{"id":3219,"date":"2023-12-29T16:11:44","date_gmt":"2023-12-29T21:11:44","guid":{"rendered":"https:\/\/blogs.luc.edu\/ipbytes\/?p=3219"},"modified":"2024-08-15T06:14:12","modified_gmt":"2024-08-15T06:14:12","slug":"whistleblowers-and-trade-secrets-a-theranos-case-study","status":"publish","type":"post","link":"https:\/\/blogs.luc.edu\/ipbytes\/whistleblowers-and-trade-secrets-a-theranos-case-study\/","title":{"rendered":"Whistleblowers and Trade Secrets: A Theranos Case Study"},"content":{"rendered":"

Silicon Valley<\/a>, located in the San Francisco Bay Area, is well known as the global center for innovation and technology. Given this reputation, it’s no surprise that numerous different tech companies and startups call this place home \u2013 companies like Apple<\/a>, Google<\/a>, and Meta<\/a>, just to name a few.
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\nWith an industry as competitive as technology, failures in Silicon Valley are commonplace. That\u2019s where Theranos<\/a> comes in. A tech start-up that was once valued at $10 billion<\/a>, Theranos was eventually brought down by claims of fraud that stemmed from information released by two whistleblowers<\/a>.\u00a0 Whistleblowers are people who disclose information regarding wrongdoing committed by an organization that would otherwise be unknown. This information is often obtained by insiders who work within the organization.<\/p>\n

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\u00a0Photo courtesy of Unsplash.<\/em><\/figcaption><\/figure>\n

The two whistleblowers in this case, Tyler Schultz<\/a> and Erica Cheung<\/a>, were former employees of Theranos. Over the course of their employment, they grew increasingly concerned by what they saw behind the scenes in terms of whether or not the company\u2019s technology actually worked. After raising their concerns to Theranos\u2019 upper-level management with no success, both Tyler and Erica left the company. However, their involvement with Theranos did not end there.<\/p>\n

Theranos\u2019 blood-testing technology (which we\u2019ll get into later) had a significant impact on the important medical decisions of patients that used it. Tyler and Erica both felt strongly about the moral issues implicated by their concerns \u2013 that Theranos was claiming to have developed revolutionary blood-testing technology that didn\u2019t actually work. These fraudulent claims, if true, would result in potentially millions of patients making life-changing decisions based on inaccurate health data. When they didn\u2019t lower their concerns, both Tyler<\/a> and Erica<\/a> reported facing immense pressure and legal threats from Theranos, such as potential suits for trade secret misappropriation<\/a>. In other words, Theranos suggested that if they disclosed concerns, they would be sued for stealing trade secrets involving functional aspects of the technology and testing results and procedures used by the laboratory. Essentially, Theranos did not want anyone to know that their technology didn\u2019t work at all.<\/p>\n

Many companies economically benefit from having and maintaining trade secrets, and therefore, protection is important to enhance any company\u2019s bottom line. But what happens when a company\u2019s fraudulent and illegal behavior can only be exposed by disclosure of this protected information? \u00a0Let\u2019s start by first explaining what a trade secret is.<\/p>\n

What is a \u201cTrade Secret?\u201d<\/strong><\/p>\n

Almost any information can be a trade secret<\/a>. A trade secret is any information that has actual or potential value from not being generally known, and is subject to reasonable secrecy. Trade secrets can potentially last indefinitely, so long as the information continues to be both valuable and actually secret. If the information is disclosed, the trade secret is terminated. A trade secret owner might still have rights to seek damages against the person who improperly disclosed it, however there can never be a trade secret once it is out in the open. However, it is important to note that absolute secrecy is not required, as the information can be shared in a controlled and limited way as reasonably necessary.<\/p>\n

Information can have economic value even if it is only potentially<\/em> valuable due to the fact that it is unknown to the general public. \u00a0In the case of Theranos, the fact that its technology did not work was valuable as a secret because it helped them get investors and deals with major companies, such as Walgreens. If this information was not secret, no one would have likely continued to invest in or partner with Theranos.<\/p>\n

