In Erhart v. BofI Holding, Inc., Case No. 15-cv-02287, (S.D. Cal. Feb. 14, 2017), a bank’s internal auditor reported alleged misconduct to federal agencies, engaged in self-help discovery by appropriating the bank’s confidential information, and allegedly widely disseminated such information. When the bank alleged that this conduct violated the parties’ confidentiality agreement and state and federal law, the employee countered that his appropriation and disclosures were protected by whistleblower statutes. As discussed below, the court held that: (i) the employee’s disclosures to the government were protected; (ii) his alleged disclosures to the media were not; and (iii) any additional protection of his appropriation and disclosure of confidential information may turn on whether his actions were reasonably necessary to pursue whistleblower claims.
Charles Erhart worked as an internal auditor for BofI Federal Bank (“BofI”). In January and February of 2015, Erhart contacted the SEC to report alleged misconduct at BofI, including an alleged failure to disclose information in response to an SEC subpoena.
In March of 2015, Erhart contacted BofI’s principal regulator, the Department of the Treasury, to report alleged wrongdoing. Next, Erhart filed a lawsuit against BofI, alleging that it retaliated against him for reporting unlawful conduct, in violation of California and federal whistleblower protection statutes. The following day, a national newspaper published an article titled Ex-Auditor Sues Bank of Internet and BofI’s share price dropped 30 percent.
BofI countersued Erhart, alleging that he violated California law, the Computer Fraud and Abuse Act, and his confidentiality agreement with BofI by disseminating its confidential information. Erhart asserted numerous affirmative defenses premised on the assertion that his actions constituted protected activity pursuant to various whistleblower statutes. BofI sought to extinguish Erhart’s affirmative defenses via summary judgment.
Determining Whether a Purported Whistleblower’s Appropriation and Disclosure of Confidential Information is Protected
Erhart admitted that he sent BofI’s 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. Erhart also emailed his mother a spreadsheet containing customer social security numbers and used his girlfriend’s computer to access BofI documents.
Erhart asserted that his appropriation and disclosure of BofI’s confidential information was protected by state and federal whistleblower statutes. He argued that BofI could not enforce the parties’ confidentiality agreement or pursue its tort claims against him because his conduct was protected by California Labor Code Section 1102.5 (which prohibits retaliation for reporting a violation of the law), the Sarbanes–Oxley Act, the Dodd-Frank Act, and several other federal whistleblower statutes. The court determined the viability of Erhart’s defenses by balancing potentially competing interests – public policy in favor of private parties’ freedom to contract and public policies that may protect Erhart’s disclosures. The court administered this balancing test in five contexts, Erhart’s: (1) communications with the Government; (2) alleged disclosure to the press; (3) self-help appropriation of BofI documents; (4) transmission of confidential information to family members; and (5) disclosure of confidential information in the complaint he filed in court.
Communications with the Government
The court held that California Labor Code Section 1102.5 and federal whistleblower statutes protect Erhart’s ability to report believed wrongdoing to the SEC and the Department of the Treasury. Specifically, the parties’ confidentiality agreement could not bar Erhart’s communications with the SEC because doing so would violate 17 C.F.R. § 240.21F-17’s prohibition against “enforcing, or threatening to enforce, a confidentiality agreement” to impede communication with the SEC (the court’s opinion states that Erhart contacted the SEC and “disclosed confidential information.” However, the court did not specify whether Erhart provided BofI documents to the SEC). Accordingly, the parties’ confidentiality agreement was found unenforceable as to Erhart’s communication with the SEC and the Department of the Treasury.
Alleged Disclosure to the Press
The court required minimal analysis to find that media leaks are not protected by California or federal law. Therefore, while BofI had not yet established that Erhart leaked confidential information to the press, if it could, Erhart would liable.
Self-Help Appropriation of Employer Documents for the Employee’s Use
The court urged a “nuanced,” “qualified” approach to Erhart’s self-help discovery of BofI’s documents. The Erhart court acknowledged prior cases enforcing confidentiality agreements against employees who argued that their self-help discovery was protected by whistleblower retaliation statutes. The court recognized JDS Uniphase Corp. v. Jennings, 473 F. Supp. 2d 697 (E.D. Va. 2007), where a federal court applied California law and held that a whistleblower cannot pilfer “an employer’s proprietary documents in violation of their contract merely because it might help them blow the whistle on an employer’s violations of law, real or imagined.” The Erhart court also cited Cafasso, U.S. ex rel. v. Gen. Dynamics C4 Sys., Inc., 637 F.3d 1047, 1062 (9th Cir. 2011), where the Ninth Circuit declined to adopt a whistleblower-based exception to confidentiality agreements and upheld summary judgment in favor of an employer’s claim against an employee for breaching their confidentiality agreement. In addition to the cases cited by Erhart, the U.S. Department of Labor Administrative Review Board has affirmed the dismissal of a SOX whistleblower retaliation claim on the grounds that the employee’s secret tape recording and downloading of company data violated the company’s employee handbook. See Galinsky v. BOA, No. 11-057 (ARB Oct. 31, 2012).
However, despite the lack of precedent supporting such a holding, the court determined that Erhart may be able to show that his appropriation should be protected if he establishes that such appropriation was limited to the documents necessary to support his whistleblower claims. Notably, the court added that Erhart can only hope to prevail if he can demonstrate that the “removal of the documents was reasonably necessary to support [his] allegations of wrongdoing.” Further, the court suggested that the jury may also determine that Erhart can only prevail if his beliefs of wrongdoing were reasonable.
Transmission of Confidential Information to Family Members
The court held that Erhart’s potential liability for sending BofI’s confidential information to his mother and accessing such information on his girlfriend’s computer would turn on Erhart’s reasoning for his actions. If Erhart felt compelled to take these measures to protect relevant information from destruction, then his actions could be considered protected activity. However, if Erhart’s transmission of BofI information was not entirely related to his whistleblower reports or he did not have a reasonable concern that such information would be destroyed, then BofI would prevail.
Disclosure in the Court Complaint
Similar to the above analysis, the court held that protection of Erhart’s disclosure of confidential information in the court complaint hinged on whether such disclosure was reasonably necessary to pursue his claims. The court noted that Erhart is required to include factual allegations of wrongdoing in order to state a whistleblower retaliation claim. Therefore, if he limited his disclosure to information necessary to state a claim, then his disclosure could be protected. However, if, as BofI claims, Erhart intended to inflict harm on BofI and benefit short sellers by disclosing confidential information, his disclosures would not be protected.
While Erhart v. BofI Holding, Inc. is a district court case, so it does not create binding precedent, it gives employers additional insight into how federal courts in California may approach whistleblower disclosure and self-help appropriation issues. This decision sends a clear message to purported whistleblowers that they do not have the right to disclose confidential information to the press. However, with respect to an employee’s ability to engage in self-help appropriation, Erhart goes against prior decisions by holding that an employee may be able to engage in limited self-help to the extent necessary to support their allegations. It remains to be seen whether any other court will adopt such a standard. Further, Erhart only went so far, as it warns employees that broad or indiscriminate self-help is likely to result in liability.