Court Opinion

ID: 2831708
Source: CourtListenerOpinion
Date Created: 2015-08-27 20:02:25.031782+00
Date Added: 2024-06-11T11:15:40.398248
License: Public Domain

In the United States Court of Federal Claims
                                       No. 11-236C

                                 (Filed: August 27, 2015)

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                                    *
DEMODULATION, INC.,                 *
                                    *
                    Plaintiff,      *            Privity of Contract; Cooperative
                                    *            Research     and      Development
v.                                  *            Agreement (CRADA); Subcontractor
                                    *            Claims; Subject Matter Jurisdiction;
THE UNITED STATES,                  *            Partial Summary Judgment.
                                    *
                    Defendant.      *
                                    *
*************************************

Keith A. McKenna, The McKenna Law Firm LLC, Montclair, New Jersey, for Plaintiff.

Gary L. Hausken, with whom were Benjamin C. Mizer, Principal Deputy Assistant
Attorney General, John Fargo, Director, and Alice Suh Jou, Of Counsel, Commercial
Litigation Branch, Civil Division, U.S. Department of Justice, Washington, D.C., for
Defendant.

                      OPINION AND ORDER ON CROSS-
                 MOTIONS FOR PARTIAL SUMMARY JUDGMENT

WHEELER, Judge.

       Plaintiff Demodulation, Inc. (“Demodulation”) filed a complaint in this Court on
April 14, 2011 against the United States seeking approximately $50 million in damages for
breach of contract, misappropriation of trade secrets, and patent infringement. The twelve
patents at issue relate to various uses of microwire. Microwire, a glass-coated amorphous
metal filament, is thinner than a human hair and is used in electronic surveillance systems.
Microwire is useful in such systems because it broadcasts a distinct signal when struck by
radio frequency waves and thus, the signal may be detected from several kilometers away
without the need for a physical connection.
        On February 26, 2015, counsel for the Government moved for partial summary
judgment as to Counts One, Two, and Five of Demodulation’s Third Amended Complaint.
In its motion, the Government argues that it should be granted summary judgment on Count
One because Demodulation was not in privity of contract with the United States for any of
the three express contracts referenced in the Third Amended Complaint. The Government
maintains that the Cooperative Research and Development Agreement (“CRADA”), No.
Y-1207-0104, was entered into between two private parties, Babcock & Wilcox Technical
Services Y-12, LLC (“B&W Y-12”) and Demodulation, and the two confidentiality
agreements were entered into by two individuals who had no authority to bind the
Government. On Count Two, alleging breach of three implied-in-fact contracts, the
Government asserts that it should be granted summary judgment because Demodulation
did not identify any implied-in-fact contract, let alone any that were breached by the United
States. Further, Demodulation only referred to one of the implied-in-fact contracts in its
complaint, thereby waiving its right to complain about the other two implied-in-fact
contracts it alleges the Government breached. Finally, the Government argues that, with
respect to Count Five, misappropriation of trade secrets, insofar as it is based upon a
contract theory, summary judgment should be entered in favor of the United States because
Demodulation did not assert any contract that was breached by the United States.

       On April 20, 2015, Demodulation filed its opposition to the Government’s motion
and cross-moved for partial summary judgment on Count One, arguing there is no dispute
that the Government was a party to the CRADA and breached the terms of the CRADA.
As for its remaining claims in Count One, Demodulation opposes summary judgment,
asserting that the Government was a party to the confidentiality agreements and that the
two individuals who signed the agreements had the authority to bind the Government. On
Count Two, Demodulation argues that summary judgment should not be granted because
the unauthorized work the Government performed on Demodulation’s samples and the
unauthorized disclosure of its proprietary information to Technology Service Corporation
(“TSC”) demonstrate that the Government breached its implied-in-fact contract with the
U.S. Naval Sea Systems Command Crane Division (“NAVSEA-Crane”). Demodulation
does not address the other two implied-in-fact contracts, claiming that the Government
moved only for summary judgment as to the NAVSEA-Crane contract. Finally,
Demodulation argues that Count Five must survive summary judgment because there is
adequate evidence of the Government’s unauthorized disclosures and use of
Demodulation’s trade secrets by third parties, which are protected under New Jersey state
law as property.

