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.
“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.”
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.