Trade Secret Disclosure Is Contract Breach By Government and Belongs in Claims Court

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By Tony Dutra  


A claim that the U.S. government misappropriated a trade secret must be heard in the Court of Federal Claims because it is founded upon a breach of contract complaint, the U.S. Court of Appeals for the Federal Circuit ruled July 15 (United States Marine Inc. v. United States, Fed. Cir., No. 2012-1678, 7/15/13).

The court affirmed the Fifth Circuit's instruction to a lower court that the case should be transferred, though it said the result might be different “if we were freshly conducting the analysis” of the interaction of two arguably conflicting federal statutes.

The Federal Circuit's primary concern was that the trade secret owner was not directly a party to the contract and thus might lose the opportunity to recover damages for the harm. However, it held that the law-of-the-case established that the trade secret owner was a subcontractor with rights to make the breach of contract claim, and that it may have a claim under the Takings Clause of the Fifth Amendment as well.

Alternative Sovereign Immunity Exceptions

Under the principle of sovereign immunity, the U.S. government is not amenable to a lawsuit. Sovereign immunity is waived--i.e., the government is subject to liability--under two statutes relevant in this case:

• Under the Federal Tort Claims Act, 28 U.S.C. §§1346(b), 2674, waiver applies to certain tort claims--using relevant state law to define the torts. Federal district courts have exclusive jurisdiction under the FTCA; appeals are to the appropriate circuit court.

• Under the Tucker Act, 28 U.S.C. §1491(a)(1), waiver applies to contracts with the federal government. The Court of Federal Claims has exclusive jurisdiction over Tucker Act claims, with appeals to the Federal Circuit.

Navy Discloses Trade Secrets

In the instant case, United States Marine Inc. held trade secrets related to the design of special operations boats sold to the military, and VT Halter Marine Inc. built boats using that design.

VT Halter had the contract with the U.S. Navy and delivered 24 Mark V special-operations craft to the Navy in the 1990s. VT Halter accurately identified USM's trade secrets pursuant to a Limited Rights Legend provision--standard under Defense Federal Acquisition Regulation Supplement rule DFARS §252.227-7013--in the government contract for development. But, for reasons unknown, that provision was not present in the subsequent production contract.

In 2004, the Navy contracted with USM's competitor, Maine Marine Manufacturing L.L.C., to build a next generation Mark V.1 boat. USM filed a lawsuit in the U.S. District Court for the District of Louisiana charging the United States with trade secret misappropriation.

The government brought VT Halter into the case and VT Halter counterclaimed under the FTCA as well. The district court found in favor of USM and VT Halter and awarded $1.45 million in damages.

On appeal, though, the Fifth Circuit held that the Louisiana court lacked jurisdiction and the case belonged in the CFC pursuant to the Tucker Act. On remand, as instructed, the Louisiana court transferred the case. USM appealed to the Federal Circuit to contest the transfer.

Start With the Tucker Act

Judge Richard G. Taranto first noted that USM's claim sounded in tort, for which the FTCA had granted exclusive jurisdiction to federal courts and for which the Tucker Act did not vest in the CFC. However, he said, the analysis changes if one begins with the Tucker Act and applies principles of sovereign immunity and its waiver.

The particular principle at issue with the Tucker Act is “the strong policy in favor of construing federal contracts under uniform federal law,” the court said, quoting Union Pacific Railroad Co. v. United States, 591 F.3d 1311, 1320 (10th Cir. 2010).

With that backdrop, the court said, “A court must consider whether the matter is within the policy underlying the presumptive congressional commitment to Claims Court/Federal Circuit exclusivity, whether it is within another congressionally enacted policy (e.g., the FTCA's liability-imposing policy, 28 U.S.C. §2674), and whether the latter displaces the former if both apply.”

The court cited a line of seven appellate court precedents concluding that a tort claim was better characterized as arising out of contract breach or that contract-related claims predominated, originating in Woodbury v. United States, 313 F.2d 291 (9th Cir. 1963).

USM Not a Party to Contract

In each case, the plaintiff lost the ability to pursue FTCA tort claims after transfer to the CFC. But, the court noted, the ability to assert privity of contract with the United States provided those plaintiffs with the possibility of compensation for contract-related harm.

In contrast, USM's additional problem in this case was that VT Halter, not USM, was the party in privity of contract with the U.S. government.

Despite the desire to have a uniform interpretation of a standard DFARS provision in a government contract, the court said, “we cannot easily dismiss (while we need not affirmatively embrace) the notion that an apparent congressional bar on adjudication of the United States' contractual duties outside the Tucker Act forums can prevail even when the result is to preclude recovery for harm.”

The court rejected the argument that the Tucker Act could be expanded to allow the CFC to consider tort claims “founded … upon” a contract, quoting the text of 28 U.S.C. §1491(a)(1). “In that view, the Tucker Act's language would have the same scope for what it affirmatively embraces as for what it impliedly excludes from other courts,” the court said.

But Meaningful Remedy May Be Available

However, the court identified “the possibility of a meaningful Tucker Act remedy for USM on other grounds.”

First, it noted the Fifth Circuit's conclusion that USM was a subcontractor to VT Halter as to the Navy contract at issue. Even a third party without privity may recover damages for the government's breach of a contractual duty, the court said, citing D&H Distributing Co. v. United States, 102 F.3d 542, 546-47 (Fed. Cir. 1996). Further, the court said, the government's position in the case urging that the CFC has jurisdiction-- accepted by the Federal Circuit herein--“legally establishes [ ] the premise that USM is within the class of those authorized to recover upon proof of breach of contract, injury, and amount of damages.”

Second, the court posited that USM's trade secret misappropriation may constitute a taking under the Fifth Amendment, according to Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1001-04 (1984). The Tucker Act goes beyond contract claims, the court said, by allowing claims against the government “founded … upon the Constitution.”

Thus, the court concluded, “the transfer question does not depend on the stark and much more problematic assertion that the interest in uniform Claims Court (and Federal Circuit) adjudication of government-contract obligations, an interest embodied in the Tucker Act, is so strong as to justify stripping an injured party of any right to compensation, including the right Congress expressly granted in the FTCA's Section 2674.”

The court thus affirmed the transfer order, “with all that entails under this court's precedents about the issues thereby resolved.”

Judges Alan D. Lourie and S. Jay Plager joined the opinion.

Charles L. Egan of Slater & Zeien, Washington, D.C., represented USM. Domenique G. Kirchner of the Commercial Litigation Branch, Civil Division, U.S. Department of Justice, Washington, D.C., represented the government.


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