What Contract? Despite Confidentiality Agreement, Employee Can Use Confidential Information in Public Whistleblower Lawsuit

Andrew E. Bollinger
Published March 31, 2017

A federal court recently ruled that an employee may use his employer’s confidential information in a whistleblower retaliation complaint, regardless of whether an employment confidentiality agreement prohibited him from doing so.  This decision comes on the heels of recent SEC enforcement measures that have imposed liability on companies for overly-restrictive severance agreements, which we covered here and here.

In Erhart v. BofI Holdings, Inc., an internal auditor, Charles Erhart, allegedly uncovered information about possible illegal business dealings with a customer who was acting as an un-registered investment advisor.  Erhart claimed that after disclosing this information to his superiors, he faced various acts of retaliation, including being told in front of coworkers by a senior vice president that “[i]f [Erhart] continues to turn over rocks, eventually he is going to find a snake and he’s going to get bit.”

Erhart sent evidence to federal regulators and filed a whistleblower retaliation action.  Erhart retained the confidential information and e-mailed some of it to his mother and girlfriend for safe-keeping, stating that he was “extremely concerned that the Bank would try to destroy the records of wrongdoing.” 

BofI contended that Erhart violated an employment confidentiality agreement by using confidential information in his publicly-filed retaliation complaint and disclosing confidential information to regulators and his mother and girlfriend.  Erhart argued that he could not be held liable on BofI’s breach of contract claim because the confidentiality agreement was unenforceable as against public policy.

The United States District Court for the Southern District of California rejected BofI’s argument.  Regarding Erhart’s disclosure to federal regulators, the court stated that public policy favoring whistleblower protection in this instance clearly outweighed the admittedly significant interests in enforcing the confidentiality agreement.  The court also held that a jury would need to consider whether Erhart’s appropriation of the company’s information was “reasonably necessary” to support his allegations of wrongdoing, noting that BofI had not shown that Erhart had engaged in a “wholesale stripping” of confidential documents or that his appropriation was “vast and indiscriminate.”  The court next concluded that a jury would have to determine whether Erhart transmitted confidential information to his mother and girlfriend because of a “reasonable concern” that BofI would have destroyed the evidence.  Lastly, the court stated that an employee may disclose confidential information in a complaint so long as he justifies why the information is “reasonably necessary” to substantiate allegations of wrongdoing.  Accordingly, the court denied BofI’s motion for summary adjudication on these issues.

Takeaway

Erhart reflects a recent trend of confidentiality agreements failing to shield companies from potential whistleblower liability.  As Erhart demonstrates, companies cannot simply rely on confidentiality agreements to immunize or minimize liability and prevent disclosure of sensitive information.  Rather, employees may disclose confidential information where doing so is reasonable and protected by whistleblower law.  Companies should review their existing employment agreements to confirm their compliance with the law.

The full opinion can be found here.

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