Reasonable secrecy measures<\/a>, on the other hand, focus on the measures taken to keep the information secret. Some common measures to maintain secrecy include keeping sensitive information in password protected files, having employees sign confidentiality agreements, labeling and identifying confidential information, restricting access to information to limited amount of people or requiring employees to attend training for trade secret handling. However, a single measure alone might not be sufficient. Generally, as long as the information is secret and treated with care to keep it as such, it will meet this requirement.<\/p>\n

Trade secrets can be important to any company, new or old. It can be said that a company\u2019s trade secrets are exactly what gives it its competitive edge. But does such importance warrant complete protection with no exceptions? In my opinion, definitely not. While protection is important, it is equally important to maintain a balance between trade secret protection and identifying the misconduct of companies like Theranos.<\/p>\n

Theranos: An Investment in the Future, or a Failure?<\/strong><\/p>\n

What if I told you that there was a machine that could change the future of health care? A machine that could perform hundreds of blood tests within minutes, just from a single drop of blood? Technology of this kind would be revolutionary \u2013 if it actually worked.<\/p>\n

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Elizabeth Holmes (left), the CEO and founder of Theranos, discussing her revolutionary technology at the 2014 TechCrunch Disrupt convention. Photo created by TechCrunch<\/a> and is licensed under CC BY 2.0.<\/a><\/em><\/figcaption><\/figure>\n

Welcome to Theranos: a failed tech start-up that claimed to invent the revolutionary technology<\/a> mentioned above. You may be asking yourself, what makes the story Theranos so unique? Tech companies fail all of the time! What sets this story apart is not failure, but rather the extent of the deceit and fraud on which the company was built. At least temporarily, Theranos concealed fraudulent activities and deception by categorizing them as trade secrets.<\/p>\n

Theranos\u2019 founder, Elizabeth Holmes<\/a>, raised over $700 million<\/a> in financing and sought partnerships with companies such as Safeway and Walgreens to offer blood testing at various locations to the public. The problem? The technology never worked.<\/p>\n

Investors spent millions of dollars financing the company based on a lie. Even worse, real patients received inaccurate blood test results<\/a> that likely influenced important medical decisions. Arguably the worst part \u2013 Elizabeth Holmes, as well as other high-level Theranos executives, knew the whole time. Trade secret or not, Theranos\u2019 fraud needed to be brought to light to prevent further harm, which was the goal of the Theranos whistleblowers.<\/p>\n

Some of the information disclosed by the Theranos whistleblowers included inaccurate test results obtained by Theranos\u2019 technology, false validation reports, protocols used by the lab, and the functions of the machines themselves. In retaliation, Theranos threatened litigation against the two whistleblowers. Among the threats was one for a suit of trade secret misappropriation, a valid claim under the Defend Trade Secrets Act (\u201cDTSA\u201d)<\/a>.<\/p>\n

What is the DTSA?<\/strong><\/p>\n

In 2016, Congress enacted the Defend Trade Secrets Act (\u201cDTSA\u201d)<\/a>. The main goal of the DTSA was to provide trade secret owners with a federal cause of action against misappropriation in addition to varying state laws.<\/p>\n

Trade secret misappropriation consists of an acquisition of a trade secret by improper means (e.g., theft, espionage, etc.) or an unauthorized disclosure of the trade secret. Remember: once a trade secret is disclosed, it is no longer a secret and therefore not subject to protection.<\/p>\n

Under the DTSA, a plaintiff asserting trade secret misappropriation claim must prove that the information at issue was a trade secret, the defendant misappropriated the trade secret, and the misappropriation damaged the plaintiff.<\/p>\n

Barring any exceptions, Theranos could have had a valid trade secret misappropriation claim under the DTSA.\u00a0 Let\u2019s first explain why there was a trade secret.<\/p>\n

The information disclosed<\/a> by the Theranos whistleblowers was central to the fact that the company\u2019s technology did not work. The tests results varied greatly from machine to machine, any unfavorable testing data was deleted and replaced with edited data, and inaccurate statistic validation data of the technology was presented to both investors and the public. This information was valuable as a secret because its secrecy helped Theranos maintain funding from current and new investors, and create lucrative partnerships with other companies. If this information were publicly known, such investments and partnerships would likely never have developed.<\/p>\n

