The Zunum Aero vs. Boeing Lawsuit: Collaboration Challenges and Trade Secret Risks
The Zunum Aero vs. Boeing case underscores the complexities and risks inherent in collaborations involving trade secret definitions. Zunum Aero, a startup developing hybrid electric propulsion systems for regional jets, partnered with Boeing, who acted as both an investor and board observer. This relationship gave Boeing insider access to Zunum’s proprietary information. However, Boeing was simultaneously working on a competing project, raising serious concerns about the misuse of trade secrets. Zunum alleged theft of trade secrets and tortious interference, ultimately winning $72 million in damages after a jury determined that Boeing’s actions were willful and malicious.
The conversation emphasizes the broader lessons for companies navigating partnerships and diligence processes. During collaborations, it is vital for smaller companies to exercise caution in sharing sensitive information and intellectual property rights, especially with larger partners who may have competing interests. The podcast suggests that startups should consider saying “no” to certain information requests, providing only what is strictly necessary, and carefully documenting what is shared. Defining clear boundaries for confidentiality agreements and maintaining robust records can help protect against potential misuse of trade secrets.
Lessons on Managing Trade Secret Risks in Partnerships
The discussion also highlights how larger organizations can better manage contamination risks. Boeing’s failure to segregate its diligence and product development teams was a key factor in the case. Best practices include using separate teams for diligence and operations to prevent the unintentional or deliberate spread of sensitive information. Many global companies implement strict policies to manage contamination risk, ensuring confidential information is kept out of their systems.
Finally, the podcast notes the severe consequences of trade secret misappropriation. Damages for such cases can be substantial, especially when courts determine that the behavior was intentional. In this case, the court awarded damages with the possibility of enhancements due to Boeing’s willful and malicious actions. This outcome serves as a cautionary tale for companies involved in high-stakes partnerships, stressing the importance of strong internal controls, careful documentation, and thoughtful strategies for managing intellectual property during collaborations.
Takeaways:
- The Zunam Aero vs. Boeing case highlights the risks and challenges of collaborations and investments involving trade secrets.
- Companies should exercise caution when sharing trade secrets during diligence and consider restricting access to sensitive information.
- Documenting confidential information and clearly defining the boundaries of confidentiality agreements can help protect against trade secret misappropriation.
- Trade secret misappropriation can result in significant damages, including potential multiple damages for willful and malicious behavior.
Transcript:
Tim Londergan (00:01.646):
All right, we’re back. Reasonable Measures podcast number five. Hey, Chris.
Chris (00:07.077):
Hey, Tim. Good morning. Good to be here.
Tim Londergan (00:09.902):
Hey, good to see you, man. So today we’re going to be talking about a case that is close to home in Seattle, a Boeing case, Zunum Aero versus Boeing. The decision just came down, was it last week, two weeks ago? And it’s a great case about the importance of trade secrets in collaborations and investments. So… maybe just diving in here to some of the fact patterns and then I’ll hand it over to you, Chris.
Some of these points are from the complaint. So first of all, Zunum is this hybrid electric propulsion system. They’re making regional jets using this hybrid electric platform. Boeing came in as an investor and Boeing was a board observer. And so… basically what that means is, you know, they don’t have a board vote, but they can attend all the board meetings. They have a very much inside view as to what’s going on in the company. Very much of an insider.
As things progressed with the technology, Boeing was looking to invest more money. And this is, you know, from the complaint itself. They were doing what any investor would do: a bunch of diligence on the technology, kind of understanding where things are. They actually had a team of people assigned to working on the diligence. Well, as it came out in the complaint, that same team of people at Boeing was also working on a competitive project inside of Boeing. So, okay, that’s, you know…
Boeing had an explanation for it, which we’ll get into. But I think when I finally got into this complaint, it sort of struck me as like, yeah, this is a juicy love triangle, right? So you have a third party in here—Safran, a big French aerospace company. Zunum went to Safran trying to get them to make some parts for them, right? Then you had Boeing, who was taking this information from Zunum and also going to Safran and asking them to do some stuff.
