W3 (11/08) Whistleblowing and Trade Secrets and

Conflicts of Interest
Text
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TB:

o Ch5 and Ch6

CFA magazine article by Julius Baer

Whistle Blowing
Cases
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Enron
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(see Case 4.1)

Sharon Watkins experience
Pump and dump schemes
Andrew Fastows SPIs and mark to market accounting
Ken Lay motivations
Market factors/economic environment (deregulatory culture under
Thatcherism and Reagonomics)
o Gov regulatory practices
Colleen Rowley at FBI
Cynthia Cooper at WorldCom
Madoff/Markopoulos
FINRA
UN case in Kenya
Case 5.2 insurance broker

What is a whistleblower?
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Definition of whistleblowing
o Member of the relevant organisation
o Voluntary release of (and not legally compelled or otherwise)
o Non public information (something not publicly known or
significance has not yet been publicly grasped and is evidence of
some misconduct
o As a moral protest (seek to correct some perceived wrong)
o By member or former member of org to
o Audience outside normal communication channels regarding (i.e.
non-established procedures)
o Illegal and/or immoral conduct that is against public interest due to
its substantial importance
Other considerations before W/B
o Is there sufficient moral urgency? Is harm imminent?
o Have all facts and importance of each been weighed?
An unfounded/misinterpreted case can cause serious
disruption
Document often, well verifiable facts, stands up to burden
of proof
o Have all internal channels been exhausted?
But be expedient and before issue deteriorates rapidly
o What is the most stakeholder-effective way to WB?

Less info revealed, less chance to breach duty of

confidentiality, but could be insufficient to trigger a wider
investigation
Charges should be made in objective and structured manner
Consider own role in organisation is it my responsibility?
Consider professional code of ethics
Is the problem under my purview within the organisation?
Are there reasonable prospects for success for positive change?
Who is the relevant authority to go to?

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Regulations for WB
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ASIC Act
FINRA Office of Whistleblower
Public Service Act (Cth)
Protected Disclosures Act 2013 (NSW)
Private sector Pt 9.4AAA Corporations Act 2004
o Protected WBers include officer/employee/contractor or their
employee who has contract to supply goods to company
o Provides qualified privilege against defamation and
o Precludes contractual/other remedies being enforced including civil
and crim liability for making disclosure (includes reinstatement and
anti-retaliatoin)
o Disclosure must be made to ASIC, companys auditor/audit team
member, director secretary, senior manager of C or another entity
authorised by company to receive revelations
o Trigger requirement is: give name before disclosure, reasonably
grounds to suspect contravention of Corps Act and act in good faith
Only come in form of protection/anti-retaliation measures?
Compare Cth and NSW anti-reprisal protections
SOX WB protections for private sector employees; every publicly traded
C establishes independent audit committee of board to detect fraud and
for all Cs to have procedures for employees to make confidential
allegations about suspected fraudulent activity
Dodd-Frank Bill anti-retal provisions are strengthened

Justification and conditions for justified whistle blowing

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Employees are contractual agents whose principal is the employer; they

are to protect confidential info and work in Ps best interests; but they also
entail a role different from a pure agent
Conflicts of interest between duty to org/employer and public interest
o Conflict between loyalty to org (as a contractual agent) and general
obligation (as citizen) to public interest
o But they are only loyal to the true goals of the org and that
exposing wrongdoings is in the best interests of the C and prevent
accumulation of deteriorative practices
o Duty to keep information obtained through their course of
employment confidential
Limits

Only obey reasonable directives within their scope of agency

(capacity) and obligations confined to needs of relationship (no
obligation beyond scope of employment)
Work in true interests of the company (as agent is an extension of P
who is vicariously liable for any torts or contracts committed by the
agent)
Law of agency excludes obligation to keep confidential information
about the commission of a crime

Effective corporate policies re W/B

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Aims: address misconduct internally and to avoid inadvertent public

disclosure
Development of policy requires
o Effectively communicated statement of responsibility to report
o Clearly-defined procedure for reporting
Enables confidential reporting
Multiple channels for flexibility
o Trained personnel to receive/investigate reports
Fair, thorough and confidential investigation
Training periodically evaluated for effectiveness
o Commitment to take appropriate action
Assurance that report is used for specific purposes
Be informed of the outcome of the investigation
o Guarantee against retaliation (e.g. poor evaluations, blacklisting,
etc)
Why they are effective ways to balance conflict attached with WB

W/B protections
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For
Society benefits (utilitarian) but can render firms inefficient (hence
U is not justified)
o Moral right to WB (moral right, as opposed to legal right, to freedom
of speech)
o Right to follow ones conscience
Against
o Gates opened to abuse (antidismissal insurance)
o Encroaches on entrepreneurial stewardship and efficient commercial
operations
o Covers up incompetence
o Cooperative spirit is diluted; disunity and conflict emerges which
endangers free enterprise
o Infringes entrepreneurial rights to run company as fit
Segregation of information critical as hurdles to a full picture before
prosecutorial action (info silos, Chinese walls)
o

Trade Secrets
Cases
Wexler vs Greenberg
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AG chief chemist for BWC analyse competitors products for use in

developing own products/formulae
AG left to join Brite (which had previously purchased exclusively from
BWC)
Due to knowledge of formulae developed while with BWC, Brite now able
to dispense of BWC supplies and turned into a manufacturer directly in
competition with BWC
Court required burden of proof on:
o Existence of a legally protectable TS
o Legal basis, either convenant or confidential relationship, on which
to predicate relief (i.e. some duty has been breached)
o Found that AG developed formulae himself and BWC did not disclose
it to him (but what about the fact that he was employed by BWC to
develop formulae? Isnt that BWC property?)
o Found that formulae not significant discoveries by AG, but through
routine application of his skills as employed (i.e. skills/tech
knowledge acquired by virtue of employment) hence transferable to
new place of employment
Anti-Lockean?

