The United States Court of Appeals for the Third Circuit recently affirmed a District Court opinion awarding punitive damages against a former employee who stole confidential information from his former employer, even though the employer did not “own” the stolen information. Advanced Fluid Sys., Inc. v. Huber, 958 F.3d 168 (3rd Cir. 2020). This is a first of its kind decision in the federal circuit courts. The Third Circuit held that the non-owner employer still had the right to bring trade secret claims because it had possessed and taken appropriate safeguards to keep that information secret from its competitors and the public prior to the theft. The Court of Appeals further determined that the employer could recover damages, including punitive damages, against the former employee who stole that information for the benefit of a competitor. The case is further detailed below.
The defendant in the case, Kevin Huber, worked as a sales engineer for plaintiff Advanced Fluid Systems (AFS), a hydraulic company. AFS created engineering drawings for a client as “work for hire.” Although the client received all ownership rights to the drawings, AFS continued to possess and safeguard the drawings from disclosure to AFS’ competitors and the general public.
While still employed at AFS, Huber began secretly working with a rival hydraulic company to steal the drawings and use them to secure new business from AFS’s client. Huber and the rival used a commercial Dropbox folder, and a virtual private network installed on Huber’s company laptop to transfer the drawings and other proprietary information to themselves. Armed with AFS’s drawings, and additional assistance from Huber, the rival company succeeded in obtaining a new contract for work from AFS’s client, at AFS’s expense.
When AFS sued Huber, the rival, and other related parties, Huber argued that his theft of the engineering drawings did not constitute misappropriation of trade secrets because AFS’s client, not AFS, owned the drawings. The District Court rejected Huber’s argument, finding that although AFS did not own the engineering drawings, “ownership, in the traditional sense, is not prerequisite to a trade secret misappropriation claim.” It was enough that AFS possessed the drawings, and took steps to prevent dissemination of the information to others. The District Court then awarded AFS compensatory damages against Huber and the rival company, and punitive damages against Huber for actual misappropriation of AFS’ trade secrets. The Court of Appeals affirmed the District Court opinion in all respects.
In this case, the principle that ownership is not prerequisite to a trade secret misappropriation claim was decided under state law, and the Court of Appeals did not directly address whether the result would be different under the Federal Defend Trade Secrets Act.
The case illustrates several best practices for protecting trade secrets. When licensing trade secrets for use by a licensee, the licensor should specify and limit the licensee’s permitted uses. In addition, because the licensor and licensee may have disparate interests, the licensee should be prohibited from asserting trade secret claims without the licensor’s express written consent. Finally, the licensor should require the licensee to promptly notify it of suspected unauthorized use or dissemination of its trade secrets.
Trade secret misappropriation impacts businesses across a variety of industries, and the consequences can be severe. A potential victim of trade secret theft, or one accused of the same, should promptly consult experienced trade-secret litigation counsel.