WHISTLE-BLOWING AND TRADE SECRETS: BALANCING PUBLIC INTEREST AND CORPORATE SECRETS

This article is written by Iqra Rasheed of Aligarh Muslim University, Aligarh, an intern under Legal Vidhiya

ABSTRACT

Since the main element that makes trade secrets commercially salient is their confidential nature, disclosure of that information takes away its commercial value resulting in damage or loss for the holder of that trade secret. However, an unrestricted right to conceal information might also lead to a certain asymmetry because then only the holder of the information – a company in the case of trade secrets – determines what  should be disclosed to whom and to what extent. In such situations, the information being concealed is not necessarily a trade secret of commercial value but one concealing wrongdoing, fraud, and corruption among other concerns. Therefore, the whistleblowers of such information disclosing it in the public interest merit legal protection from any form of retaliation. But no legal protection can warrant blanket immunity to the whistleblowers because such an immunity will erase all possibilities of any corporate confidentiality. This article analyses both the concepts and also suggests the need to strike a balance between public interest and corporate confidentiality so that none leads to the detriment of lawful activities of the other.

Keywords

Whistleblowing, Trade Secret, Public Interest, Corporate Confidentiality

INTRODUCTION

Companies protect their intellectual property not only in the form of federal patents, trademarks, and copyrights, but also in the form of day-to-day information that runs their businesses. It could be customer lists, account books, future plans etc. Commonly  termed as ‘trade secrets’, these constitute the most vital piece of information and therefore businesses take great measures to prevent employees from divulging these trade secrets to others, out of a search for profit, carelessness, or even retribution.^[1] In fact, trade secrets are exactly what gives a company its competitive edge. But such significance does not warrant complete protection with no exceptions. While protection is important, it is equally important to identify the misconduct, if any, on the part of companies to avoid any danger to the public.[2]

The act of exposing the fraudulent activities of any corporation in the public interest is called ‘whistleblowing’. Whistleblowing (Tattle-telling, telling on, being an informant, snitching etc. in a layman’s language) is mostly tinged with a negative hue to its description. Betrayal tends to underline how the concept of whistleblowing is viewed in the corporate sphere. The term ‘whistleblowing’, however, is not always riddled with negative connotations only and can have some inherently positive outcomes. Whistleblowing means all the actions that reveal or report illegal activities or information. Such activities may range from minor infractions to acts posing serious threat to people and institutions.

Whistleblowing is very effective mechanism through which a number of corporate frauds have come to light. The information provided by the whistleblowers leads to the apprehension of people involved in different kinds of misconduct.[3] This is a beneficial way to mitigate instances of corruption by any business or corporation. But whistleblowers rarely receive the credit they deserve and are often looked down upon as leakers of confidential information or ‘trade secrets’ that ought to have been preserved by the members of trading corporation.

They frequently face reprisal, sometimes at the hands of the organization or group which they have accused, sometimes from related organizations, and sometimes under law.[4] Any disclosure made by them might expose them to federal trade secret theft liability, if the information is not shared through the proper channels.[5] This concern has taken on greater moment as companies accused of illegal conduct have increasingly filed lawsuits against whistleblowers and their counsel^[6]

The trade secret law provides defenses- clear public policy exception that could keep a check on the concealment of any illegal activity. To avoid clash between the two, a balance needs to be struck so that public interest is not hampered.

TRADE SECRET: FOUNDATION OF CORPORATE  CONFIDENTIALITY

Any information that has an actual or potential value from not being known generally, and is subject to reasonable secrecy constitute a trade secret. However, absolute secrecy is not required, as the information needs to be shared in a controlled and limited way between members of the organization. Trade secrets can potentially last indefinitely, so long as the information continues to be both valuable and confidential. As soon as the information is disclosed, the trade secret is terminated immediately. There can never be a trade secret once it is out in the open. In case of such a violation of secrecy, a trade secret owner acquires the right to seek legal remedy against the person who disclosed it improperly.^[7]

LAWS PROTECTING TRADE SECRET

Since trade secrest are the most valuable piece of information on which any business is carried on, their protection from any kind of frivolous mishandling is an absolute necessity. A number of legislations have been enacted by states across the globe to afford protection to their trade secrets within their domains. Some of these important legislations have been discussed here:-

• WTO TRIPS Agreement Relating To Undisclosed Information-

The TRIPS Agreement (w.e.f. 1 January 1995) is to date the most comprehensive multilateral agreement on intellectual property.