       The Court notes that it dismissed all of Demodulation’s trade secret claims in
Demodulation, Inc. v. United States, No. 11-236C, 2015 WL 4760255, at *1 (Fed. Cl. Aug.
13, 2015) as a sanction for Plaintiff’s counsel’s willful violation of the Court’s discovery
orders, despite being given three chances by the Court to amend its discovery responses.
Accordingly, a summary judgment ruling on part of Count One and all of Counts Two and
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Five was made moot by the Court’s previous decision. Demodulation’s claim for the
Government’s alleged breach of the CRADA in Count One survived, however, because the
claim relies upon more than just Plaintiff’s trade secrets. For example, Demodulation’s
claim also pertains to the Government’s alleged failure to disclose to Demodulation
inventions resulting from information gained from the CRADA, the Government’s failure
to identify existing Government technology to commercialize Demodulation’s technology,
and the Government’s misrepresentation to Demodulation that there were no government
applications for its technology. Further, the definition of proprietary information under the
CRADA included more than just trade secrets. Thus, the only remaining issues for the
Court to decide are first whether the Government was a party or otherwise in privity with
the parties to the CRADA and, if so, whether the Government breached the CRADA.

        Whether the Government was a party or otherwise in privity to the CRADA is a
legal issue that is appropriate for resolution through summary judgment. The Court finds
that Demodulation was a subcontractor with B&W Y-12 and that the Government was not
a party to the contract between B&W Y-12 and Demodulation, or otherwise in privity with
Demodulation. A subcontractor cannot maintain a direct appeal against the Government
unless the contract provisions clearly indicate that the parties intended to give the
subcontractor the right to a direct appeal against the Government, that the prime contractor
was the purchasing agent for the Government, or that the Government was so involved
with the day-to-day activities of the prime contractor that the prime contractor was an agent
for the Government. Lockheed Martin Corp. v. United States, 50 Fed. Cl. 550, 555 (2001).
The presence of the disputes clause providing for appeals of the decisions of the contracting
officer to state court in Tennessee demonstrates that the parties did not intend for
Demodulation to have the right to a direct appeal against the Government. B&W Y-12
also was not the Government’s purchasing agent or its agent when it administered the
CRADA. Demodulation was not in privity with the United States and, thus, cannot
maintain its claim for breach of the CRADA in this Court because the Court does not have
subject matter jurisdiction over its subcontractor claims. Accordingly, the Government’s
motion for partial summary judgment on the CRADA is GRANTED.

                                         Factual Background

       Before the litigation in this case commenced, Demodulation held twelve patents for
various uses of amorphous metal wire, all of which have now expired.1 Government’s
Appendix (“GA”) 210, Dkt. No. 94; Demodulation, Inc. v. United States, 118 Fed. Cl. 69,
75 (2014). Amorphous metal wire has multiple applications, including applications in
magnetic sensors. GA 130 (amorphous glass-coated wires “are appropriate for sensor
applications even if the sensitive element is working under applied stress due to their very
1
  The Court dismissed Demodulation’s allegations relating to a thirteenth patent, U.S. Patent No. 6,270,591
(the “Chiriac patent”), because Demodulation lacked ownership of the patent. See Demodulation, Inc. v.
United States, 118 Fed. Cl. 69, 76 (2014).
                                                    3
good mechanical properties”). The wire is made by placing metal powder in a glass vial
and then heating the vial with an induction field. “When the metal melts and the glass
softens, the glass is pulled to form microwire.” GA 212.

       On March 23, 2007, Demodulation entered into the two-year CRADA at issue here.
The parties to the CRADA were B&W Y-12 (“the Contractor”) under its U.S. Department
of Energy (“DOE”) Contract and Demodulation (“Participant”). Under the CRADA,
Demodulation and B&W Y-12 agreed to use Demodulation’s fundamental sensor
technology to “develop sensor systems for detection, monitoring and tracking of material
and assets.” GA 177, 191-92. B&W Y-12 was the management and operating contractor
for the National Nuclear Security Administration’s (“NNSA’s”) Y-12 facility located in
Westwood, New Jersey. Pl.’s Appendix (“PA”) 69, Dkt. No. 111. DOE and the NNSA
own the Y-12 facility. The CRADA was signed by Mr. Willie Wilson, Senior Contracts
Manager for B&W Y-12 on February 12, 2007, and Mr. James O’Keefe, President and
Chief Executive Officer of Demodulation on March 23, 2007. GA 191. The Government
was to provide funding for the CRADA through its contract with B&W Y-12 and the
CRADA also specified that formal reports would go to DOE. B&W Y-12’s contract with
the Government also mandated that any CRADA entered into by B&W Y-12 first had to
be approved by a DOE contracting officer. PA 574.