Anyway, Boeing backed out of the Series B investment. And now you have this company that had framed itself with Boeing as its key partner, right? That was going to be how they got to market and ultimately made the airplanes, and so on. And now they’re sort of left at the altar. They’ve got no money, and they’ve unearthed the fact that, boy, Boeing hasn’t been behaving as well as we had hoped or expected.
In the complaint, there’s a really good sentence: “This was a concerted and systematic strategy to delay and then foreclose the entry of an innovative competitor into the aircraft industry.” I think that kind of sums it up—it’s a sort of age-old story in these tech partnerships, you know, David versus Goliath kind of stuff. So anyway, Chris, tell us about the outcome of the litigation.
Chris (03:50.501):
Sure, Tim. So to me, this case is really interesting because it is a collaboration. Like most collaborations, they start out well. Everyone’s excited to work together to develop some innovative new products and really come to market. For Zunum, if they were going to pick a partner, Boeing or Airbus would be the obvious first choices. Getting into the aerospace market is hard. It’s not like you come up with a new coffee cup or a new bicycle frame where you can kind of do it on your own. These days, you have to collaborate. The days of being able to develop an entire product on your own and go to market without collaborating with anyone largely doesn’t exist anymore. Maybe 20 or 50 years ago you could do that, but not anymore.
Zunum complained about two things: One is the theft of trade secrets. Boeing was alleged to have accessed—well, to originally get proper access—but then use all of that trade secret information inappropriately to develop their own competing product. And also, there was this tortious interference, which is legalese for basically interfering with my business in Boeing’s dealings with Safran, who was going to be a key supplier.
So, all of this is kind of a classic story, but Zunum alleged those two causes of action and ultimately prevailed with the jury. They found that there was trade secret misappropriation, there was breach of contract, and that Boeing acted consistently over a long time, very badly, in stalling things out and basically… you know, Zunum ran out of money and had to shut down operations because they couldn’t get the funding they needed. Developing a new airplane platform is expensive. I mean, that’s a tough business to go into. If you run out of cash, it’s a very easy thing to do.
So, yeah, they ultimately got over… was it around 90 million or so? There was an interesting fact about Zunum not mitigating damages. The court did say that Zunum could have closed the tap on the trade secret loss earlier, so the damages were knocked down somewhat—not a lot, but a fair amount—due to Zunum not catching the problem earlier and not taking more steps to get things under control when things started to turn south. But, for them, they still ended up with 72 million in damages, which could be enhanced based on the willful and malicious nature of what Boeing did. So this is a great initial result for Zunum.
Boeing says they’re going to appeal. It’ll be interesting to see if they appeal and what the appeal actually looks like. But it’s going to be tough sledding for Boeing. So, interesting case for sure.
Tim Londergan (07:13.134):
There’s a… and when you say tough sledding, that’s just based on what came out during the trial.
Chris (07:22.629):
Yeah, it’s based on… I mean, it’s my prediction, obviously. But based on Boeing’s systematic behavior over time and the fact that what the jury found was pretty compelling—Boeing’s bad behavior, both regarding the trade secrets themselves, as well as interfering with Zunum’s business going forward and ultimately Zunum not being able to continue. That’s kind of a tough pattern to appeal. Also, there’s a huge disparity in size and resources between Boeing and Zunum. That story doesn’t look really good for Boeing, as far as how they behaved as both a partner and as an investor in this small startup. So it’s going to be an uphill battle if they do appeal.
Tim Londergan (08:19.694):
Yeah, so 90 million bucks between the two claims. So 81.2 million plus another 11.6 for the interference claim. So whatever that is, 93 million and change maybe. But yeah, so it got brought down by 20.8 million to ultimately 72 million as the final number.