Section 7 of the TRIPS Agreement protects undisclosed information (trade secrets, etc.)  from any leakage. Articles 39 and 40 safeguard the holder of secret information from being forced to part with that information to anybody.

According to Article 39.2, the protection applies to information that is secret and consequently has some commercial value and reasonable steps are taken to keep it secret. The Agreement does not mandates that the undisclosed information should be treated as a form of property, but it does require that a person in control of such information must prevent it from being disclosed to, acquired or used by others without his/her consent in a manner contrary to honest commercial practices.

Article 40 of the TRIPS Agreement recognizes that certain licensing practices or conditions pertaining to intellectual property rights restraining competition may have adverse effects on trade and may impede the dissemination of technology. Member nations must adopt, in consistence with the other provisions of the agreement, appropriate measures to prevent or control such licensing practices which are abusive and anti-competitive.[8]

• UNIFORM TRADE SECRETS ACT-

In 1979, several U.S. States adopted the Uniform Trade Secrets Act (UTSA) which was further amended in 1985 with approximately 47 states having adopted it.

Under the Uniform Trade Secrets Act (“UTSA”), a ‘trade secret’ has been defined to include an information that derives independent economic value as it is not generally known or readily ascertainable, and it is the subject of efforts to maintain secrecy. Unlike copyrights, patents, and trademarks, trade secrets are not registered with any government agency. However they might constitute a company’s most valuable intellectual property assets. The UTSA has been enacted by most states, but in states where it has not been enacted, infringement or misappropriation of a trade secret remains a common law tort.[9]

• ECONOMIC ESPIONAGE ACT-

With the enactment in 1996 of the Economic Espionage Act(EEA), the Federal Government has moved aggressively into the protection of private property rights in trade secrets by making the theft or misappropriation of trade secrets a federal crime. The primary reason to enact EEA was the fully documented effort of foreign governments to gain access to the trade secrets of U.S. companies (high-tech and computer industries) to advance the economic interests of their private sector. The EEA provides broader protection for trade secrets of international interest in comparison to those that are purely domestic.[10]

• DEFEND TRADE SECRETS ACT

In 2016, the then US President Barak Obama signed the Defend Trade Secrets Act (DTSA) – an important legislation that for the first time gave American companies an opportunity to seek a federal cause of action against trade-secret misappropriation.^[11]

The Defend Trade Secrets Act (DTSA) sought to amend the Economic Espionage Act (EEA) by providing a private civil cause of action to enforce the EEA and authorized enforcement against violations of state trade secret protections “related to a product or service used in, or intended for use in, interstate or foreign commerce” in a federal court. The federalizing of trade secret enforcement attracted wide support from various business and innovation groups to combat rising domestic and international threats to trade secret protection in the digital age.[12]

• In 2016, the Europeon Union also adopted a Directive on Protection of Trade Secrets.

UNDERSTANDING WHISTLEBLOWING

A whistleblower (whistle-blower or whistle blower) is a person who informs the public or those in authority about alleged dishonest or illegal activities (misconduct) happening in a government department, a public or private organization, or a company. This alleged misconduct may be classified in many ways, for example, violation of a law, rule, regulation and/or a legal process or a direction under law which may pose a threat to public interest, such as fraud, corruption or health/safety breach.[13]

Whistleblowers acting legally ensure public safety and are serving a vital purpose for ensuring that the ethical misconduct is halted, curbed and punished. Whistleblowers are the agents of incredible change across multiple industries by bringing to light a number of cases involving Policy corruption, Fraud, Abuse of power, Lawbreaking, Disregarding public health and safety, Embezzlement and various other public wrongs. Through their selfless services, they help authorities to put legislation in place to ensure better protection of workers as well as the consumers against unsafe or immoral corporate or federal practices.^[14]

LEGISLATIONS PROTECTING WHISTLEBLOWERS OF TRADE SECRETS

• DEFEND TRADE SECRETS ACT-

The DTSA make specific provisions regarding employee and contractor immunity and anti-retaliation in case of disclosure of a trade secret. These provisions are intended to protect the whistleblowers who need to disclose trade secret information as part of their claims.[15] 

DTSA provides under 18 U.S.C. § 1833(b)(1) that:

“An individual shall not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret that . . . is made . . . in confidence to a Federal, State, or local government official, either directly or indirectly, or to an attorney” and “solely for the purpose of reporting or investigating a suspected violation of law”; or  “in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.”