       The CRADA contemplated that various reports would be produced, including a final
report that would contain a list of “Subject Inventions.” Subject Inventions are “any
invention of the Contractor or Participant conceived or first actually reduced to practice in
the performance of work under th[e] CRADA.” GA 177. The CRADA also contained
specific provisions for dealing with Proprietary Information. Proprietary Information is
defined as “information which embodies (i) trade secrets or (ii) commercial or financial
information which is privileged or confidential under the Freedom of Information Act (5
U.S.C. § 552(b)(4)), either of which is developed at private expense outside of this CRADA
and which is marked as Proprietary Information.” Any “information produced in the
performance of [the] CRADA” was marked as “Generated Information” unless it was
marked as “Protected CRADA Information” by a party to the CRADA and “which would
have been Proprietary Information had it been obtained from a non-federal entity.” Id.

       A key provision in the CRADA is the disputes clause providing for the resolution
of any dispute that arose between the parties to the CRADA. GA 189-190. The disputes
clause provides:

                     The Parties shall attempt to jointly resolve all disputes
              arising from this CRADA. If the parties are unable to jointly
              resolve a dispute within a reasonable period of time, the dispute
              shall be decided by the DOE Contracting Officer, who shall
              reduce his/her decision to writing within 60 days of receiving
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              in writing the request for a decision by either Party to this
              CRADA . . . . The decision of the DOE Contracting Officer is
              final unless, within 120 days, the Participant brings an action
              for adjudication in a court of competent jurisdiction in the State
              of Tennessee.

       Id. (emphasis added). On June 29, 2012 Plaintiff sought final adjudication from a
contracting officer alleging that the Government breached the CRADA. The DOE
contracting officer denied all claims finding that the Government was not a party to the
CRADA. GA 195, 250-56. On April 14, 2011, Demodulation filed suit in this Court. The
parties’ cross-motions for partial summary judgment are fully briefed and the motions are
ready for decision.

                                          Analysis

       A. Standard of Review

       Summary judgment is appropriate where “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.” Rule 56(a). A
material fact is one that “will make a difference in the result of the case.” Curtis v. United
States, 144 Ct. Cl. 194, 199 (1958). The burden of demonstrating the absence of any
genuine issue of material fact initially falls on the moving party. Young Enters., Inc. v.
United States, 26 Cl. Ct. 858, 863 (1992). The moving party may discharge its burden by
showing the absence of evidence in support of the non-moving party’s case. Celotex Corp.
v. Catrett, 477 U.S. 317, 321, 325 (1986). The non-moving party must then bring forth
sufficient evidence to show that a genuine issue of material fact exists for trial. Crown
Operations Int’l, Ltd. v. Solutia, Inc., 289 F.3d 1367, 1377 (Fed. Cir. 2002) (citing Celotex,
477 U.S. at 322-23).

       B. The Government is Not in Privity with Demodulation and B&W Y-12 Under the
          2007 Cooperative Research and Development Agreement.

       Demodulation claims that there is no genuine dispute of material fact regarding its
claims for breach of the CRADA and that it is clear the Government is a party to the
CRADA. Pl.’s Compl. ¶ 34; Pl.’s Opp. to Def.’s Mot. for Partial Summ. J. at 18 (“Pl.’s
Opp.”), Dkt. No. 111 (“[A]ll CRADAs are contracts with the [F]ederal Government that
support Tucker Act jurisdiction” and that B&W Y-12 was merely “standing in the shoes
of the United States Government.”). According to Demodulation, all rights and obligations
of the CRADA remained with the Government at all relevant time periods. Thus, Plaintiff
claims that at a minimum, the Government was in privity of contract with B&W Y-12 and
Demodulation. The Government argues, on the other hand, that the CRADA was merely
an agreement between two private parties and it was not a party to the contract or in privity

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with either party. Thus, the Court has no subject matter jurisdiction to hear the claim under
the Tucker Act, 28 U.S.C. § 1491. Def.’s Mot. for Partial Summ. J. at 19-21, Dkt. No. 94
(“Def.’s Mot.”).

        The Court agrees with the Government’s assertion that it is not a party to the
CRADA between B&W Y-12 and Demodulation. The Government and B&W Y-12 had
a contract for B&W Y-12 to run the Y-12 National Security Complex (“Y-12 facility”).
PA 560. B&W Y-12 then entered into a contract with Demodulation for research activities
at the Y-12 facility. Thus, the CRADA between Demodulation and B&W Y-12 is a
subcontract between two private entities. PA 69; GA 188 (“It is understood and agreed
that this CRADA is entered into by the Contractor under the authority of its prime contract
with DOE.”) (emphasis added). The Government is not a signatory of the CRADA. See
GA 191 (CRADA was only signed by B&W Y-12 and Demodulation).

