Court Rules on Confidentiality Agreements for SEC Whistleblowers

A U.S. District Court in the Southern District of California has recently ruled on the validity of a SEC whistleblower’s defense to the enforcement of a company’s confidentiality agreement.  In the decision, the Court accepts the validity of a public policy defense to a limited whistleblower disclosure of confidential information concerning securities fraud.

The case arose after a whistleblower sued the company for retaliation.  The company brought counterclaims against the whistleblower-plaintiff for breach of the confidentiality clause of its employment agreement.  The whistleblower then asserted the public policy in favor of whistleblowing as a defense.

These issues have been more frequently litigated in the context of the False Claims Act, where whistleblowers (known as relators) are required to bring a qui tam lawsuit through the judicial system.  This litigation process permits companies to bring counterclaims, unlike standard submissions to the SEC whistleblower program where the whistleblower is not involved in the government’s enforcement action.

To briefly summarize the important areas of the decision for securities whistleblowers:

  • The public policy exception allowing breach of a confidentiality agreement by a whistleblower applies to SEC whistleblowers providing information to the U.S. Government.
  • The whistleblower has a public policy defense at least allowing a limited removal of documents from the company in order to demonstrate the fraud and protect against document destruction.
  • A SEC whistleblower retaliation complaint can rely on confidential information that is reasonably necessary to demonstrate the retaliation.
  • The whistleblower defense allowed does not offer protections for breach of the confidentiality agreement when a whistleblower provides confidential information to the press.

The ruling strengthens the protections for SEC Whistleblowers.  The SEC has independently pursued civil enforcement actions against companies recently both for retaliation against whistleblowers as well as impeding communications from SEC whistleblowers through a variety of tactics.

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