Demodulation, Inc. v. United States

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.

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Defendant. *

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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

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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).

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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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