       The Tucker Act confers jurisdiction on the Court and allows the Court to render
judgment upon any claim by or against, or dispute with, a contractor arising under section
10(a)(1) of the Contract Disputes Act (“CDA”), including a dispute concerning the
termination a of contract. 28 U.S.C. § 1491(a)(2). Generally, however, subcontractors
cannot seek and collect damages from the Government because they are not in contractual
privity with the Government. See Lockheed Martin, 50 Fed. Cl. at 554. This rule is
designed to create “a legal buffer between the subcontractor and the Government. It
provides the Government with a means of ‘administering its procurement through a single
point of contact, [thereby making] the Government’s job . . . simpler and cheaper.’” Id.

       In most cases, the subcontractor “has no right of direct action against the
Government, but must go through the prime contractor.” The subcontractor may recover
against the Government indirectly if the prime contractor sponsors or certifies the
subcontractor’s claims or if a prime contractor includes its liability to a subcontractor in its
damages against the Government. Id. There are three exceptions, however, which allow
a subcontractor to bring a direct action against the Government. Id. “The first is when the
contractual provisions indicate that the parties intended to give the subcontractor the right
to [bring a] direct appeal against the Government. The second is when the contract
provides that the contractor will act as a purchasing agent for the Government.” Finally,
privity may be created “when the Government so circumvents the authority of the
contractor that the contractor becomes a mere agent for the Government.” Id. at 555. Thus,
unless one of the three exceptions for direct subcontractor appeals applies, Demodulation
cannot maintain suit in this Court for the alleged breach of the CRADA.

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          1. The Parties Did Not Intend for Demodulation to Have the Right to a Direct
             Appeal Against the Government.

        In United States v. Johnson Controls, Inc., 713 F.2d 1541 (1983), the Federal Circuit
held that the Armed Services Board of Contract Appeals (“ASBCA”) did not have
jurisdiction over subcontractor Johnson Controls, Inc.’s (“Johnson’s”) direct appeal against
the United States under the CDA. Id. at 1556. The Federal Circuit relied upon four factors
in determining that the ASBCA did not have jurisdiction over Johnson’s appeal: (1) there
was no direct relationship between the Government and Johnson; (2) the contract contained
an express disclaimer of a contractual relationship between the Government and Johnson;
(3) the prime contractor was required to obtain a Miller Act payment bond, which provided
Johnson recourse other than a direct appeal; and (4) there was no provision in any of the
contract documents that clearly authorized a direct appeal by Johnson. Id. at 1552-53. The
factors listed in Johnson Controls are known as the “otherwise in privity” exception to the
general bar against direct subcontractor appeals. See RMI Titanium Co. v. Westinghouse
Elec. Corp., 78 F.3d 1125, 1139 (6th Cir. 1996).

       Here, like in Johnson Controls, Demodulation was not in privity with the
Government. Demodulation is a start-up company that did not have a prior contractual
relationship with the Government. See Pl.’s Opp. at 4. While there was no express
disclaimer of a contractual relationship between the Government and Demodulation or a
requirement that B&W Y-12 obtain a Miller Act payment bond in the CRADA itself, the
intent of the parties that Demodulation would not have a direct appeal against the
Government is evident from the disputes clause contained in the CRADA. The disputes
clause provided for disputes between the parties to be adjudicated by state court in
Tennessee. GA 189-90. Although the CRADA initially allows a dispute to be brought to
a DOE contracting officer, there is no direct right of appeal of the decision of the
contracting officer. See, e.g., RMI Titanium, 78 F.3d at 1140-41 (finding contractual
privity because RMI had a direct contractual relationship with the Government for 25 years
and because the contract “expressly authorized and direct[ed] RMI to bring its claims
before the DOE contracting officer with a direct right of appeal to the Energy Board of
Contract Appeals”). Here, instead, the parties were required to bring an appeal of the
decision of a DOE contracting officer in state court in Tennessee. Ignoring the disputes
clause contained in the CRADA and allowing a direct appeal by Demodulation would
render the disputes clause meaningless. See Johnson Controls, 713 F.2d at 1555. Because
a waiver of sovereign immunity is strictly construed, absent a clear contractual intent that
the parties intended for Demodulation to have a direct appeal, see id. at 1556-57; see also
Lockheed Martin, 50 Fed. Cl. at 566, Demodulation cannot maintain its claim for breach
of the CRADA in this Court based upon the “otherwise in privity” exception.

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          2. B&W Y-12 Was Not the Government’s Purchasing Agent.

