Can a Non-Owner of a Trade Secret Sue for Misappropriation? Courts Say Yes.

Fenwick & West LLP

Fenwick & West LLP

In Advanced Fluid Systems v. Huber, the U.S. Court of Appeals for the Third Circuit held that a company that did not own, but lawfully possessed, a trade secret could bring a misappropriation claim. Other courts, including the Fourth and Tenth Circuits, have ruled similarly, signaling a growing consensus among courts to focus on possession rather than ownership when evaluating standing in trade secret cases.

Huber involved competing hydraulics companies vying for contracts with a NASA rocket launch facility in Virginia. The trade secrets at issue were Advanced Fluid Systems' engineering drawings from its design and installation of a hydraulic system for the facility. AFS’s contract with the Virginia Commonwealth Space Flight Authority deemed these materials “work for hire” and the “exclusive property” of the space authority. Still, AFS retained them and marked them as AFS’s confidential information. The company’s retention of these materials became key in the tale of “disloyalty and deception” that followed. When a company using the facility for its rocket launch took over from the space authority, it solicited new vendors. An AFS sales engineer who was “intimately involved” in AFS’s project gave the drawings to an AFS competitor. He helped that competitor obtain the contract, while simultaneously working on (and undermining) AFS’s bid. The engineer resigned from AFS, formed his own business, and successfully outbid both companies for another project contract.

AFS, having lost out on the contracts, sued its ex-employee, his company, the other competing company, and the company that took over the facility alleging trade secret misappropriation under Pennsylvania’s Trade Secret Act. AFS won on summary judgment when the district court found the ex-employee and his company liable for misappropriation. After a subsequent bench trial, the court held the competitor to which the employee had been feeding information jointly and severally liable.

On appeal, the Third Circuit affirmed the district court’s ruling that AFS had standing to assert trade secret misappropriation even though AFS’s contract with the space authority designated the information as the space authority’s “exclusive property.” The district court had rejected the defendants’ reliance on common law references to ownership based on more recent understanding of the “knowledge-driven value” of trade secrets. The Third Circuit agreed, reasoning that neither the statutory text nor the legislative history of either the uniform law or the Pennsylvania statute discuss legal ownership as a prerequisite. Adopting the Fourth Circuit’s reasoning in an earlier case, it explained that the value of a trade secret comes from its secrecy: an ownership requirement does not account for “the substantial interest that lawful possessors of the secrets have in the value of that secrecy.” Even without an “explicit license” to AFS in its contract, the Third Circuit found sufficient facts establishing AFS’s “permission to hold and use the secrets,” thus entitling it to sue.

The Huber Court qualified its holding to “circumstances like this.” Still, the Third Circuit’s ruling provides a path for those who possess, but do not own, trade secrets to sue for misappropriation. On the other hand, AFS’s naming of the company that later operated the facility (which claimed to be the legal owner of the trade secrets following its acquisition of the space authority) as a defendant provides a caution to trade secret owners. A trade secret owner deciding to license or provide its trade secret to third-parties should be mindful that doing so could later involve litigation over its trade secrets that it does not initiate.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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