTSA whistleblower immunity provision that Congress devised to protect them.