Addressing a variety of challenges to a judgment against defendants in a trade secret misappropriation action, the US Court of Appeals for the Third Circuit found that the plaintiff had standing on the basis of lawful possession (as opposed to ownership) of the trade secret materials and that the damages awarded, including punitives, was supported by sufficient evidence. Advanced Fluid Systems, Inc. v. Huber, Case Nos. 19-1722; -1752 (3d Cir. Apr. 30, 2020) (Jordan, J.).

Advanced Fluid Systems (AFS) makes hydraulic systems. Kevin Huber was a sales engineer for AFS, and later founded INSYSMA. Livingston & Haven competes with AFS. Clifton Vann is the president of Livingston and the CEO of its holding company. Thomas Aufiero worked at AFS from 1989 to 2011, then became a regional sales manager at Livingston.

In 2009, AFS contracted with the Virginia Commonwealth Space Flight Authority to install hydraulic systems for the NASA rocket launch facility on Wallops Island, Virginia. Orbital Sciences uses the Wallops Island facility to launch its Antares rocket, using a hydraulic system designed and installed by AFS. While AFS provided the Authority with engineering drawings relating to the hydraulic system, the drawings were the property of the Authority. In September 2012, the Authority experienced financial difficulty, resulting in Orbital acquiring control of the launch system.

Huber, while still working for AFS, began communicating with Livingston, Vann and Aufiero (collectively, the Livingston parties), claiming that Orbital was unhappy with AFS and wanted new vendors. Huber helped the Livingston parties become familiar with the hydraulic system and Orbital’s operations. He arranged tours and sent the Livingston parties confidential AFS internal documents and engineering drawings. The Livingston parties created a Dropbox folder, installed a virtual private network on Huber’s AFS laptop, and provided Huber with a Livingston email address. When Orbital sought bids for two projects, Huber worked closely with Livingston to prepare bids, undermined AFS’s bids (including by inflating their price and withholding relevant information) and continued providing Livingston with confidential AFS documents.

About a month later, Huber formed INSYSMA to compete for one of the contracts. He downloaded 98 gigabytes of AFS’s proprietary files, including all of its pending and past project files dating back to 1993. Huber then resigned from AFS. Huber continued to work with Livingston, including by sharing the stolen AFS files. Livingston relied heavily on the AFS files and other insider knowledge from Huber in preparing and submitting its bids. Ultimately, Orbital awarded Livingston one of the contracts and INSYSMA the other.

AFS brought suit against Huber, INSYSMA, the Livingston parties and Orbital. AFS settled with Orbital in exchange for a subcontract. The settlement provided that “no money is being paid” by Orbital in respect of AFS’s claims against Huber, INSYSMA or the Livingston parties. As to the other parties, the district court granted summary judgment that Huber and INSYSMA had misappropriated AFS’s trade secrets, and held a bench trial on AFS’s remaining claims. The Livingston parties’ counsel, Philip Morin, informed the court that he was not admitted to practice before it and that he was subject to disciplinary action in other states. Nonetheless, the district court permitted Morin to continue to represent the Livingston parties. After the trial, the district court ordered the parties to file proposed findings of fact and conclusions of law. AFS, Huber and INSYSMA filed submissions, but the Livingston parties never filed any. Morin did not disclose this failure to the Livingston parties. The district court found that the Livingston parties were liable for misappropriating AFS’s trade secrets; that Huber had breached a duty of loyalty to AFS; and that Livingston and Vann, but not Aufiero, aided and abetted that breach. The district court then awarded AFS compensatory damages (lost profits) from Huber, INSYSMA and the Livingston parties; punitive damages against Huber for trade secret theft; and punitive damages against Huber, Livingston and Vann for the breach of fiduciary duty.

The defendants appealed, raising a variety of issues.

Standing. Defendants argued that AFS had no standing to sue for misappropriation of information that it did not own or lawfully possess. The Third Circuit rejected this argument, explaining that ownership (as opposed to lawful possession) is not required, and that AFS did, in fact, lawfully possess the information. Defendants also argued that the information was not protectable as trade secrets because AFS did not take adequate measures to protect its secrecy. The Court rejected this argument as well, notwithstanding the absence of a confidentiality agreement between AFS and the Authority, because the Authority had honored AFS’s proprietary designations and did not disclose its information except as necessary for operation of the hydraulic system.

Counsel. The Livingston parties requested a new trial based on Morin’s misconduct. The Third Circuit rejected these arguments, finding that the Livingston parties were not prejudiced by Morin’s conduct, that the extraordinary relief of a new trial was not warranted, and that it was the Livingston parties’ responsibility to retain and supervise their counsel.

Punitive Damages. Vann and Livingston challenged the punitive damages award because the record lacked evidence that their conduct was sufficiently egregious and because the district court improperly relied on their lack of remorse. The Third Circuit rejected both positions, finding ample evidence of egregious conduct by Vann and Livingston, most notably a compensation package that Vann approved for Huber that incentivized Huber to damage AFS while knowing that Huber owed AFS a duty of loyalty under Pennsylvania law. The Court also held that the district court properly considered Vann’s and Livingston’s lack of contrition as evidence of their state of mind at the time of their wrongdoing.

Offset. Defendants argued that the damages award should be set off by the amount of the Orbital settlement. The Third Circuit rejected this argument because defendants had failed to raise it at or before trial and had effectively denied AFS the opportunity to put on evidence relating to such a theory, and because defendants had failed to prove (or even provide evidence) that Orbital was a joint tortfeasor.

Lost Profits. Defendants challenged the lost profits award as allegedly failing to account for costs that AFS would have incurred in obtaining the lost profits. The Third Circuit sustained the district court’s lost profits award as supported by the evidence of record.

Practice Note: Even when confronted with the most one-sided fact patterns, it is important to formulate and timely disclose damages theories, and prove them at trial.