Confidentiality Agreement of Limited Use Against Whistleblowers

California Lawyers

Banks, mortgage firms, and other financial services companies generally require employees to sign confidentiality agreements at the time of hire that prohibits the employee from downloading or disseminating the employer’s confidential information to third parties. However, such confidentiality agreements may be of limited value when it comes to whistleblowing activities, at least according to a recent decision by a federal judge sitting in Southern California [Erhart v. BofI Holding, Inc., 2017 U.S. Dist. LEXIS 20959 (S.D. Cal. Feb. 14, 2017)].

Background

Erhart worked as an internal auditor for BofI Federal Bank (“BofI”). As an internal auditor, Erhart had access to information BofI treated as proprietary and confidential. Over a three-month period, Erhart contacted the SEC and the U.S. Department of Treasury to report what he suspected was misconduct, including the alleged failure to disclose all relevant information in response to an SEC subpoena.

He subsequently filed a civil action against BofI under both California and federal whistleblower protection provisions, alleging BofI retaliated against him for reporting unlawful conduct to the government. The following day, The New York Times published an article titled “Ex-Auditor Sues Bank of Internet.” The share price of BofI’s publicly traded holding company plummeted thirty percent.

BofI counterclaimed and alleged that Erhart violated California state law, the Computer Fraud and Abuse Act, and the provisions of his confidentiality agreement with BofI by publishing BofI’s confidential information and deleting hundreds of files from his company-issued laptop.

Erhart admitted many of BofI’s allegations. He had indeed forwarded a copy of confidential information to his personal email account and downloaded BofI’s files to his personal computer. He printed copies of BofI documents, including customer bank account information and internal audit reports, and had even emailed his mother a spreadsheet containing customer social security information. He also used his girlfriend’s computer to access BofI documents.

Federal Court Said Government Disclosure Was Protected Activity

The federal judge made a number of important rulings, including the following:

•  That California Labor Code Section 1102.5 and the federal whistleblower statutes protected Erhart’s ability to report believed wrongdoing to the SEC and the Department of the Treasury, in spite of the existence of his confidentiality agreement.

•  To the extent that Erhart had disclosed confidential information to the Press, such “leaks” were not protected activity. To the extent that BofI could establish that Erhart was responsible for the leaks, he could be liable.

•  Erhart’s transmission of private and confidential information to his family members, and his accessing of such information from his girlfriend’s computer, was not necessarily privileged. The issue turned on whether he felt compelled to take such measures to protect relevant information from destruction. If so, then his actions were protected. If Erhart did not have a reasonable concern that such information would be destroyed, then BofI would prevail.

•  Erhart had a “qualified” right to preserve the downloaded evidence. The judge noted that a whistleblower cannot pilfer an employer’s proprietary documents in violation of his or her contract merely because it might help the person blow the whistle on an employer’s violations of law, “real or imagined.” But Erhart might be able to show that his appropriation should be protected if he established that such appropriation was limited to the documents necessary to support his whistleblower claims.

•  As to whether his disclosure of information in his court filings violated his confidentiality agreement, the judge said that Erhart was, of course, required to include factual allegations of wrongdoing in order to state a whistleblower retaliation claim. To the extent that he did so, his disclosure was allowed. But to the extent that Erhart disclosed information with intent to harm BofI and, for example, to benefit short sellers by disclosing confidential information, his disclosures would not be protected.

Conclusion: Confidentiality Agreements Work to Prevent Public Disclosure – They Do Not Shield a Business From Wrongdoing

In the judge’s decision, Erhart secured what one might call a half-victory. The judge affirmed that when it comes to disclosing wrongdoing to state and federal authorities, the employer cannot hide behind a confidentiality agreement. On the other hand, the employer should be protected from disclosure of confidential information to the press or to other third parties. It is likely that these sorts of disputes will have to be resolved on a case-by-case basis.

CKB VIENNA LLP: Proven Attorneys

CKB VIENNA LLP offers a full range of advocacy services that can be tailored to address each client’s unique needs. Whether it is litigation involving confidentiality agreements, disputes related to business contracts, or challenging issues related to commercial real estate, our attorneys have been successful in achieving results in a wide range of adversary proceedings. These proceedings have included federal and state, trial and appellate, and arbitration and other forms of alternative dispute resolution. Our team understands the complexity of the issues and stands ready to represent you aggressively. We have offices in Rancho Cucamonga, San Bernardino, and Los Angeles. Contact us by telephone – 909.980.1040 – or complete our online form.