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Archived updates for Wednesday, September 14, 2005

"State Secrets" Privilege Narrowly Construed in Trade Secret Case

In Crater Corp. v. Lucent Technologies (Fed. Cir. September 7, 2005) the court agreed with the government’s assertion of the "state secrets privilege" in an intellectual property dispute but refused to allow the case to be dismissed for lack of discovery.

The arose when Lucent asked Crater to provide it with technical data, drawings, and other information relating to Crater's patented underwater connectors for fiber optics (right). Lucent expressly agreed not to reveal the information to third parties and not to produce the Crater coupler until a license agreement was finalized. When that agreement was breeched, Crater filed suit against Lucent alleging patent infringement and misappropriation of trade secrets and breach of contract.

However, ten months after the suit was filed, the federal government moved to intervene in order to assert the state secrets privilege. Specifically, the government sought to prohibit Crater "from conducting any discovery or serving any subpoena for information relating to the manufacture or use of [Crater’s] coupling device, or any coupling device, by or on behalf of the United States" because disclosure of such information would gravely damage national security.

Following a review of the classified discovery materials, the district court dismissed Crater’s complaint. The court reasoned that, although Crater would not have to prove the particular use of its trade secrets in order to prevail on its misappropriation of trade secrets claim, it would have to show that Lucent somehow incorporated its design information in a classified government device. The lower court also noted that, in light of the government’s proper invocation of the state secrets privilege, Lucent would not be able to adequately defend itself because it would not be able to disclose what it did or did not do for the government.

Hoever, the Federal Circuit court of appeals did not believe that these problems were sufficient to require dismissal of the complaint:

"Resolution of whether any of Crater’s claims can be adjudicated without privileged information turns on an analysis of the claims in light of the state secret that forms the basis for the government’s assertion of the privilege. We think that, at this juncture, however, there is a fundamental obstacle to conducting that analysis. The obstacle lies, we believe, in the fact that the record as it pertains to Crater’s state law claims is not adequately developed. . . .

In short, we think that deciding the impact of the government’s assertion of the state secrets privilege on Crater’s state law claims without first determining what trade secrets exist and whether a contract existed between Crater and Lucent is akin to putting the cart before the horse. If there are no alleged trade secrets and there was no contract, the issue of the state secrets privilege becomes moot. Alternatively, if there are trade secrets and/or there was a contract, an understanding of the precise nature of the trade secrets and the terms of the contract is essential to the analysis of whether Crater’s misappropriation of trade secrets and breach of contract claims may proceed in the face of the assertion of the privilege. In other words, in order to adjudicate this case, there must be a determination of (i) the precise trade secrets that exist in connection with the Crater coupler; (ii) which of those trade secrets Crater alleges were misappropriated; (iii) whether a contract existed between Crater and Lucent; (iv) if a contract did exist, its terms; (v) which of the contract’s terms Crater alleges were breached; and (vi) what constituted the alleged breach.

In sum, we conclude that the decision of the district court dismissing Crater’s complaint must be reversed and the case remanded to the court for further proceedings. Although we agree that there is a state secret here that must be protected, we conclude that further proceedings are required because we do not believe the record in the case—as it relates to Crater’s two state law claims—is sufficiently developed to enable a determination as to the effect of the government’s assertion of the privilege on those claims, in terms of Crater’s ability to assert the claims and Lucent’s ability to defend against them. If Crater establishes that it has one or more trade secrets in connection with the Crater coupler, the district court will know precisely what the secrets are. The government can then provide an affidavit or declaration—or otherwise address—how the precise questions involved, such as whether a particular trade secret was incorporated in a government device, would impermissibly implicate the state secrets privilege. Armed with that knowledge and with the knowledge of the state secret that must be protected, the court will be able to assess whether any misappropriation of trade secrets claim can go forward. As far as Crater’s breach of contract claim is concerned, if the district court determines that a contract did exist between Crater and Lucent and what the terms of that contract were, the district court, again armed with its knowledge of the state secret that must be protected, will be able to determine which, if any, of Crater’s breach of contract claims can proceed in the face of the government’s assertion of the state secrets privilege. In making that determination, the court may require the government to supply particularized affidavits or declarations in order to resolve the discovery issue.

Finally, the question of whether the state secrets privilege would be implicated by the production of particular documents is not ripe for resolution, and our discussion should not be read as resolving that question. We have not reviewed any of the documents which are sought in discovery and which the district court reviewed in camera. On remand, after the district court determines the precise nature of Crater’s state law claims, it will be for that court then to determine, in the first instance, which, if any, of the documents sought in discovery may be produced in the face of the government’s assertion of the state secrets privilege."

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