Patent Watch: Raytheon Co. v. Indigo Sys. Corp.

Alerts / August 8, 2012

[T]he discovery rule is focused on the reasonableness of the plaintiff's failure to discover a cause of action.

On August 1, 2012, in Raytheon Co. v. Indigo Sys. Corp., the U.S. Court of Appeals for the Federal Circuit (Linn,* Dyk, O'Malley) reversed the district court's summary judgment dismissing Raytheon's claims against Indigo Systems Corporation and FLIR Systems, Inc. for trade secret misappropriation on the ground that they were time barred. The Federal Circuit stated:

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 Texas and California, whether or not a plaintiff "should have known" under the discovery rule is ordinarily a question of fact. The same is true when the statute of limitations is tolled by fraud. While the discovery rule is focused on the reasonableness of the plaintiff's failure to discover a cause of action and fraudulent concealment is focused on the actions of the defendant to prevent the plaintiff from discovering the cause of action, the two issues turn on the same questions of fact in the present case. The district court acknowledged this when it explained that the distinction between fraudulent concealment and the discovery rule would make no difference here because "[t]he circumstances that render the doctrine of fraudulent concealment unavailing ensure the same fate for Raytheon's discovery rule argument."

The only way Indigo alleges-- and the district court found -- that Raytheon could have known of the alleged misappropriation is by taking apart Indigo's camera. So, for Raytheon's claim to be time barred, the facts must establish as a matter of law that Raytheon could have and should have acquired and disassembled the camera before March 2, 2004, because by that time it already had a reason to believe the camera contained evidence that its trade secrets had been misappropriated. The threshold problem with the district court's conclusion is that it fails to recognize this basic point: the disassembly and inspection of the Indigo camera is the only alleged path to Raytheon's knowledge of the facts giving rise to Raytheon's cause of action. To reach the conclusion it did, the district court needed to find (at least implicitly) that Raytheon, as a matter of law, should have acquired and disassembled the Indigo camera before March 2004. But there is no way the district court could reach such a conclusion without resolving factual questions against Raytheon, the non-moving party, at summary judgment.

Raytheon denies that it bought the camera due to any suspicion at all. And Raytheon supported its claim with testimony relating to its past practice of examining competitive products, which the district court ignored. Moreover, the fact that Raytheon waited from March 2004, when it acquired the camera, until August of the same year before taking it apart, supports Raytheon's contention that it did not actually suspect anything before it dissected the camera. Thus, the facts of record could support a reasonable inference in Raytheon's favor, which the district court improperly declined to draw. Instead, the district court focused only on the witnesses who denied being aware of previous instances of reverse engineering for competitive-analysis reasons. Thus, the district court drew impermissible factual inferences against the non-moving party to a summary judgment motion. To the extent that the district court's decision depends on the conclusion that Raytheon bought the Indigo camera due to a preexisting suspicion, it cannot be sustained.

We must next determine whether the district court erred in concluding that Raytheon should have suspected Indigo at an earlier time. The district court asserted that all the relevant facts (aside from those discovered inside the camera itself) -- i.e. the employee mobility, the confidentiality agreements, the expiration of the consultancy, and the 2000 and 2003 Indigo victories in the marketplace -- were already known to Raytheon before March 2004. As the district court explained, there was "no change in circumstances between 2000, when it ceased reposing trust in Indigo to perform consulting services, and March of 2004, when Raytheon had developed suspicions it deemed worth investigation." But this reasoning is premised on the district court's factual conclusion that Raytheon's discovery of its cause of action was not based entirely on happenstance rather than any preexisting suspicion. Thus, the district court's conclusion that, because nothing had changed in the intervening time, Raytheon's delayed discovery was unreasonable, fails for the same reason as the district court's factual conclusion that Raytheon discovered the injury through its own pre-existing suspicion: it rests on the resolution of the same genuine issue of material fact against the non-moving party at summary judgment. . . . The district court accepted that initially "Indigo's assurances reasonably convinced Raytheon that its fears of misappropriation were unfounded." [T]he district court held that the conceded reasonableness of relying on these assurances expired in 2000 along with the consultancy itself. Thus, the district court essentially concluded that from 2000 on, Raytheon was on permanent inquiry notice and therefore had a constant duty to investigate all acts of competition by Indigo for evidence of misappropriation.

The district court presumed that because Raytheon once suspected Indigo, therefore, as a matter of law, it should have continued to suspect Indigo after 2000. But, this presumption ignores Indigo's assurances and was impermissible under both Texas and California law, because, as discussed above, whether or not the discovery rule applies is ordinarily a question of fact in both states. It was for the jury and not for the district court to determine when Raytheon should have first discovered the facts supporting its cause of action. The district court erred by resolving genuine factual disputes in favor of Indigo, the moving party, when it concluded that Raytheon should have discovered its cause of action before March 2, 2004.

If you have questions about the material presented above, please contact Dr. Lawrence M. Sung (lsung@bakerlaw.com or 202.861.1537) or any member of our Intellectual Property Team.

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