By Pacific Coast Business Times Staff Monday, September 21st, 2009

In one of the most-watched legal fights in the defense industry, infrared camera maker Flir Systems has won a preliminary victory against Raytheon over infrared sensor technology developed in Goleta.

In 2007, Raytheon sued Flir, alleging the smaller company had stolen its trade secrets, competed unfairly and infringed its patents. On Aug. 31, a federal judge tossed out almost everything but the patent claims in a pre-trial summary judgment.

The judge wrote that Raytheon waited until Flir started beating Raytheon for contracts to file its lawsuit when it should have done so years earlier, when it first suspected Flir of taking its trade secrets.

Massachusetts-based Raytheon employs about 1,500 people in the Tri-Counties, and Oregon-based Flir has about 300 workers. Though their legal battle is unfolding in a federal court in Texas, the essence of the dispute revolves around a core of entrepreneurial engineers in Goleta that developed advanced infrared sensors over nearly three decades, technology that has shown up in luxury automobiles and military fighter jets.

In one sense, the fight between Flir and Raytheon is another battle in a years-long larger war over the right of those engineers to start new companies and compete against their former employers.

The core of engineers started Amber Engineering in the 1980s and sold it to Raytheon in 1993. In 1996, several of those engineers – including Bill Parrish and Tim Fitzgibbons – left Raytheon to start Indigo Systems, another company in the infrared sensor business. Flir bought Indigo in 2004 for $190 million.

Raytheon has argued that Flir competed unfairly by stealing Raytheon’s employees and trade secrets. Flir has fought Raytheon’s accusations, arguing that Raytheon – a $20 billion a year firm – was dismayed that the smaller Flir started winning contracts that Raytheon wanted and filed suit to stop the company from competing.

But Flir, too, has used the legal system to address potential competitive threats from former employees.
When engineers Parrish and Fitzgibbons left Flir in 2006 to again start a new company, Flir sued and stymied the effort, alleging that the two men couldn’t start the proposed new venture without stealing its trade secrets. Bill Brewer, an attorney for Flir, said the suit wasn’t designed to keep Parrish and Fitzgibbons out of the market.

“Flir’s claims against those individuals arose from very specific events, which raised the specter that someone who owed significant fiduciary duties to Flir might be violating those duties,” Brewer told the Business Times in a statement.

But on the stand during the trial, Flir Chief Executive Officer Earl Lewis testified that he did not “think it would be good, healthy for [Parrish and Fitzgibbons] to go and directly compete with us” and that Flir “couldn’t tolerate a direct competitive threat by [Parrish and Fitzgibbons] because it flies in the face of everything that we spent $200 million to buy.”

In June, a state appeals court upheld an earlier decision that sided with Parrish and Fitzgibbons and awarded the two $1.6 million in legal costs.

Though Flir didn’t prevail in that case, it’s fared better in its fight against Raytheon. In that case, Judge Richard Schell wrote that Raytheon had waited beyond the three-year statute of limitations to file its trade secrets claim against Flir.

The three-year clock for trade secrets claims starts ticking when a stolen trade secret is discovered or should have been discovered “by the exercise of reasonable diligence,” according to the ruling. Raytheon argued the three-year clock started in 2004, but Flir argued it started in 1997, invalidating the claims in Raytheon’s 2007 lawsuit.
Raytheon had suspected Flir of taking its secrets since the late 1990s but had gotten formal reassurances in 1997 from the firm, then known as Indigo, that Raytheon’s intellectual property wasn’t being taken, according to the ruling.

Judge Schell said that if Raytheon suspected its trade secrets were being taken in 1997, it should have investigated further then. But Raytheon, Schell found, waited until 2004 – after Flir had beat out Raytheon for lucrative contracts – to buy one of Flir’s infrared cameras, look at its guts and claim that its secrets had been stolen.

“Raytheon maintains that the camera was purchased as part of a routine competitive analysis, but this contention is also belied by its own witnesses, at least five of whom testified that they had never heard of Raytheon taking such steps,” Schell wrote.

“Why, then, would Raytheon take what for it was the unusual step of reverse engineering a competitive product if it did not do so in the pursuit of a preexisting suspicion about that product or its manufacturer? Clearly Raytheon had developed an acute suspicion of before March of 2004 that Indigo was infringing its intellectual property rights.”

Despite the early summary judgment, Raytheon said it intends to purse the remaining claims of patent infringement.

“This procedural ruling does not address the merits of the case,” Jon Kasle, a Raytheon spokesman, told the Business Times via e-mail. “We will continue to actively pursue our claims against Indigo and Flir in this litigation for their systematic misappropriation of trade secrets and patent infringement.”

Brewer, Flir’s attorney, said he plans to argue in trial that Raytheon is also beyond the statute of limitations for patent claims, which must be brought within six years of the discovery of infringement. Raytheon says that clock started ticking in 2004, but Flir says it started ticking in 1997.

“We’ll just have to take the patent claims next,” Brewer said in an interview. “We’re just happy to see the cloud cast on our products is beginning to be dispelled.”

Michael Brooks, a Simi Valley engineer and intellectual property attorney who is not involved in the case, said that federal judges have a lot of leeway in deciding when the clock starts on the statute of limitations for patent claims. Though the law says six years, judges sometimes won’t grant that much time if they decide a reasonable patent holder should have investigated potential infringement much earlier.

“The full six years is not a slam dunk,” Brooks said. “The judges look very askance at someone who games that six-year limit. Some judges won’t give you the full six if they feel you’ve been sitting on your hands to get a better position.”