Tenth Circuit Reverses DOL Administrative Review Board and Dismisses Whistleblower Complaint

Decision: On October 17, 2017, the US Court of Appeals for the Tenth Circuit overturned the US Department of Labor Administrative Review Board’s (ARB) decision that Cypress Semiconductor retaliated against a former employee for complaining that the company was unlawfully withholding information about its alternative compensation plan (Dietz v. Cypress Semiconductor Corp., Nos. 16-1209 & 16-1249). In March 2016, the ARB upheld an Administrative Law Judge’s finding that the employee had been constructively discharged in violation of Sarbanes-Oxley because his complaints reflected his reasonable belief that the company engaged in mail and wire fraud by withholding information about its alternative compensation plan. In a strongly worded opinion, the Tenth Circuit vacated the ARB’s decision. The court emphasized that the federal mail and wire fraud statutes require “a conscious objective to deprive the victim of property” and the employee’s proffered evidence was “woefully inadequate to support any belief that [the company] committed a fraud in order to deprive the employees of their property.” Accordingly, because the employee failed to establish that he had made his complaints with a reasonable belief that the company had committed mail or wire fraud, his complaints were not protected activity under Sarbanes-Oxley.

Analysis: Sarbanes-Oxley protects whistleblower activity only when an employee “reasonably believes” that his or her employer has engaged in certain enumerated federal offenses. While an employee does not need to prove that every element of the alleged offense was actually satisfied, the employee must show that the at-issue complaint was based on a reasonable belief that an enumerated offense occurred or was occurring. In vacating the ARB decision, the Tenth Circuit emphasized that the facts known to the employee—including that the company provided training and explanations of its alternative compensation plan before implementing it—could not “reasonably be squared” with the elements of mail or wire fraud. Given the broad scope of Sarbanes-Oxley and other similar whistleblower protection statutes, employers should exercise caution to avoid unlawfully retaliating against an employee who makes a whistleblower complaint. However, the Dietz decision makes clear that Sarbanes-Oxley does not protect every employee who complains about any violation of the law. Rather, the employee must reasonably believe that the company’s activity constitutes a violation of the alleged offense being reported for the complaint to qualify as protected activity.

District Court Denies Request for Preliminary Injunction Because Employer Did Not Adequately Protect Its Confidential Information

Decision: On October 3, 2017, a district court in the Eastern District of New York denied a cookware and kitchenware company’s request for a preliminary injunction under the Defend Trade Secrets Act (DTSA) prohibiting its former salesperson from using customer contact lists, designs and marketing strategies that the salesperson sent from his work computer to his personal email account right before his termination. In Art and Cook, Inc. v. Haber (No. 17-cv-1634), the court denied the company’s request for a preliminary injunction because it had failed to demonstrate a likelihood of success on the merits of its DTSA claim. The court determined that the customer lists were little more than a compilation of publically available information and therefore could not be a trade secret. Turning to the product designs and marketing strategies, the court recognized that such information is “the sort of business information that the DTSA was designed to protect” but that the company could not show that it took reasonable measures to keep the information secret. Among the facts that the court found significant for its ruling were the company not requiring the salesperson to sign a non-compete and failing to ask him to sign a non-disclosure agreement until approximately three years after he was hired. Further, the company continued to employ him for two more years after he refused that request and took no steps during that time to limit his access to its sensitive proprietary information. The court found that the company’s other steps to secure its information, including using a password-protected server and password-protected folders, were inadequate given the company’s others failures.

Impact: This decision underscores the importance of restrictive covenants and confidentiality agreements in protecting employers’ trade secrets and other confidential information, regardless of other security measures in place to protect sensitive data.

Fourth Circuit Rejects Claim of Racially Hostile Environment Because Employer Had Anti-Harassment Policy and Employee Failed to Comply with Reporting Procedures

Decision: On October 19, 2017, the US Court of Appeals for the Fourth Circuit in John L. McKinney v. G4S Government Solutions Inc., Case No. 16-1498, granted summary judgment to the defendant employer on the plaintiff’s claim for hostile work environment and retaliation because the employer conducted a reasonable investigation of the alleged incidents once it learned of them and the employee failed to take advantage of the company’s established procedures to report his complaints. The plaintiff sued his employer under Title VII, alleging that he was subjected to a hostile work environment and retaliated against for reporting racially motivated harassment. His co-workers, including supervisors, allegedly hung a noose in the workspace, forced him to carry it away and pretended to wear a Ku Klux Klan hood in his presence, among other things. The plaintiff reported the behavior to the highest-ranking Army officer at the installation where his employer was contracted to perform services, who in turn reported the complaint to the employer.

The court held that the employer was entitled to summary judgment based on the Faragher/Ellerth affirmative defense, which allows an employer to avoid liability for harassment by exercising “reasonable care to prevent and correct” harassing behavior and where the employee “unreasonably fail[s] to take advantage of any preventive or corrective opportunities provided by the employer.” The employer had distributed an anti-harassment policy, which it had adopted and implemented in good faith, and took reasonable measures to prevent and later correct racially hostile behavior toward the plaintiff. Further, the plaintiff had failed to report his complaint consistent with the reporting procedures set forth in that policy, which required him to report any incidents to a supervisor, a manager or to the Corporate Human Resources Department.

Impact: The decision serves as an important reminder of the importance of developing and implementing anti-discrimination and harassment policies, as well as establishing clear procedures allowing employees to report violations and complaints. These are not only good business practices but can help protect employers from being held liable for their employees’ bad behavior.

Tenth Circuit Holds That Employers Must Show Irreparable Harm to Obtain Preliminary Injunction in Trade Secrets Dispute

Decision: On October 30, 2017, the US Court of Appeals for the Tenth Circuit clarified its standard for granting a preliminary injunction in a case involving a trade secrets dispute. In a unanimous opinion by Judge Scott M. Matheson, Jr., the Tenth Circuit panel reversed a district court order granting a preliminary injunction in favor of First Western Financial Inc. The order barred Kenneth Malamed—the founder of an investment firm acquired by First Western—from soliciting First Western’s clients after he was terminated. The district court held that First Western need not show irreparable harm because the conduct at issue—misappropriating the company’s client list—was a violation of trade secrets law. Thus, even though First Western could be financially compensated for any lost clients, and thus lacked irreparable harm, the district court determined that a preliminary injunction was warranted. The Tenth Circuit disagreed, holding that the company must indeed demonstrate irreparable harm because the governing statutes—the Defend Trade Secrets Act and Colorado Uniform Trade Secrets Act—do not provide for a presumption of irreparable harm.

Impact: The Tenth Circuit’s holding clarifies the standard for obtaining a preliminary injunction in a trade secrets misappropriation case. As a result, companies will find it more difficult to prevent the actual use of misappropriated trade secrets moving forward, at least in the absence of showing irreparable harm. However, the decision leaves intact companies’ ability to recover financial compensation for misappropriation, a less desirable result for companies that want to avoid the greater cost and risk that financial recovery entails.