There was plenty of evidence of measures to keep the information secret. For example, the lab protocols included extraordinary measures to be keep information and lab activities secret. Such measures reportedly included barricades<\/a> that acted as organizational silos<\/a> (separation of employees into groups with limitations on communications between different groups), and prohibiting communication between employees in different roles<\/a>.<\/p>\n

Trade Secret Misappropriation<\/strong><\/p>\n

Now let\u2019s talk about the misappropriation, which basically means taking the trade secret without permission.<\/p>\n

Theranos did not authorize the disclosure of the information. Since both whistleblowers had signed NDAs upon employment at Theranos, they breached their duty to maintain secrecy when they disclosed the information. According to the DTSA, a breach of duty to maintain secrecy satisfies the \u2018improper means\u2019 requirement for misappropriation.<\/p>\n

Damage to Theranos is indisputable. Following the disclosure, Theranos lost valuable partnerships<\/a> and was eventually forced to close its doors.<\/p>\n

Even though Theranos could fulfill all elements of trade secret misappropriation, Tyler Schultz and Erica Cheung can likely avoid liability for their disclosures. This is likely all thanks to Whistleblower Provision of the DTSA,<\/a> which helps to strike the important balance between trade secret protection and public welfare.<\/p>\n

Whistleblower Provision of the DTSA<\/strong><\/p>\n

Although the DTSA was enacted to protect trade secrets, it has some important exceptions, like the Whistleblower Provision. This provision precludes liability in specific\u00a0 circumstances like public welfare.<\/p>\n

The Whistleblower Provision provides that there will be no liability for an individual who discloses a trade secret to report illegal conduct. This provision therefore protects whistleblowers who disclose trade secrets to expose wrongdoing \u2013 as long as the disclosure is made in accordance with the requirements. The Whistleblower Provision requires that a disclosure must only be made to a government official, an attorney, or via a sealed document for court proceedings.<\/p>\n

With Theranos, the information disclosed by the whistleblowers was all tied to the fraud committed by the high-level executives of the company. Theranos used test results, false validation reports, lab protocols \u2013 essentially everything \u2013 \u00a0to cover up their failing technology and defraud investors. Given that fraud is a crime \u2013 of which Elizabeth Holmes was eventually convicted<\/a> \u2013 Tyler Schultz and Erica Cheung fell under the protection of the Whistleblower Provision when they bravely came forward to expose Theranos\u2019 secrets \u2013 assuming their disclosure was made in accordance with the requirements discussed above.<\/p>\n

Interested in learning more about the story of Theranos? Check out the podcast Bad Blood<\/a>, hosted by Rebecca Jarvis at ABC News.<\/p>\n

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Hannah Dawson<\/em>
\nAssociate Blogger<\/em>
\nLoyola University Chicago School of Law, J.D. 2025<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"

Silicon Valley, located in the San Francisco Bay Area, is well known as the global center for innovation and technology. Given this reputation, it’s no surprise that numerous different tech companies and startups call this place home \u2013 companies like Apple, Google, and Meta, just to name a few. Continue reading Whistleblowers and Trade Secrets: A Theranos Case Study<\/span><\/a><\/p>\n","protected":false},"author":55,"featured_media":4413,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[10],"tags":[368,138,153,155,367,366,318,369],"class_list":["post-3219","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-trade-secrets","tag-dtsa","tag-intellectual-property","tag-ip-law","tag-ip-trade-secrets","tag-silicon-valley","tag-theranos","tag-trade-secrets","tag-whistleblower"],"_links":{"self":[{"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/posts\/3219","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/users\/55"}],"replies":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/comments?post=3219"}],"version-history":[{"count":8,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/posts\/3219\/revisions"}],"predecessor-version":[{"id":4522,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/posts\/3219\/revisions\/4522"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/media\/4413"}],"wp:attachment":[{"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/media?parent=3219"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/categories?post=3219"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blogs.luc.edu\/ipbytes\/wp-json\/wp\/v2\/tags?post=3219"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}