       The second exception, the purchasing agent exception to the general bar on direct
appeals by subcontractors, is also inapplicable here. The second exception provides that
the Government may be in privity of contract with a subcontractor when “the prime
contractor is a mere Government purchasing agent.” Lockheed Martin, 50 Fed. Cl. at 562.
Three requirements must be met for this exception to apply: (1) the prime contractor must
be acting as a purchasing agent for the Government; (2) the agency relationship between
the Government and the prime contractor was established by clear contractual consent; and
(3) the contract stated that the Government would be directly liable to the vendors for the
purchase price. Id.

        B&W Y-12 was not acting as a purchasing agent for the Government here. Rather,
B&W Y-12 was simply the manager and operator of the Y-12 facility owned by NNSA.
Def.’s Reply to Demodulation’s Opp., Dkt. No. 128 (“Def.’s Reply”). Further, the
CRADA did not state that the Government would be liable to Demodulation. The
Government was only funding the CRADA through its contract with B&W Y-12; it was
not purchasing anything from Demodulation. The Government is mentioned in the
CRADA primarily because it maintained some rights and benefits in the contract and was
the initial arbiter of disputes between B&W Y-12 and Demodulation. The mere mention
of the Government in the CRADA, however, does not make it a party to the contract.
Wagner v. United States, 71 Fed. Cl. 355, 364 (2006) (noting that where the Government
is merely a “third party beneficiary of a contract between two private parties, there is no
contract with the United States”). Further, unlike in Kern-Limerick, Inc. v. Scurlock, 347
U.S. 110, 112-113 (1954), where the contract made the purchasing agent relationship
explicit, there is no such similar language in the CRADA at issue here. Demodulation has
failed to establish that B&W Y-12 was DOE’s purchasing agent so as to be in privity with
the Government.

          3. The Government Did Not Circumvent B&W Y-12’s Authority to Create
             Privity with Demodulation.

       Finally, B&W Y-12 is not the Government’s agent, and thus, the third exception
does not apply. B&W Y-12 was responsible for administering the CRADA, not DOE.
GA 188. While Demodulation and B&W Y-12 had to submit annual reports on their
progress to DOE, GA 186, the agency was not controlling the day-to-day activities that
would put the Government in privity with Demodulation, see Blue Water Envtl., Inc. v.
United States, 60 Fed. Cl. 48, 51 (2004) (citing United States v. Orleans, 425 U.S. 807, 814
(1976)) (“direct federal agency supervision of day-to-day operations of a government
contractor may convert the government contractor into a federal agency.”).

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       Accordingly, because the Government was not a party or in privity of contract with
Demodulation under the CRADA, the Court lacks subject matter jurisdiction over
Plaintiff’s claim for breach of the CRADA. Defendant’s motion for partial summary
judgment on Plaintiff’s claim for breach of the CRADA is GRANTED. Demodulation’s
cross-motion on whether the Government breached the CRADA is DENIED.

      C. The Government’s Summary Judgment Motion is Moot as to the Remaining
         Claims in Counts One, Two, and Five of Demodulation’s Third Amended
         Complaint.

       The remainder of the Government’s motion for partial summary judgment is moot
because the Court dismissed all of Demodulation’s trade secret claims in Demodulation,
Inc., 2015 WL 4760255, at *1, as a sanction for Plaintiff’s counsel’s willful violations of
the Court’s orders and the Government’s discovery requests, despite being given three
chances by the Court to amend its discovery responses. The remaining claims in Count
One and all of the claims in Counts Two and Five relied entirely upon Demodulation’s
trade secrets. Demodulation’s claims in Count Two are breach of implied-in-fact contract
claims that pertain to the unlawful use of and disclosure of Demodulation’s trade secrets.
Likewise, Count Five is for misappropriation of trade secrets. Finally, Demodulation’s
remaining claims in Count One, namely breach of the two confidentiality agreements, rest
entirely on the Government’s alleged disclosure of its trade secrets to third parties in
violation of those agreements. Thus, claims regarding the breach of the two confidentiality
agreements in Count One and all of the claims in Counts Two and Five are MOOT.

                                       Conclusion

       For the foregoing reasons, the Court GRANTS the Government’s motion for partial
summary judgment on Count One regarding the CRADA. The Court DENIES
Demodulation’s motion for partial summary judgment on the same. The Government’s
motion for summary judgment on the trade secret claims in Counts One, Two and Five is
MOOT. All that remains are Demodulation’s patent infringement claims in Count Three
on the twelve patents it previously held for various uses of microwire.

      IT IS SO ORDERED.

                                                       s/Thomas C. Wheeler
                                                       THOMAS C. WHEELER
                                                       Judge

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