It's a worst-case scenario for many government contractors. Despite using strict confidentiality agreements and bold restrictive legends, the government releases a valuable trade secret to the public. The Trade Secrets Act may result in criminal consequences for the offending individuals, but the more pressing question for the contractor is how to recoup the loss of a valuable asset. The recent decision in Spectrum Sciences and Software, Inc. v. United States, No. 04-1366C (Fed. Cl. Feb. 14, 2011) [pdf], offers some guidance.

The case involved a contractor-developed improvement to an assembly line conveyor system used to manufacture aerial bombs. After completing the initial development work itself, Spectrum entered into a Cooperative Research and Development Agreement with the Air Force, which provided a framework for the parties to exchange information needed to refine and test the contractor's new design. Despite the broad confidentiality requirements in the CRADA, the government used Spectrum's design improvements to conduct a separate competitive procurement for improvements to the conveyor system. The Air Force actually released a draft RFP reflecting several of Spectrum's design improvements directly to Spectrum's competitors. A lengthy 2008 opinion in the case discusses the facts at length.

Since the government had already been found liable, the 2011 decision focuses exclusively on the question of Spectrum's damages. Citing the Federal Circuit's decision in First Federal Lincoln Bank v. United States, 518 F.3d 1308 (Fed. Cir. 2008), the opinion explains that the case involved the valuation of a lost asset:

When the defendant’s conduct results in the loss of an income producing asset with an ascertainable market value, . . . the most accurate and immediate measure of damages is the market value of the asset at the time of the breach.

The court weighed the testimony of two competing experts as to the market value of Spectrum's proprietary information. Both experts attempted to estimate the number of units sold, the approximate sales price, and the profit that would have resulted from the sales. Both used a discount factor to address the risk that there would be no such profits. But their conclusions were different. Spectrum's expert estimated the value of the design improvements at $1,721,373. The Air Force's expert estimated Spectrum's damages at $477,008.

As you might expect, the court's assessment fell somewhere in between—$1,211,754, plus litigation costs. The court accepted much of the analysis offered by Spectrum's expert, but not his approach to profit. Spectrum's expert used a profit figure of 31.5 percent, based on data published by the Risk Management Association. The court found 15 percent to be more appropriate, citing the profit limitations imposed on federal research-and-development contracts. See FAR 15.404-4(c)(4)(i)(A).

Tort remedies?

One thing not discussed in either of the Spectrum decisions is the availability of tort-based damages for misappropriation of trade secrets. The D.C. Circuit's 2005 decision in Jerome Stevens Pharmaceuticals, Inc. v. Food & Drug Administration, 402 F.3d 1249 (D.C. Cir. 2005), found the theoretical basis for such a claim to be viable. There, the FDA posted the plaintiff's New Drug Application on its website and extended a deadline that allowed competitors three additional years to market their unapproved drugs. The plaintiff alleged that the government had misappropriated its valuable trade secret and sought more than $1.3 billion in compensatory damages. The trial court dismissed the complaint on sovereign immunity grounds, but the appeals court reversed and remanded for further proceedings. There will be no court opinion on damages in the Jerome Stevens case. It settled in 2008.