Further, 18 U.S.C. § 1833(b)(3)-(4), lays down that “[a]n employer shall provide notice of the immunity set forth in this subsection in any contract or agreement with an employee [or contractor or consultant] that governs the use of a trade secret or other confidential information.”

Thus, Section 18 USC 1833 of the Defend Trade Secrets Act ( DTSA) grants the whistleblower  an “immunity” from any liability for the disclosure of a trade secret to the government or in a court filing under seal.

The DTSA bars any kind of civil or criminal liability of an individual under any Federal or State trade secret law for the disclosure of a confidential information in confidence to a Federal, State or local government official, either directly or indirectly, or to an attorney.^[16]

The DTSA also allows the recovery exemplary damages and attorney’s fees in cases of ‘willful’ and ‘malicious’ misappropriation and failure to comply with notice provisions.

CHALLENGES WITH WHISTLEBLOWING AND TRADE SECRETS: BALANCING PUBLIC INTEREST & CORPORATE SECRETS

Suing the whistleblowers for disclosing proprietary information to the government is the most common defense strategy adopted by the companies to reverse the effect of the act of whistleblowing and saving harm to their reputations that is now at stake. On the other hand, certain companies have legitimate reasons for limiting the disclosure of proprietary information alleged to be illegal. In cases where there is a possibility of the whistleblower being mistaken as to the illegality, the leakage of trade secret can cause significant harm to the trade secret owner. Once trade secrets leak, those who learn of them through legitimate means are free to use them however they like. Also, even if some conduct was in fact illegal, disclosure of whatever trade secrets the whistleblower chooses might not be the appropriate remedy. Nonetheless, punishing genuine whistleblowers and preventing the government from evaluating incriminating evidence is unjustified. In such a situation, a public policy exception to trade secret protection should balance the interests of law enforcement with the legitimate interests of trade secret owners.[17]

There could be two ways to solve this puzzle. First, studies indicate that whistle blowing is resorted to by the employees not under a sense of unfair competition or commercial disadvantage of the employer but under a compelling sense of morality, social welfare and public justice. What they seek to promote is social good-  something consistent with the guiding principles of trade secret protection: commercial morality and technological advance. It is ironic that a legal regime grounded in promoting commercial morality has stood in the way of fretting out illegal activity. Such misconduct undermines commercial and social morality.

Second, confidentiality rules existing within the legal framework provide safeguards against disclosure of trade secrets by attorneys and government officials. Government agencies routinely deal with trade secrets and follow strict rules to keep this information confidential. A number of legislations have been enacted to ensure exemption of trade secrets from public disclosure. The federal government holds federal officers and employees strictly accountable for disclosing trade secrets to the public without authorization. The Trade Secrets Act prescribes strict penalties like imposition of fine, or imprisoned upto one year, or even removal from office or employment in cases of unauthorized disclosure made by government employees.

Thus, reporting of alleged illegal activities by employees as well as the contractors subject to Non Disclosure Agreements (NDAs) can be reconciled with the protection of trade secret law by immunizing the whistleblowers from any form of liability so long as they maintain the confidentiality of information. This can be accomplished by authorizing employees or other individuals subject to NDAs to share confidential information only with certain trusted intermediaries: government officials and attorneys legally bound to safeguard proprietary information. Thus, disclosure of even substantial amounts of proprietary information to a trusted intermediary—an attorney, court, or government official— will not jeopardize trade secrecy. Such a regime enables potential whistleblowers to obtain legal advice without risk of liability for trade secret misappropriation. It also provides government enforcers with access to critical information about compliance with the law, government contracts, and other vital areas of public concern. [18]

