Tattletales Beware: Whistleblowing May Result In Trade Secret Misappropriation Liability

In the Brady Bunch episode "Stop Tattling," Mike Brady (the father) gives Cindy (youngest of the clan) a stern warning after her tattling lands Alice (the Brady caretaker) in hot water with Sam (the Brady's butcher and Alice's date to the dance). Mike Brady explains the pitfalls of tattling during this scolding and warns: "You have to learn when to keep quiet."

The case of J-M Manufacturing Co., Inc. v. Phillips & Cohen LLP, et al., Case No. L79214 (Superior Court of New Jersey, Middlesex County, filed Feb. 10), highlights the "when to keep quiet" dilemma facing modern-day tattletales—i.e., whistleblowers. These individuals must decide whether to keep quiet about suspected corporate malfeasance or to come clean, disclose potential trade secrets in the name of public welfare, and face potential liability for doing so. Last month, J-M sued John Hendrix, a former J-M engineer, and the law firm of Phillips & Cohen LLP ("P&C"), alleging trade secret misappropriation, breach of fiduciary duty, breach of contract, computer-related offenses, conspiracy, and racketeering stemming from Hendrix's 2005 whistleblower False Claims Act lawsuit against J-M in a federal court in California.

As background, the False Claims Act (31 U.S.C. §§ 3729-3733) imposes civil liability on any person who knowingly uses a false record or statement to get a false or fraudulent claim paid or approved by the government. It allows a private individuals (called "relators" under the law) to bring a "qui tam" action on the government's behalf to hold a defendant —e.g. federal contractors—liable for defrauding the government. The relator, in many cases, is a whistleblower, such as a current or former employee with knowledge of the alleged fraud. The United States, after an investigation, can intervene in the action, dismiss the action, or settle it over the relator's objections. (That is how, after initially declining to prosecute, the federal government finally involved itself in legal action against Lance Armstrong, joining the FCA lawsuit filed by former Armstrong teammate Floyd Landis.) When initially filed, qui tam complaints are placed under seal to allow the government to determine whether to assume control of the litigation. As an incentive to bring qui tam suits, relators such as Landis can receive between 15-25 percent of the proceeds of an action or settlement if the government intervenes and between 25-30 percent if the government does not intervene.

Hendrix, whom...