Theranos Whistleblower Claims “Fraud is Not a Trade Secret”

Posted by Katherine M. Silverman on

Where’s the line between legitimately protecting your business’s trade secrets and misusing a trade secret to conceal fraudulent activity? That’s one of the questions at the heart of John Carreyrou’s Bad Blood: Secrets and Lies in a Silicon Valley Startup. The book tells the story of the rise and fall of Theranos, a Silicon Valley “unicorn” (a privately held startup company once valued at over $1 billion). Theranos and its CEO Elizabeth Holmes raised millions of dollars from seasoned investors by claiming that the company was developing innovative blood testing technology. In reality, Theranos never got its proprietary technology off the ground and now the company has shut down and Holmes has been indicted on fraud charges.

One question many are asking, and one the book takes great pains to answer, is how could this happen? How could a company like Theranos fool so many people into investing in its business when it couldn’t back up its claims? According to the book’s author, one method Theranos used was vigorous protection of its trade secrets.

In the book, Carreyrou describes how Theranos forced every single visitor to its office to sign a non-disclosure agreement. When employees left the company, many were pressured to sign severance agreements that contained highly restrictive covenants limiting what former employees could say about the company. Despite these agreements, several former employees chose to speak out as whistleblowers. In fact, Carreyrou acknowledges that he would not have been able to write his book without the information provided by those former employees.

One of those former employees was Tyler Shultz, the grandson of former U.S. Secretary of State George Shultz. Tyler Shultz made the decision to come forward, despite pressure from his grandfather, who was serving on Theranos’s board of directors. When Tyler Shultz broke his silence, Theranos took legal action against him, ultimately causing his family to incur more than $400,000 in legal fees. When Tyler Shultz was asked about his decision to come forward, he said, “Fraud is not a trade secret. I refuse to allow bullying, intimidation and threat of legal action to take away my First Amendment right to speak out against wrongdoing.” (If you’re wondering what IS a trade secret – check out this blog post on our website for more information).

While it appears Theranos was misusing its restrictive covenants and claims of trade secrets to bully former employees, there are many legitimate reasons a business needs to have such protections in place. If your business involves valuable intellectual property or proprietary technology, you should consider whether you have appropriate agreements in place to protect those assets.