GUIDELINES FOR CORPORATIONS

In the wake of plenty of immunity being afforded to the whistleblowers, corporations also need to be cautious in order to avoid falling prey to any such situation that might be detrimental to the progress of their business. Following are the guidelines that various organizations may follow to prevent losses through misappropriation of trade secrets by the whistleblowers:-

1. Limit access- Actual and potential whistleblowers are hard to identify and therefore companies must implement detailed policies and protocols to protect their trade secrets and sharply limit access to them.
2. Notify-  Companies are required to notify their employees regarding the specific terms of the immunity provision and noncompliance may result in loss of exemplary damages or attorneys’ fees that are otherwise available under the DTSA.[19] 
3. Analyze how the whistleblower acquired the trade secrets and whether he had authority to acquire the information. DTSA does not protect a whistleblower acquiring information unlawfully.[20]
4. Examine how the whistleblower disclosed the secrets. Failure to comply with the requirements of immunity provision will take away any benefit that may have been enjoyed by the whistleblower. The DTSA immunity provision will not apply unless and until the whistleblower satisfies each of its requirements.[21]
5. When a trade secret is stolen, the organisation should always endeavor to be the first to take an action before the whistleblower.
6. Companies must use the DTSA to protect their trade secrets during the litigation by seeking court orders or injunctions and through ex parte seizure of the trade secrets.[22]

While strategies adopted by companies may vary from case to case depending on the facts, these steps support a proactive approach to addressing potential trade secret misappropriation by a purported whistleblower.[23]

CONCLUSION

Whistleblowing, though apparently seems like an absolute betrayal, is in fact a very selfless, brave and honest act performed by an individual. By exposing the illegality of conduct of its own organization, a whistleblower exposes himself to a lot of retaliation and backlash. Accordingly, their protection must be ensured to encourage others to do what is right. But there is also a need to ensure equally effective protection to trade secrets holders who might suffer at the hands of a whistleblower having made an error of judgement.  Some of the ways to strike a balance have already been discussed above but research and dialogue must continue to devise effective legislations and strategies to deal with the conflict.

REFERENCES

1. Arttu Vesterinen, Why Is Whistleblowing So Important?, FALCONY BLOGS ( March4, 2024, 8:04 PM), https://blog.falcony.io/
2. Bret A Cohen, Michael T. Renaud, and Nicholas Armington, Explaining the Defend Trade Secrets Act, ABA BUSINESS LAW SECTION (Sep 20, 2016) https://www.americanbar.org/groups/business_law/resources/business-law-today/2016-september/explaining-the-defend-trade-secrets-act/
3. Hannah Dawson, Whistleblowers and Trade Secrets: A Theranos Case Study, IP BYTES (March 03, 2024, 9:04 PM), https://blogs.luc.edu/ipbytes/
4. https://blowthewhistle.com/can-sued-divulging-trade-secrets-bring-whistleblowing-claim/
5. J. Derek Mason, Gerald J. Mossinghoff  and David A.Oblon, The Economic Espionage Act: Federal Protection For Corporate Trade Secrets, OBLON (Mar 1999) https://www.oblon.com/publications/the-economic-espionage-act-federal-protection-for-corporate-trade-secrets
6. Justia, https://www.justia.com/ (last visited march 4,2024 5:34 PM)
7. Katherine Williams, Whistleblower | Definition, Protection & Examples (11/21/2023) https://study.com/learn/lesson/what-is-a-whistleblower-ethics-law-examples-of-the-whistleblower-protection-act.html
8. Kreindler & Associates, https://blowthewhistle.com/ (last visited March 6, 2024)
9. Madeline Cahill and Charlie Hoge, The Defend Trade Secrets ActProviding Immunity Notice to Employees — A Critical Question, San Diego County Bar Association https://www.sdcba.org/
10. Peter S. Menell, Tailoring a Public Policy Exception to Trade Secret Protection, Vol. 105:1 California Law Review1 (2017), file:///C:/Users/hp/Downloads/fulltext.pdf
11. Peter Menell , The Defend Trade Secrets Act Whistleblower Immunity Provision: A Legislative History Vol. 1 The Business, Entrepreneurship And Tax Law Review [2017] https://core.ac.uk/download/pdf/217050717.pdf
12. R. Mark Halligan, The trade secret whistleblower, REUTERS (January 16, 202410:23 PM)  https://www.reuters.com/legal/legalindustry/trade-secret-whistleblower-2024-01-16/
13. Wikipedia, https://en.wikipedia.org/wiki/Whistleblowing (last visited March 6, 2024 10:29 PM)
14. William Taylor and Callan Stein, Seven Steps to Address Trade Secret Misappropriation by Whistleblowers THE TEMPLE 10-Q (January 22, 2020) https://www2.law.temple.edu/10q/seven-steps-to-address-trade-secret-misappropriation-by-whistleblowers/
15. World Trade Organisation, https://www.wto.org/ ( last visited march 6, 2024 9:20 PM)