AP vs INS
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INS obtained news gathered by AP and posted on public

bulletins/forums/open market. No finding of breach of trust, improper
acquisition, misappropriation, fraud, coercion, etc. Found mere use of
service without compensation
Supreme Court held that should be framed in terms of fair competition
that underlying principle same as that of equitable theory of consideration
in law of trusts (who paid the price, should reap the beneficial use of
property); hence there was misappropriation
Intellectual production become free, fair and common use after voluntary
communications to others
If acquisition of something was at substantial cost to the acquirer in view
of a future profit, there is no right by others to misappropriate it for own
profit

Definition
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Rights of C to maintain secret valuable information that provides CA or to

withhold release of info that would provide competitiors with CA vs duty of
employees not to disclose info or use info acquired during course of
employment for non-permissible purposes

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Formula, pattern, device or compilation of information used for

competitive advantage (e.g. IP such as software, product design,
compositional info, manufacturing process, survey results, salaries,
etc) Restatement of Torts
Cf confidential information (e.g. salary) about specific matters but
directly used in production of good/service
Information that cannot be patented/copyrighted has same legal
status as trade secret (i.e. patents which owners enjoy full property
rights (including exclusion of use/control/possession by others))
6 factors to determine if TS
Is information is legally protectable as a TS
Information known outside business?
Information known inside?
Measures to guard secrecy
Value of information to competitors (independent
economic value, actual of potential, from not being
known to or readily ascertainable through proper
means by the public)
Effort and money to product info in first place
Is information easily duplicated?
Is there a legal basis, either convenant or confidential rship,
upon which to predicate relief?
In USA Restatement of Torts (s757)

Justification for TS protections

1) Source of property rights under common law principles
o U principle of enabling companies to innovate with protections on
R&D
o Cf patents, copyrights, trademarks which are like tangible chattels
in that ownership provides exclusive use and rights such as
assignment; TS however doesnt confer exclusive use but right not
to have secret misappropriated or wrongfully acquired; once known
not longer TS
o Economic property of IPs being perfectly excludable
o Lockean view that we own the fruits of our labor including IP (which
in a case of employment can be exchanged for income)
o Limitations
Limitations on information use, such as patents, can increase
prices temporarily
Problem of over patenting, evergreening, withholding
licences/dissemination of information
2) Fair competition (right to compete and innovate)
a. Competitors free riding on information that was obtained/acquired
at a cost
b. Though, employees have right to seek new employment and to
compete with former employer (Wexler) balancing protection of

business against unfair competition due to breach of TS and

individuals economic mobility
c. Non-compete agreements time period specified, geographical area
of exclusion, kind of work excluded
i. MUST protect legitimate business interests (protection of
proprietary info, customer relations, but not to prevent
competition)
ii. Not be more restrictive than what is required to protect
legitimate interests
1. Time period specified
2. Geographical area
3. Kind of work excluded
iii. Not impose undue hardship on ability of employee to obtain
gainful employment
iv. Not be damaging to public interest
3) Violation of confidentiality (either implied or through explicit confidentiality
agreement)
o Common law principle of agency provides base duty of
confidentiality (not to communicate info provided in confidence by
principal or acquired through course of, or on account of, agency, to
Ps injury)
o Obligation of confidentiality continues after termination
Competitor intelligence gathering and limits
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Unethical practices include:

o Theft and receipt of unsolicited information
o Misrepresentation (e.g. negotiation with intention to inveigle
confidential information)
o Improper influence
o Covert surveillance

Conflicts of interest
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When personal interest interferes with a persons acting so as to promote

interest of another when that person has an obligation to act in that
others interest
o Forms
Actual when personal interest leads person to act against
interests of a beneficiary/principal
Potential possibility person will fail to fulfil an obligation to
act in interests of B/P; e.g. where only competing interests
only merely exist but no real apparent threat
Personal when personal interest conflicts with clients/P/B
Impersonal when obligation to act in interest of two parties
whose interests compete with one another
Individual and organisational CoIs
o 4 kinds
Biased judgment (gifts, bribes, kickbacks, external
investment with competitor)
Direct competition

Judgement impaired due to extraneous interest

Quality of work reduced due to diluted time/effort
Misuse of position (nepotism, cronyism, extortion)
Violation of confidentiality
Managing CoIs in 7 ways
Avoidance though difficult identifying/anticipating new
conflicting interest; or if avoidance is impossible, alignment
whereby new interest inserted to neutralise to adverse
interest
Objectivity impartial and intellectually honest
Disclosure transparency denies conflicting interests to
advance
Competition
Rules and policies
Independent judgment third party
Structural changes compartmentalisation of units
(independence) and different staff (integrity)