Chris (08:41.893):
Yeah. And then Zunum also borrowed some money from Boeing as a loan. So they’re going to have to repay that as well, but it’s small potatoes compared to the total damages here. Yeah. It was some small amount. I mean, it’s a lot of money to you and me personally, but yeah, to Boeing, it’s small potatoes.
Tim Londergan (08:50.99):
It was like 800,000 or something, wasn’t it?
Chris (09:02.478):
Yes.
Tim Londergan (09:03.685):
Especially in the context of 72 million. Well, a couple of things. This whole partnership thing is fascinating, and diligence on small companies, startup companies. We’re quite familiar with that as a venture-funded company at Tangibly. It’s interesting. I’ve had probably countless discussions now with investors.
Chris (09:12.869):
Mm-hmm. Exactly.
Tim Londergan (09:31.886):
Sometimes with partners, but a little bit more on the investor side, they’ll say… and, you know, I guess if you haven’t done this before and you’re not confident just saying no, it’s tough, right? But we’ve had numerous times where people say, “Well, tell us how you trained your AI model. Like, just tell us.” It’s like, no, you know, like, I’m not telling you that. Why would I tell you that?
Chris (09:52.941):
Yeah.
Tim Londergan (10:00.046):
It does feel a little bit like… I think one of the threads here for me was, as you’re getting into diligence, you should feel free to say no sometimes, right? And I think that also sort of sets the bar a little bit higher. So that’s one thing. And then the second thing is, if now you’re in this relationship with Boeing, and again, didn’t get into the weeds of the case, but clearly they… they did a decent enough job to win the case of documenting things, right?
That’s where I just think as a small company up against a big company, you know, in a relationship, it’s going well, everything’s working, it’s just as we planned, you know, it doesn’t take much to go the extra mile to document things and make sure that people understand, “Hey, this is confidential, falls within, you know, the confines of this agreement,” whatever agreement it is, right? It strikes me as though those two things, you know, I think are good points of learning here.
Chris (11:06.245):
Yeah, I think in diligence, maybe not start with “no” as a default answer, but at least understand why someone needs a particular piece of information. Because if you’re on the asking side, of course, you ask for everything. “Show me everything in your business.” Because it’s easy to ask for that. You don’t have to put much thought behind it. Just show me everything. But yeah, if you’re the smaller company holding the trade secrets…
Tim Londergan (11:23.246):
Yeah. Yeah.
Chris (11:30.414):
Right. Yeah.
Tim Londergan (11:37.029):
Yeah, I wouldn’t say no to everything because then that’s… you know, people need access to some information. But you should be a little cautious and understand why the other party really needs some information. Because some of it they do need—maybe there’s a legitimate reason—but others, you know, they’re just fishing. So, you know, either don’t provide it or maybe provide a watered-down summary version that will satisfy the other party but not reveal the inner critical darks, trade secrets that you need for your continued success.
The other thing is just understand who’s going to have access. In some of my past lives, we’ve done a lot of M&A projects and you’d actually have a different team. So you’d have a team of people who do the diligence and do the deal, but they’re not going to be involved in product development or in the actual product going forward. So that way, if these people do see trade secrets, it lowers your risk of contamination. Versus if you have people who are working on very similar projects due to diligence, avoiding that contamination suddenly becomes difficult or maybe even impossible. So really restricting the people who have access can help out a lot.
Tim Londergan (13:03.086):
Yeah, it seems like Boeing really missed the mark on that one, didn’t they? Like, boy, it’s like, man, yeah, they put themselves in a tough situation.
Chris (13:07.461):
Mm-hmm. Yeah, totally.
Chris (13:12.965):
Mm-hmm. Yep. Well, and they’re a big enough organization that they could segregate people out easily. I mean, they have thousands and thousands of people, versus a small company where you just don’t have that luxury of having different diligence teams. So it could have been done and could have been handled much better.
Tim Londergan (13:21.294):
Sure. Yeah.
