8 minute read | March.13.2014
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 J-M hired in 2002, filed the False Claims Act lawsuit against J-M and Formosa Plastics Corp. USA (J-M’s previous owner). Hendrix alleged that J-M and Formosa Plastics knew the PVC pipes J-M manufactured and sold to its customers for water and sewer systems failed to meet government standards, that they lied about the quality of the pipes, and that they failed to make improvements despite knowledge that the pipes did not meet government standards. Hendrix also alleged that the J-M pipes were used throughout the country and that given the substandard materials and manufacturing process, the pipes would rupture substantially earlier than expected. In September 2013, Formosa Plastics settled the qui tam against it for $23 million. In November 2013, in the qui tam action against J-M, a California federal jury found that J-M knowingly misrepresented the quality of its PVC pipes used to build those water and sewer systems.
In the present suit, J-M alleges that it learned of Hendrix’s and P&C’s unlawful conduct when Hendrix’s qui tam complaint was unsealed in 2010. J-M contends that Hendrix breached his employee secrecy agreement (“ESA”) and conspired with P&C to pursue the False Claims Act lawsuit against J-M by, among other things, misappropriating J-M’s confidential and proprietary documents:
When he was hired by J-M in 2002, Hendrix executed J-M’s Employee Secrecy Agreement. … Thus, Hendrix was fully aware that his acts of purloining J-M’s confidential and trade secret documents and information for P&C’s review and use was unlawful and in clear contravention of his ESA with J-M.J-M further alleges that P&C played an active role in Hendrix’s unlawful conduct by encouraging and facilitating Hendrix’s “act of theft and deception”:
P&C’s conduct in directing, encouraging and facilitating Hendrix’s act of theft and deception cannot be mistaken for, or excused as, simple “legal advice.” Rather, P&C was actively engaged in this pilfering scheme. Over a period of four months, P&C directed Hendrix’s unlawful conduct by, among other things, supplying Hendrix with specific search terms to use while searching through J-M’s proprietary AS400 computer database, and requesting that Hendrix purloin original and other documents from J-M, and send them to P&C’s offices for review, duplication and eventual disclosure by P&C to end-users of J-M’s products, all of which was designed to intentionally harm J-M. P&C’s actions and directors enabled Hendrix not only to purloin the documents specifically requested by P&C, but to place the originals of those documents back in J-M’s files undetected so that Hendrix could continue his theft of valuable trade secret and proprietary information from J-M.J-M further alleges that Hendrix and P&C lured “unwitting” employees and secretly recorded their conversations, fabricated records, and then disclosed this material to recruit parties for the qui tam lawsuit. J-M is seeking compensatory damages, punitive damages, exemplary damages, and attorneys’ fees, claiming that:
As a direct and proximate result of P&C’s nationwide campaign to meet with various end-users and recruit these entities as plaintiffs for their qui tam action, and P&C’s improper use of the stolen records and data, end-users removed J-M products from their approved products lists.J-M’s lawsuit highlights two sets of competing interests. On the one hand are the public policy interests in encouraging qui tam actions where whistleblowers have a legitimate concern about corporate wrongdoing and investigate and report the suspected fraud. On the other hand are the interests in safeguarding trade secrets and preventing irreparable harm if a corporation’s trade secrets or confidential proprietary information is disclosed during a qui tam action—notwithstanding the merits of the qui tam litigation.