Trade Secret Ownership: Possession is Nine-Tenths of the Law

When a plaintiff asserts claims of trade secret misappropriation, it must own the underlying trade secrets, right? Wrong. According to the Third Circuit’s April 30, 2020 decision in Advanced Fluid Systems, Inc. v. Huber, under state law, the plaintiff only needs to prove lawful possession.

In 2009, Advanced Fluid Systems, Inc. (“AFS”) entered into a three-year agreement (the “Agreement”) with the Virginia Space Flight Authority (the “Authority”) to build, install, and maintain a hydraulic system for the NASA rocket launch facility on Wallops Island, Virginia. Under the Agreement, all materials generated by AFS during the performance of the Agreement were “work for hire” and the “exclusive property” of the Authority. Despite this Agreement, AFS included stamps on its engineering drawings that identified them as AFS’s proprietary and confidential data.

A few years after the Agreement was executed, the Authority encountered financial difficulties and Orbital Sciences Corporation acquired control of the launch system. AFS and Orbital did not execute a non-disclosure or confidentiality agreement, but, nevertheless, Orbital only disclosed AFS’s drawings on a “need-to-know” basis.

Shortly after Orbital took over for the Authority, Kevin Huber, an AFS employee at the time, began disclosing AFS’ confidential information to competitor Livingston & Haven LLC (“Livingston”) and even helped Livingston secure a contract with Orbital to replace “gripper arms” on the hydraulic system. Then, unbeknownst to both AFS and Livingston, Huber formed his own business entity, INSYSMA, to secure the Orbital “cylinder upgrade” contract and downloaded nearly 100 gigabytes of AFS’s proprietary files to an external hard drive before resigning from AFS. Huber shared these files with Livingston and continued to work with it on its gripper arm designs and cylinder upgrade bid. But Orbital ultimately awarded the cylinder contract to INSYSMA.

In December 2013, AFS sued Huber, INSYSMA, Livingston, two Livingston employees, and Orbital for misappropriation of trade secrets under the Pennsylvania Uniform Trade Secrets Act (“PUTSA”). Prior to trial, AFS and Orbital reached a settlement agreement whereby Orbital granted AFS a subcontract for certain work on the hydraulic system. Following a bench trial, the district court ruled against the remaining defendants and they appealed, asserting three primary arguments which the Third Circuit rejected.

First, appellants argued that AFS could not maintain an action for misappropriation of trade secrets because the contract between AFS and the Authority designated the information at issue as the Authority’s “exclusive property.” But the court, relying on a Fourth Circuit decision,[1] explained that on its face, the PUTSA – like the Maryland Uniform Trade Secrets Act (“MUTSA”) – lacks an ownership requirement. The court further explained that trade secrets are a “species of property” and ownership is not the sole interest subject to protection. It therefore concluded that “lawful possession” of a trade secret is sufficient to sustain a PUTSA claim.

Second, appellants argued that AFS did not lawfully possess the information it claimed to be trade secrets because the Agreement transferred AFS’s possession rights to the Authority. But the court rejected this argument in light of the uncontroverted record that AFS (i) physically retained possession of the trade secrets, (ii) under the Agreement and contracts with Orbital following the Agreement, AFS was required to use and did in fact use the trade secrets to fulfill its obligations, and (iii) the Authority never once objected to AFS’s retention or use of the trade secrets.

Third, appellants argued that there was a genuine issue of material fact regarding the reasonableness of the measures taken to ensure the information’s secrecy. The court found, however, that even though AFS provided the information to the Authority, which is “a public entity subject to a state open-records law,” without a formal non-disclosure or confidentiality agreement, the Authority’s “theoretical freedom” to disclose AFS’s trade secrets was “entirely speculative” because the Authority adhered to its obligation to preserve the confidentiality of the information.

The PUTSA, like trade secrets acts in most other states, is based on the Uniform Trade Secrets Act (“UTSA”).[2] Therefore, the Third Circuit’s reasoning that lawful possession (rather than ownership) of a trade secret is enough to sustain a misappropriation claim may be followed by courts applying the trade secret law of other states. Under the federal Defend Trade Secrets Act (“DTSA”), however, such reasoning presumably would not apply since ownership of the trade secrets is an express requirement.[3]

[1] TSM Research, L.L.C. v. AT & T Corp., 245 F.3d 327 (4th Cir. 2001)

[2] New York and North Carolina are the only states that have yet to adopt the UTSA.

[3] 18 U.S.C. § 1836(b)(1)