Summary Judgment improperly granted in trade secret misappropriation case

William Westerman | September 7, 2012

Raytheon Company v. Indigo Systems Corp. and FLIR Systems, Inc.

August 1, 2012

Panel:  Linn, Dyk and O’Malley.  Opinion by Linn.

Summary

Raytheon sues Indigo for misappropriation of trade secrets in selling an infrared imaging camera to a general contractor on the F-35 Joint Strike Fighter program.  The district court grants Indigo’s motion for summary judgment that the statute of limitations (3 years) had lapsed.  Former employees of Raytheon started up Indigo to produce infrared imaging cameras. The district court impermissibly drew inferences against the non-moving party (Raytheon) in granting the summary judgment motion.  Further, the summary judgment motion should not have been granted because Texas and California law state that the discovery rule for the statute of limitations is a question of fact and not of law.

Details

Raytheon Company (“Raytheon”) appeals from a decision of the U.S. District Court for the Eastern District of Texas entering summary judgment and dismissing Raytheon’s claims against Indigo Systems Corp. and FLIR Systems, Inc. (“FLIR”) (collectively “Indigo”) for trade secret misappropriation on the ground that they were time barred.

Raytheon specializes in infrared imaging equipment, and employed James Woolaway and others in the infrared imaging field in the mid 1990’s.  In 1996, Woolaway and two other Raytheon employees left Raytheon to start up Indigo Corp. to compete in the infrared imaging business.  Indigo eventually became a wholly owned subsidiary of  FLIR.   In his resignation letter from Raytheon, Woolaway promised not to recruit Raytheon employees while still at the company or while any consulting was done for Raytheon after his departure.  His consulting with Raytheon was terminated in 2000.

In 1997, Raytheon had some indication that Indigo might be recruiting Raytheon personnel and obtaining Raytheon trade secrets.  Raytheon contacted Indigo to complain, and Indigo stated that there was no basis to that concern, and that Indigo, in fact, had multiple policies aimed at protecting Raytheon’s intellectual property.

In 2000, Indigo won a competition for an infrared camera over Rayteon, among others.  Then, in March 2003, Indigo won a subcontract, over Raytheon and others, from Northrop Grumman to provide an infrared camera for the F-35 Joint Strike Fighter contract.

In March 2004, Raytheon obtained an infrared camera that had been designed and manufactured by Indigo, but did not disassemble it for purposes of reverse engineering until August.  In the process of reverse engineering, Raytheon came to the conclusion that some of its trade secrets had been used and that there was also patent infringement.

On March 2, 2007, Raytheon sued Indigo in the U.S. District Court for the Eastern District of Texas for patent infringement and misappropriation of trade secrets under both Texas and California law.  Indigo defended by asserting a statute of limitations defense (3 years).  Raytheon replied that the discovery rule (under which a cause of action does not accrue until it is known or should be known to the plaintiff) applies.  The patent infringement issue was settled between the two parties.

The district court held that Raytheon’s trade secret claim was time barred and granted summary judgment in favor of Indigo.  The district court did not believe that Raytheon undertook the reverse engineering as part of “routine competitive analysis” based on testimony of witnesses from Raytheon that indicated that they had not seen “routine competitive analysis” in the past.  The district court specifically concluded that “[t]he evidence demonstrates as a matter of law that Raytheon knew or should have known all of the facts on which it base[d] its trade secret misappropriation claim before March of 2004.”

CAFC analysis

Summary judgment is granted if the movant (Indigo in this case) shows that there is no genuine dispute as to any material fact and then the movant is entitled to judgment as a matter of law.  The CAFC will review the district court’s decision (de novo), viewing the evidence in the light most favorable to the non-moving party (Raytheon in this case).

California and Texas have both adopted a “discovery rule” such that claims for trade secret misappropriation  accrue for statute-of-limitations purposes when the plaintiff knew or reasonably should have known of the facts that give rise to the claim.  In both states, whether or not a plaintiff “should have known” under the discovery rule is ordinarily a question of fact.

Essentially, Indigo alleges that when Raytheon obtained the Indigo camera, it did so because Raytheon suspected trade secret misappropriation by Indigo.  As noted, Raytheon said that it did so because of “routine competitive analysis.”  The CAFC stated that “the facts of record could support a reasonable inference in Raytheon’s favor, which the district court improperly declined to draw.”  Therefore, the district court erred in drawing impermissible inferences against the non-moving party in order to decide a summary judgment motion.  In essence, the district court presumed that because Raytheon once suspected Indigo, it should have continued to suspect Indigo after 2000.  To make this presumption does not take into account Indigo’s assurances.  Accordingly, the summary judgment was incorrect and the case will be returned to the district court for a factual determination of whether or not Raytheon “should have discovered” the trade dress misappropriation before March 2, 2004.

Takeaway

In the above two jurisdictions (Texas and California), state law controls the statute of limitations with regard to trade secret misappropriation.  Know your state law regarding trade secrets, and if you suspect trade secret misappropriation , take investigative steps and action (if appropriate) before the statute of limitations runs out.

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