Plaintiffs wishing to sue for patent, copyright, or trademark infringement all have one thing in common: they must prove they own the IP at issue. Not so for trade secrets. Last month, the United States Court of Appeals for the Third Circuit held that the Pennsylvania Uniform Trade Secrets Act only requires a plaintiff to lawfully possess, rather than formally own, the trade secrets it wishes to vindicate. With this opinion, the Third Circuit affirmed a district court decision awarding $3.5 million in damages and fees to NASA subcontractor Applied Fluid Systems Inc. (“AFS”) in its suit for trade secret misappropriation.
The “sorry story of disloyalty and deception piled upon deception” began in 2009, when AFS entered into a three-year contract with the Virginia Commonwealth Space Flight Authority (the “Authority”) to build, install, and maintain a hydraulic system for a NASA rocket launch facility. However, the Authority experienced financial difficulty, and eventually had to cede control of the launch system to a private entity, Orbital Sciences Corp. (“Orbital”). Through this acquisition, Orbital inherited the AFS contract. Importantly, the initial contract between AFS and the Authority made any materials generated by AFS for the Authority the property of the Authority.
Meanwhile, AFS engineer Defendant Kevin Huber (“Huber”) began communicating with an AFS competitor. Huber claimed Orbital was displeased with AFS and was seeking new vendors to service the hydraulic system at the launch pad. Huber even took affirmative steps to familiarize the competitor with the system and Orbital’s general operations by arranging tours and sending the competitor confidential AFS documents and drawings. Eventually, when Orbital sought to replace two aspects of the hydraulic system, Huber worked closely with the competitor to prepare a bid.
Huber’s “deceit led to another twist” when, unbeknownst to AFS or its competitor, he formed his own business entity, Integrated Systems and Machinery, LLC (“INSYSMA”). This turned a two-supplier market into a three-supplier one, with Huber involved in all three to varying degrees. INSYSMA ultimately won the contract both AFS and its competitor, particularly with Huber’s assistance, had expected to win. AFS sued, naming as defendants Huber, INSYSMA, and others.
After motion practice caused AFS to drop some claims, only AFS’s trade secret misappropriation claims under state law remained. On those claims, the district court held that AFS had adequately alleged lawful possession and “ownership, in the traditional sense, is not prerequisite to a trade secret misappropriation claim.” Advanced Fluid Sys., Inc. v. Huber, 28 F. Supp. 3d 306, 323 (M.D. Pa. 2014). After a six-day bench trial, the court found Livingston and Huber jointly and severally liable for misappropriation of AFS’s trade secrets and all but two defendants liable for breach of fiduciary duty or for aiding and abetting that breach.
On appeal, defendants argued AFS’s claim for trade secret misappropriation could not stand because AFS did not “own” the purported trade secret at issue. Defendants based this argument on the initial contract between AFS and the Authority, pursuant to which the Authority became the owner of the materials AFS generated for the launch pad. But the Third Circuit disagreed. Instead, the court noted that while “ownership of the sort traditionally associated with real or personal property” can maintain a trade secret misappropriation claim, “it is not a necessary condition.” The court observed that a per se ownership requirement fails to account for either the substantial interest that lawful possessors of trade secrets have in the value of that secrecy or the statutory language that does not mention ownership as an element of a misappropriation claim.
The Third Circuit is not alone in concluding that ownership is not required to pursue a trade secret misappropriation claim. Here, the court relied on a Fourth Circuit opinion similarly holding that a party asserting misappropriation under the Maryland Uniform Trade Secrets Act need only demonstrate lawful possession of a trade secret, and not “ownership in its traditional sense.” DTM Research, LLC v. AT&T Corp., 245 F.3d 327, 333 (4th Cir. 2001). The Third Circuit also noted in a footnote that “neither the commentary to the uniform law nor [the Trade Secrets Act]’s legislative history include[s] any specific reference to legal ownership of the trade secrets as a prerequisite to a cause of action.” The same footnote also cited “a leading treatise” which recognizes that “because the gravamen of [a Uniform Trade Secrets Act] misappropriation action is wrongful acquisition or improper use of information gained from a plaintiff, possession, as opposed to ownership, suffices.” Advanced Fluid Sys., Inc. v Huber et al., — F.3d — , 2020 WL 2078298, at *5 n.6 (3d Cir. 2020) (quoting 4 Roger M. Milgrim & Eric E. Bensen, Milgrim on Trade Secrets § 15.01 (2020)). Courts beyond the Third and Fourth Circuit may therefore reach similar conclusions.
The case in the Third Circuit is Advanced Fluid Sys., Inc. v Huber, — F.3d — , (3d Cir. 2020).