March 10, 2021 Feature

Ownership: Not Necessary to Launch Trade Secrets Claim into Litigation

Court concludes that possession alone is sufficient under state statute

By Mark A. Flores

An ex-employee’s attempt to take confidential rocket-related information from his former employer blasted into litigation that provides further clarification on the definition of a trade secret and whether a plaintiff must own the information to make a claim under a state’s uniform trade secrets act. ABA Litigation Section leaders say that the decision serves as an important reminder for practitioners to closely analyze issues of ownership and possession when addressing the application of state trade secret laws to proprietary commercial information.

An ex-employee allegedly lifted confidential information related to a rocket launch hydraulic system

An ex-employee allegedly lifted confidential information related to a rocket launch hydraulic system

Photo illustration by Elmarie Jara | Getty Images

An Employee Lifts Hydraulic Information

In Advanced Fluid Systems, Inc. v. Huber, an employee of Advanced Fluid Systems, Inc. (AFS), allegedly downloaded confidential information related to a hydraulic system from the company’s server to use for his own benefit. AFS had developed the information under a contract with the Virginia Commercial Space Flight Authority (VCSFA), which operated a NASA rocket launch facility. Pursuant to the contract, AFS ceded legal ownership of the confidential information to VCSFA. But AFS stamped the information as confidential and proprietary, and stored it on its own computers, which the employee had access to.

A new entity called Orbital acquired control of the launch system from VCSFA. Orbital bid out work for the system. The employee allegedly fed some of AFS’s proprietary information to one of AFS’s competitors to help it secure work from Orbital. The employee also formed his own company and allegedly used AFS’s proprietary information to secure his own contract with Orbital for work on the launch system.

AFS filed a lawsuit under the Pennsylvania Uniform Trade Secrets Act (PUTSA) and other state laws against its former employee and the competitors that benefited from the use of AFS’s trade secrets. In the U.S. District Court for the Middle District of Pennsylvania, the defendants argued that AFS could not state a claim under PUTSA because AFS had relinquished ownership of the proprietary information to VCSFA in the parties’ contract. The trial court rejected that argument and issued a judgment for AFS following a bench trial. The defendants appealed.

Affirmed on Appeal

The U.S. Court of Appeals for the Third Circuit affirmed the trial court’s various rulings and judgment in favor of AFS, including the court’s central holding that AFS could assert and prevail on its PUTSA claims, even though it was not the legal owner of the misappropriated information.

The appellate court first affirmed the trial court’s conclusion that possession alone was sufficient to assert a PUTSA claim, adopting the Fourth Circuit’s reasoning in DTM Research, L.L.C. v. AT&T Corp. “[W]hile ownership of the sort traditionally associated with real or personal property is sufficient to maintain a trade secret misappropriation claim because the complete bundle of rights related to trade secrets includes the right to enjoy the value of the information’s secrecy, it is not a necessary condition” under the statute, the court concluded.

The appellate court also rejected the argument that AFS did not have lawful possession of the information because its contract with VCSFA failed to contain an express license for AFS to use the information. The appellate court concluded that a party lawfully possesses a trade secret when a party “retains and uses a trade secret owned by another for that owner’s benefit, with that owner’s knowledge, and, at a minimum, with that owner’s implied consent.” AFS had sufficiently proven that in the trial court.

A Common Yet Infrequently Considered Concept

“Most people would not think about asserting a trade secrets action based on trade secrets that you do not own,” declares Chad S.C. Stover, Wilmington, DE, cochair of the Section of Litigation’s Intellectual Property Litigation Committee. “Most people generally think of trade secrets as a property right and you do not think of asserting rights in a property that you do not own.”

“This issue comes up not only in government contracting situations like this, but also in universities where there are collaborations with universities and industries,” as well as in commercial joint venture, notes Nicole D. Galli, Philadelphia, PA, cochair of the Section’s Business Torts & Unfair Competition Committee.

Cautious Reassessment

“We are probably not looking at the opening of the floodgates for litigation,” cautions Galli. “We might, however, if more courts are starting to embrace this definition, and there could be other contexts where this is relevant.”

Outcomes in this area are “all very fact sensitive,” concurs John A. Stone, Paramus, NJ, cochair of the Trade Secrets Subcommittee of the Section’s Intellectual Property Litigation Committee. “All you have to do is have a possessory interest in the trade secret, which means a number of things like a licensing agreement, joint venture agreement, and now, if you can use it, even without ownership, you can sue to protect it.”

“In-house counsel and others will have to think about this definition of ownership when trying to identify a company’s intellectual property,” offers Stover. “A company’s intellectual property rights might also include trade secrets that the company does not own but still has a right to use, giving the company a potential claim for misappropriation.”

A company's intellectual property rights might also include trade secrets that the company does not own but still has a right to use, giving the company a potential claim for misappropriation

Chad S.C. Stover, Wilmington, DE

Cochair, Intellectual Property Litigation Committee

State-by-State Review

Whether possession alone is sufficient to state a claim under each state’s trade secrets act will depend, in part, on the specific language in each statute. The federal Defend Trade Secrets Act (DTSA), by contrast, has an express ownership requirement. This divergence in the state of the law only further heightens the importance of the initial analysis of the case and the law that applies.

“It makes the choice of law analysis important in a case if the two sides are fighting on which law applies when a trade secrets misappropriation claim is made,” explains Stover. “To the extent there are differences in ownership language or a difference in the state and federal DTSA language, it could make or break your case, and it is important to know that before you go.”

“For years there were separate common laws regarding misappropriation of trade secrets before the Uniform Trade Secrets Act was enacted,” adds Stone. “Despite the term ‘uniform,’ many states adopted different versions of the uniform statute or interpreted the same ‘uniform’ language differently, and there are disparate approaches, making careful analysis of each state’s trade secret statute all the more important given the global implications resulting from a global economy.”

Still, the decision “does open up an interesting avenue to pursue,” according to Galli. She advises businesses to take care in analyzing and addressing how various trade secrets acts may impact information that they possess, own, or license.

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By Mark A. Flores

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Mark A. Flores is an associate editor for Litigation News.


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