The National Law Forum

The Blog of the The National Law Review

In Ninth Circuit, Whistleblowers Not Exempt From Confidentiality Agreements

Posted in the National Law Review an article by attorney Anthony Navid Moshirnia of Sheppard, Mullin, Richter & Hampton LLP about blowing the whistle on alleged fraud against the Government does not entitle an employee to loot:

 

Blowing the whistle on alleged fraud against the Government does not entitle an employee to loot and disclose her employer’s records in violation of a confidentiality agreement – at least not in the Ninth Circuit. In an opinion handed down in March of this year, the Ninth Circuit refused to adopt a so-called “public policy exception to confidentiality agreements to protect [qui tam plaintiffs]” who misappropriate documents from their employers ostensibly to buttress claims brought under the federal False Claims Act (“FCA”). U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1061-62 (9th Cir. 2011). Though this opinion has been on the books since Spring, it remains relevant, and worth keeping an eye on, as it provides powerful ammunition against FCA plaintiffs that continue to tout the “public policy” exception as though it were unassailable.

After learning that her job at General Dynamics C4 Systems, Inc. (“General Dynamics”) was going to be terminated, but before leaving her employment, Mary Cafasso “copied almost eleven gigabytes of data from [her employer's] computers in anticipation of bringing a qui tam action” under the FCA.  When it discovered what Ms. Cafasso had done, General Dynamics filed suit in Arizona state court, seeking return of its purloined documents through a temporary restraining order (“TRO”). Apparently to avoid complying with the TRO, which the state court granted, Ms. Cafasso filed “a conclusory six page complaint . . . alleg[ing] FCA violations and retaliation.” She then used the FCA action to persuade the Arizona court to vacate the TRO and stay General Dynamics’ lawsuit.

When Ms. Cafasso’s FCA complaint was unsealed, General Dynamics counterclaimed alleging, inter alia, breach of contract arising from Ms. Cafasso’s misappropriation of documents in violation of a confidentiality agreement. In opposition to General Dynamics’ motion for summary judgment, Ms. Cafasso argued that General Dynamics had failed to prove contract damages and that, even if it had, her conduct was permissible because “[p]ublic policy grants [a] Relator a privilege in gathering copies of documents as part of an investigation under the FCA and gives [a] Relator immunity from civil liability based on claims against her for so doing.” U.S. ex rel. Cafasso v. Gen. Dynamics C4 Sys., Inc., 2009 WL 1457036, *13 (D. Ariz. May 21, 2009).

The trial court dismissed both of Ms. Cafasso’s arguments. It found that damages were established by the stipulated damages clause in the General Dynamics confidentiality agreement. After reviewing the parties’ competing legal arguments, the trial court also found that “public policy does not immunize Cafasso, [who] confuses protecting whistleblowers from retaliation for lawfully reporting fraud with immunizing whistleblowers for wrongful acts made in the course of looking for evidence of fraud.” The court concluded that “[s]tatutory incentives encouraging investigation of possible fraud under the FCA do not establish a public policy in favor of violating an employer’s contractual confidentiality and nondisclosure rights.”

On appeal, Ms. Cafasso did not dispute that her actions violated her confidentiality agreement with General Dynamics, but nonetheless urged the Court to “adopt a public policy exception to enforcement of such contracts that would allow relators to disclose confidential information in furtherance of an FCA action.”  While noting that Ms. Cafasso’s position was not frivolous, and might apply “in particular instances for particular documents,” the Ninth Circuit found that Ms. Cafasso’s data removal was not privileged.

The Ninth Circuit appears to have relied on two factors to reach this conclusion: the scope and volume of the documents Ms. Cafasso took. With respect to scope, the Ninth Circuit faulted Ms. Cafasso’s “indiscriminate appropriation of documents,” referring to it as an “unselective taking [that included] attorney client privileged communications, trade secrets belonging to [General Dynamics] and other contractors, internal research and development information, sensitive government information, and at least one patent application that the Patent Office had placed under a secrecy order.”  The Court was also troubled by the fact that Ms. Cafasso had taken over 11 gigabytes of data, noting that “the need to facilitate valid claims does not justify the wholesale stripping of a company’s confidential documents.” In sum, the Ninth Circuit found that an “exception broad enough to protect the scope of Cafasso’s massive document gather in this case would make all confidentiality agreements unenforceable as long as the employee later files a qui tam action” – an unacceptable result.

While Cafasso stopped short of rejecting the public policy defense to data theft as a matter of law, it certainly provides a new avenue to FCA defendants attempting to prevent qui tam relators from benefitting from extrajudicial discovery.

Copyright © 2011, Sheppard Mullin Richter & Hampton LLP.

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