In Government Contracting Dispute, 11th Circuit Affirms $2M Verdict for Breach of Teaming Arrangement and Revives $100M Trade Secrets Claim

The opinion can be found here.

Beginning in 1969, AAI provided services to the US Air Force’s KC-135 fleet. In 1998, the Air Force issued an RFP, which would bundle those services into a larger contract. Boeing won the larger contract; and Boeing and AAI, at the Air Force’s request, entered a teaming agreement to jointly provided those services from 1998 to 2008. The Air Force contract represented approximately 80% of AAI’s revenue. When the Air Force announced its intention to recompete the contract, AAI and Boeing entered a new teaming arrangement to submit a joint bid. But when the Air Force reduced the quantity of aircraft for the contract, Boeing terminated the arrangement, and Boeing and AAI submitted separate bids. Boeing ultimately won the contract, with a bid price only 1.28% lower than AAI. Shortly thereafter, AAI went out of business and filed for bankruptcy. AAI then sued Boeing, claiming: (1) Boeing breached the teaming agreement through its unilateral termination, given that the terms of the teaming agreement contemplated a reduction in the number of aircrafts; and (2) Boeing misappropriated AAI’s trade secrets, namely, pricing, costs, and workflow, in submitting its bid for the Air Force contract.

Boeing moved to dismiss the trade secrets claim, arguing that the claim was not timely under the statute of limitations in the Alabama Trade Secrets Act (ATSA). AAI countered that the claim arose under the Missouri Uniform Trade Secrets Act (MUTSA), which had a five-year (versus a two-year) statute of limitations. AAI emphasized that the teaming agreement had a choice of law provision that selected Missouri law and governed both “the interpretation” of the teaming agreement and the parties’ “rights and liabilities.” The US District Court for the Northern District of Alabama agreed with Boeing, noting that the trade secrets claim was a tort such that the choice of law provision did not apply; and, that under the lex loci delicti (place of the injury) choice of law test, Alabama law applied because AAI suffered its financial injury in Alabama. Accordingly, the district court dismissed AAI’s trade secrets claim.

AAI’s breach of contract claim moved forward to trial, where the jury awarded AAI over $2.1 million, the costs incurred by AAI in preparing its solo bid for the Air Force contract. Notably, the district court instructed the jury that it could draw an adverse inference against Boeing based on evidence indicating that a Boeing executive spoliated ESI by permanently deleting emails related to AAI and an alleged Boeing effort to convert the joint bid to a solo bid.

Both parties appealed. AAI asked the Eleventh Circuit to revive its trade secrets claim, arguing that MUTSA, rather than ATSA, applied. Boeing asked the Eleventh Circuit to vacate the jury verdict on the breach of contract claim, maintaining (among other things) that the spoliation jury instruction was improper. The Eleventh Circuit agreed with AAI across the board.

With respect to choice of law, the Eleventh Circuit held that MUTSA applied to AAI’s claim. The court opined that the Missouri choice of law provision in the teaming agreement governed the parties’ dispute because it expressly applied not only to the “interpretation of” the agreement but also to the “rights and liabilities” of the parties to the agreement. While the court did not go so far as to say the choice of law provision would apply to any dispute between the parties, it held that it certainly applied to issues having a nexus to the agreement. In any event, the court continued, the lex loci delicti test pointed to Missouri, not Alabama, as Missouri was where Boeing allegedly misappropriated AAI’s trade secrets. In other words, the place of injury in a trade secrets misappropriation claim is not the place of financial harm, but rather, the place of the misappropriation. Placing a sharper point on the issue, the court stated that the concept of “injury” is not to be confused with the concept of “damages.” Finally, the court explained it would apply the MUTSA statute of limitations because it is substantive in nature, rather than procedural in nature. In reaching this decision, the court noted that the MUTSA statute of limitations is “inextricably bound up in the statute” as a whole. As such, the Eleventh Circuit remanded the trade secrets claim on the merits.

As to spoliation, the Eleventh Circuit held that the evidence was sufficient to justify the jury instruction. Of note, the Eleventh Circuit rejected the notion that the duty to preserve had not arisen at the time of Boeing’s deletion, pointing to evidence of internal Boeing emails noting AAI “would probably sue” as an indication that litigation was reasonably foreseeable.

For government contractors, the Eleventh Circuit’s decision illustrates some important principles. First, contractors should review their choice of law provisions with care. The applicable law is not only important, but as this case demonstrates, it may be dispositive. So too is the scope of the choice of law provision. Broad applicability, as in this case, could permit application of the chosen law to disputes related to, but not necessarily arising under, the contract. Second, preservation obligations are real, and violations—particularly where there is evidence that the spoliation was intentional or otherwise in bad faith—can have substantial consequences. In sum, government contractors dealing with trade secrets in their teaming efforts for contract awards must be vigilant, both in making every effort to protect those secrets from misappropriation and in anticipating the litigation that often follows.