When Possessing a Trade Secret is Enough to Sue
Third Circuit Upholds Trade Secret Protection for NASA Supplier Even Though Supplier Did Not Own the Trade Secret
In trade secret litigation, particularly among government contractors, defenses are sometimes asserted based on whether the plaintiff actually owns or retains a sufficient interest in the trade secret at issue. This can arise, for example, in the context of data rights disputes when a prime or subcontractor's trade secret was delivered to its government customer, and the defendant contractor later accused of misappropriating the alleged trade secret may cry, "It's government property." (In this scenario, the government may be a licensee with unlimited rights to the contractor's deliverable but usually does not own it or the underlying intellectual property.) Or, as demonstrated in a recent opinion from the U.S. Court of Appeals for the Third Circuit in Advanced Fluid Systems Inc. (AFS) v. Huber et al.,1 a defendant may assert that the alleged trade secret is not owned at all by the plaintiff contractor because the trade secret was conveyed to another party. These are essentially trade secret standing fights. Their resolution, to no surprise, depends on the facts and circumstances of each case, as demonstrated in the AFS opinion.
Former Employee Obtains and Discloses Technical, Design and Maintenance Data
Plaintiff AFS distributes, manufactures and installs hydraulic components and hydraulic systems. The main defendant, Huber, was employed as a sales engineer for AFS. AFS entered into an agreement with the Virginia Commonwealth Space Flight Authority (the Authority) to build, install and maintain a hydraulic system for the NASA rocket launch facility on Wallops Island, Virginia.
AFS supplied the Authority with a comprehensive package of engineering drawings generated during the design and installation of the hydraulic system. AFS and the Authority agreed that all materials generated for the project were to be deemed "work for hire" and the "exclusive property" of the Authority. However, the project drawings that AFS delivered to the Authority contained an AFS title block and confidentiality stamp facially benefitting AFS.
Huber was intimately involved in the development of the hydraulic system, eventually becoming its de facto project manager. After the Authority encountered financial difficulties, another party, Orbital Sciences Corp.("Orbital"), acquired control of the NASA launch system, including the hydraulic system designed and manufactured by AFS. While AFS did not execute a nondisclosure agreement with Orbital, Orbital only disclosed the drawings supplied by AFS on a need-to-know basis.
With Huber's assistance, AFS submitted a bid to Orbital for the work on this NASA project. Others also bid on the project, including Livingston & Haven ("Livingston"), an AFS competitor. Unbeknownst to AFS, Huber sent Livingston various confidential AFS internal documents and engineering drawings to assist with its bid. Huber also inflated AFS's bid to ensure that Livingston's bid was more competitive. To communicate with Huber, Livingston provided Huber with a Livingston email address, created a commercial Dropbox folder and installed a virtual private network (VPN) on Huber's AFS laptop. Livingston's team relied extensively on confidential engineering drawings created by AFS and transmitted by Huber. To both AFS's and Livingston's chagrin, in the interim, Huber formed his own company, INSYSMA, which was ultimately awarded a subcontract for the system based on AFS's drawings, beating out both AFS and Livingston.
AFS sued Huber, Livingston, INSYSMA and others under the Pennsylvania Uniform Trade Secret Act (PUTSA), among other claims. AFS prevailed at summary judgment on its trade secret claim against Huber and was awarded substantial compensatory and exemplary damages at trial against him, Livingston and other parties.
The Court's Analysis and Holding that AFS's Possession of Confidential Information was Sufficient to Support and Prevail on Trade Secret Claim
The predominant issue on appeal was whether AFS could maintain a misappropriation claim, even though it agreed that the trade secret information was the Authority's "exclusive property." The Third Circuit affirmed that AFS did not have to own, in the traditional sense, the trade secret on which it brought suit. Rather, "[a] per se ownership requirement for misappropriation claims is flawed since it takes account neither of the substantial interest that lawful possessors of the secrets have in the value of that secrecy, nor of the statutory language that creates the protection for trade secrets while saying nothing of ownership as an element of a claim for misappropriation." Indeed, PUTSA, which is based on the Uniform Trade Secret Act, does not include "owner" or "ownership" in its statutory definitions.2
Instead, citing the U.S. Court of Appeals for the Fourth Circuit in DTM Research LLC v. AT&T Corp., 245 F.3d 327 (4th Cir. 2001), the Third Circuit agreed that lawful possession of the trade secret, such as AFS did here in its dealings with the Authority, may be sufficient, even without ownership. The court made clear, however, that ownership was still a relevant factor in a trade secret claim, but "[i]t is not the sole kind of interest that is relevant and subject to protection."
Relatedly, Huber and the other appellants also contended that the trade secrets were not protectable under PUTSA because the information was provided to the Authority, a public entity subject to a state open-records laws, without a written nondisclosure or confidentiality agreement. This was not persuasive. The Third Circuit noted that the Authority "honored AFS's proprietary designation and did not disclose its information except as needed…" and observed that there was no evidence the Authority was ever actually subject to a records request relating to AFS's trade secrets, which was unlikely, nor was there any evidence as to how the Authority may have handled such a request if one were made.
Key Takeaway – Trade Secrets Claim May be Viable Even When Ownership or Unlimited Rights Conveyed to Government, Prime or Higher-Tier Subcontractor
The Third Circuit's holding in AFS may have broad implications for government contractors with potential trade secret claims relating to valuable technical data, designs, software, manufacturing and other business processes developed under subcontracts that support government prime or higher-tier subcontracts. This is because 1) many prime contractors and higher-tier subcontractors, such as the Authority and Orbital, require that their subcontractors convey ownership in intellectual property, including any trade secrets developed under the subcontract, and 2) the government customer (in this case, NASA) ordinarily obtains unlimited rights as a licensee in technical data that can comprise such trade secrets (see FAR 52.227-14).
AFS's holding that fee simple ownership of a trade secret is not a prerequisite to a misappropriation claim under PUTSA opens the door for such subcontractors and other non-owner or possessor-based trade secret claims. But it is very fact dependent on what the lawful possessor and actual owner do with the trade secret at issue and how they take reasonable safeguards to protect it – a key part of any trade secret claim. Additionally, AFS confirms that a nondisclosure agreement may not always be required as a reasonable security measure to protect trade secrets. For example, if the claimant can show that the prime contractor or government in fact protected the trade secret from disclosure and either accepted or acquiesced to the claimant's application of an appropriate restrictive legend, a trade secret claim should be considered where the misappropriation resulted in monetary or competitive harm.
1 Advanced Fluid Systems, Inc. v. Huber, et al., Nos. 19-1722 and 19-1752 (3rd Cir. Apr. 30, 2020).
2 See 12 Pa. C.S.A. § 5302 (defining a trade secret as "information" that has independent economic value because it is not "generally known" or "readily ascertainable by proper means"); Note, however, that the more recently enacted federal Defend Trade Secrets Act (DTSA), in contrast to some states' Uniform Trade Secret Acts, does include "owner" in its definitions. See 18 U.S. Code § 1839(3)-(4) (providing that "the owner" of a trade secret must have "taken reasonable measures to keep such information secret" and defining "owner" as "with respect to a trade secret, . . . the person or entity in whom or in which rightful legal or equitable title to, or license in, the trade secret is reposed"). The complaint in AFS was filed in 2013 before the enactment of DTSA.