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[1]  Kreindler & Associates, https://blowthewhistle.com/ (last visited March 6, 2024)

[2] Hannah Dawson, Whistleblowers and Trade Secrets: A Theranos Case Study, IP BYTES (March 03, 2024, 9:04 PM), https://blogs.luc.edu/ipbytes/

[3] Arttu Vesterinen, Why Is Whistleblowing So Important?, Falcony Blogs ( March4, 2024, 8:04 PM), https://blog.falcony.io/

[4] Wikipedia, https://en.wikipedia.org/wiki/Whistleblowing (last visited March 6, 2024 10:29 PM)

[5] https://blowthewhistle.com/can-sued-divulging-trade-secrets-bring-whistleblowing-claim/

[6]  Peter S. Menell, Tailoring a Public Policy Exception to Trade Secret Protection, Vol. 105:1 California Law Review1 (2017), file:///C:/Users/hp/Downloads/fulltext.pdf

[7] Hannah Dawson, supra note 2

[8] World Trade Organisation, https://www.wto.org/ ( last visited march 6, 2024 9:20 PM)

[9] Justia, https://www.justia.com/ (last visited march 4,2024 5:34 PM)

[10] J. Derek Mason, Gerald J. Mossinghoff  and David A.Oblon, The Economic Espionage Act: Federal Protection For Corporate Trade Secrets, OBLON (Mar 1999) https://www.oblon.com/publications/the-economic-espionage-act-federal-protection-for-corporate-trade-secrets

[11] Bret A Cohen, Michael T. Renaud, and Nicholas Armington, Explaining the Defend Trade Secrets Act, ABA BUSINESS LAW SECTION (Sep 20, 2016) https://www.americanbar.org/groups/business_law/resources/business-law-today/2016-september/explaining-the-defend-trade-secrets-act/

[12] Peter S. Menell, supra note 2, at 11

[13] Wikipedia, https://en.wikipedia.org/wiki/Whistleblowing (last visited March 6, 2024 10:29 PM)

[14] Katherine Williams, Whistleblower | Definition, Protection & Examples (11/21/2023) https://study.com/learn/lesson/what-is-a-whistleblower-ethics-law-examples-of-the-whistleblower-protection-act.html

[15] Madeline Cahill and Charlie Hoge, The Defend Trade Secrets ActProviding Immunity Notice to Employees — A Critical Question, SAN DIEGO COUNTY BAR ASSOCIATION https://www.sdcba.org/

[16]  R. Mark Halligan, The trade secret whistleblower, REUTERS (January 16, 202410:23 PM)

https://www.reuters.com/legal/legalindustry/trade-secret-whistleblower-2024-01-16/

[17] Peter S. Menell, supra note 2, at 13

[18]       Peter Menell , The Defend Trade Secrets Act Whistleblower Immunity Provision: A Legislative History Vol. 1 The Business, Entrepreneurship And Tax Law Review [2017] https://core.ac.uk/download/pdf/217050717.pdf

[19] 18 U.S.C. § 1833(b)(3)(C)

[20] 18 U.S.C. § 1833(b)(5).

[21] 18 U.S.C. § 1833. 

[22] 18 U.S.C. § 1836(b)(3)(A).

[23]  William Taylor and Callan Stein, Seven Steps to Address Trade Secret Misappropriation by Whistleblowers THE TEMPLE 10-Q (January 22, 2020) https://www2.law.temple.edu/10q/seven-steps-to-address-trade-secret-misappropriation-by-whistleblowers/

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