Newport News Industrial v. Dynamic Testing, Inc.

• Decision Date: 05 February 2001
• Docket Number: CIV. A. No. 3:00CV379.
• Citation: 130 F.Supp.2d 745
• Parties: NEWPORT NEWS INDUSTRIAL, et al., Plaintiffs, v. DYNAMIC TESTING, INC., et al., Defendants.
• Court: U.S. District Court — Eastern District of Virginia

130 F.Supp.2d 745

NEWPORT NEWS INDUSTRIAL, et al., Plaintiffs, v. DYNAMIC TESTING, INC., et al., Defendants.

CIV. A. No. 3:00CV379.

United States District Court, E.D. Virginia, Richmond Division.

February 5, 2001.

Joseph C. Kearfott, Michael R. Shelbelski, Hunton & Williams, Richmond, VA, Douglas W. Kenyon, Hunton & Williams, Raleigh, NC, for Plaintiffs.

Christopher Schwartz, Leslie McAdoo-Brobson, Steven D. Gordon, Holland & Knight, LLP, Washington, DC, for Defendants.

MEMORANDUM OPINION

PAYNE, District Judge.

The Motion for Partial Judgment on the Pleadings filed by the Defendants is ripe for decision on the issue whether the Virginia Uniform Trade Secrets Act ("VUTSA"), Va.Code § 59.1-336 et seq. precludes respondeat superior liability. For the reasons set forth below, it does not.

STATEMENT OF FACTS

Plaintiff Newport News Shipbuilding, Inc. ("NNSI") instituted this action in the name of its operating division, Newport News Industrial ("NNI"). Plaintiff Newport News Shipbuilding and Dry Dock Company ("NNS") is a wholly owned subsidiary of NNSI.

NNS is one of the nation's premier ship-builders and also provides products to the United States Navy. NNI engages in numerous industrial activities, including the manufacture of components and products engineered by NNS. NNI has no engineering staff of its own, instead relying exclusively on NNS and other firms for engineering support. Defendant Samuel Runge was employed by NNS as an engineer from May 1982 to January 15, 1999.

In late 1991, NNS began exploring possible designs for shock mounts for the Navy to use to protect "commercial-off-the-shelf" ("COTS") equipment from the effects of jarring and movement that are necessarily attendant to military use. As part of this design effort, Runge participated in the development of a Shock Acoustic Mount ("SAM"), which was the first known application of HytrelTM (a thermoplastic polyester elastomer substance) in Naval shock mounts.

In 1996, NNS began developing a shock mount as part of the Integrated Communications and Advanced Network Program (ICAN) Navy Contract. The Navy again sought shock mount designs that would enable it to more easily use COTS equipment. The development of the mount for the ICAN program was funded by the Navy pursuant to its Aircraft Carrier Engineering Support ("ACES") contract with NNS.

NNI and NNS allege that Runge relied upon a unique C-shaped mount that he had conceived and, to some extent, developed, while using NNS Internal Research and Development (IR & D) funds. It is undisputed that Runge played a central role in developing the C-shaped mount using HytrelTM. He was involved also in programs for the testing of alternative materials which might be used to manufacture the shock mounts.

On March 12, 1997, NNS reported the invention of the C-Worthy mount to the Navy and notified the Navy of its intention to retain title to the invention and to file for a patent on it, pursuant to the Patent Rights Provision of the ACES contract. NNS filed that patent application on July 3, 1997, stating in the applications that the mount could be scaled up or down for larger and smaller loads by varying the dimensions of the mount or by using a material with greater or lesser elasticity.

In mid-1997, Runge began developing a "scaled-up" version of the C-shaped mount in order to support heavier loads. The smaller version became known as the Style-2 C-Worthy Mount and the larger version became known as the Style-1 C-Worthy Mount.¹ In March 1998, Runge created a document called the "Business Plan for Advanced Design Shock Mounts" ("Business Plan"), wherein he discussed market projections, customer lists, cost figures, and advertising strategies. The document explicitly stated that the implementation of the business plan might be at NNS or at NNI or at some other subsidiary of the parent.

Runge also authored an initial marketing brochure for the Style 1 C-Worthy mount (published on April 6, 1998) and a second brochure for the Style 2 C-Worthy mount (published on July 1, 1998). These brochures were distributed to potential customers. NNS copyrighted these brochures on June 19, 2000 and June 9, 2000, respectively. NNI and NNS recently executed (August 15, 2000) an assignment of copyrights, in which NNS assigned to the Parent an undivided one-half interest in the copyrights, though the Plaintiffs contend that NNI was a beneficial owner of the copyrights from the time it succeeded to NNS's shock mount business.

In addition to distributing brochures, NNI and NNS also sent prototypes of the mounts to potential customers, as well as drawings of, and engineering data about, the mounts. The parties dispute whether this information was distributed with any expectation of confidentiality or with any indication that it was confidential information.

Defendant Dynamic Testing, Inc. ("DTI") performs testing services for equipment to be used in military and commercial maritime applications. NNS routinely contracted with DTI to perform testing services for its new designs. In 1998, NNS engaged DTI to undertake testing on the new C-Worthy mount. As part of the purchase orders between the two companies, DTI agreed not to use or disclose the information that it received in connection with the testing it was to perform.

In May 1998, NNS made the decision to use NNI for the development of the shock mount. NNS transferred the C-Worthy business to NNI so that NNI could undertake manufacture of the product.² During the transition, Runge provided significant support to NNI respecting production methods, alternative composition materials, sales and marketing.

DTI extended an offer of employment to Runge on October 9, 1998 and Runge accepted that offer on October 25, 1998. Although Runge informed NNS that he would be leaving for employment at DTI, he did not disclose to NNS that his work there would involve the development of a competing shock mount. Runge left employment at NNS on Friday, January 15, 1999 and began his employment at DTI on Monday, January 18, 1999.

On January 19, a company by the name of DTI Engineering, LLC ("DTIE") issued a purchase order to DTI authorizing it to provide research and development engineering for the creation of a shock mount. DTIE was created for the sole purpose of funding the development of a component isolation shock mount and other marine products. However, DTIE has no employees of its own. Instead, it contracts with DTI to provide all the design, development, testing, engineering, manufacture and marketing of the mounts. The exact date on which DTIE came into existence is unknown. However, the company was not actually incorporated until July 29, 1999.

On May 5, 1982, when he first began his employment with NNS, Runge executed an Employee Agreement with NNS wherein he agreed: (1) not to disclose the company's confidential information; (2) to disclose to NNI all of his inventions; and (3) that all inventions created a year after his employment relating to the subject of his employment would presumptively belong to NNS. NNI and NNS allege that Runge violated this agreement by creating alternate shock mount designs and not disclosing these designs to NNS and by revealing trade secret and confidential information to the Defendants.

According to the Plaintiffs, Runge created a shock mount design for DTI and DTIE which mirrors the C-Worthy mount that he created while employed at NNS. DTI advertises its mounts, the DTI-Shock Mount, through brochures that are essentially the same as NNS's, (according to the Plaintiffs), and therefore infringe their copyrights. The Plaintiffs assert that Runge took with him electronic files containing NNS's brochures and used those files to create the DTI brochure.

In August 2000, DTI entered an agreement with DTI Holdings, LLC ("DTIH") in which DTI transferred all of its assets and most of its liabilities to DTIH, effective as of January 1, 2000. DTIH has the same employees and essentially the same management as DTI. The Plaintiffs allege that DTIH is liable for its own acts and omissions occurring after January 1, 2000, and is liable as a successor in interest for the acts of DTI prior to January 1, 2000.

During discovery related to this litigation, the Plaintiffs discovered, on the computer used by Runge while employed by NNS, a computer file which Runge had created. It detailed the design of a C-shaped mount which is quite similar in appearance to the DTI-Shock mount. Apparently, Runge intended to delete from that computer all his files before he left NNS, but this one was somehow overlooked. In his deposition, Runge admitted that he had created this design while employed by NNS. However, he claims that he deleted the design because it had flaws and proved to be unworkable.

The Plaintiffs now seek to hold Runge, DTI, DTIH, DTIE and the officers of those corporations Michael Dolan and Randolph Fairfield³ liable for Copyright Infringement, Misappropriation of Trade Secrets, Breach of Contract, Breach of Fiduciary Duty, Tortious Interference with Contract, Conspiracy to Injure NNS in its Trade or Business, Conversion and Unjust Enrichment.

DISCUSSION

The Motion for Partial Judgment on the Pleadings is addressed only to the claim under Va.Code § 59.1-336 ("VUTSA"), for Misappropriation of Trade Secrets. DTI and DTIE argue that they cannot be vicariously liable for any alleged misappropriation committed by Runge because the VUTSA does not allow for the imposition of liability under the theory of respondeat superior.

As a procedural matter, the DTI and DTIE bring this motion pursuant to Fed. R.Civ.P. 12(c) rather than Rule 12(b)(6) because the pleadings are closed, yet they have already filed a responsive pleading. See Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir.1999) (defendant's motion for failure to state a claim should be analyzed pursuant to Rule 12(c) as a motion for judgment on the pleadings because the defendant previously...