Tim Londergan (13:34.542):
Yeah. So I’m kind of interested to see, like, you know, if… okay, well, first of all, let’s just imagine Boeing writes a check, right? Which they probably won’t, but they’ll drag it on for a while, most likely. But 72 million bucks, you know, I don’t have a PitchBook account, but I’m guessing if we dug into PitchBook, we’d find these guys raised, what was, you know, easily to find, they probably raised 10 million bucks or something, right? So…
Wow, 70 million bucks on a 10 million invested. That’s a great return. So it’d be interesting to see what happens to the company if and when they get money. But one of the things that does strike me is these highly disruptive companies, it’s almost like they have… I appreciate your point about, yeah, no company can be fully vertically integrated from the ground up on day one. That’s ridiculous. But it does sort of feel like, hey, if you want to go build this airplane, like, man, just you got to get outside of the conventions. You got to get outside of those power bases. And if it’s compelling enough, you can raise a ton of money.
So maybe it’s just like, look, that’s just a strategic mistake, you know, to go think, “Hey, I’m going to go disrupt this market. And by the way, I’m going to, you know, the companies that I’m going to go disrupt, I’m going to, you know, co-opt them in on day one.” It’s like, eh, I don’t know. Maybe that’s part of the issue.
Chris (15:21.541):
It could be. And if they had gone after traditional funding, like VCs or angels or government grants, their risk of problems would have gone way down. The Fox came into the henhouse early here, and that may have been part of the issue. But Boeing obviously understands the regional jet market very well, so I understand why they would want a Boeing or an Airbus type company as an early partner, but you’re also bringing in risk with the opportunity. So you do have to balance that. Ideally, you’d be self-funded and do everything without collaborating with anyone and go to market and live happily ever after. But that’s tough and most people can’t do that.
Tim Londergan (15:53.314):
Yeah.
Tim Londergan (16:14.414):
It’s interesting, you know, just one last thought is, you know, some of the companies, you know, that we’ve worked with past and present, you know, and I’m thinking, you know, global, you know, fortune sort of 500 types, they do like an extremely good job of managing the contamination risk. It’s like part and parcel to their process, right? Like, I want none of that stuff in my system, you know?
And yeah, I’ve really come to appreciate those kinds of companies. You know, like you find it a little annoying in some respects, like they don’t want me to tell them anything, right? Or I can’t send them anything, or, you know, but boy, when you look at a case like this, those kinds of systems that are set up to protect, you know, bigger companies from claims from much smaller companies, it makes a lot of sense.
Chris (17:07.941):
It really does. And contamination can be deadly, or at least very painful. So having good systems, policies, and procedures to avoid it is super important. And this is a great example of when contamination can go wrong. And contamination can be innocent. Like, you can have contamination that was unintentional. The jury here found that this was very much intentional, so it’s even worse.
Tim Londergan (17:37.07):
So, hey, one last question on that. And I don’t think we’ve touched on it yet, but so in patent litigation, there’s the triple damages, right? If you willfully infringe someone’s patent, you can get three times the damages. Does a similar kind of thing exist in trade secrets?
Chris (17:46.917):
Mm-hmm. Yep.
Chris (17:55.717):
Absolutely. And that’s why it’s such a big deal that the jury said this was willful and malicious, right in the jury holding. So it’s the same thing. And the court could issue a multiple on some or all of those damages and make this even more painful than it already is for Boeing. Absolutely. Yeah, it’s real money.
Tim Londergan (18:19.886):
All right, man, this is a good one. Thanks, Chris. We’ll see you on the next one. What are we going to talk about next? What’s the next one?
Chris (18:22.245):
It is.
Chris (18:27.557):
I probably is Sigma Farm Laboratories, which is just a really wild, unusual trade secret case. Cause most trade secret cases all follow the same kind of general pattern. This one is wild and crazy. So stay tuned.
Tim Londergan (18:34.894):
Yeah, yeah.
Tim Londergan (18:42.19):
Yeah. All right. Awesome. Look forward to that. See you, man. Take care. Bye-bye.
Chris (18:45.229):
Okay, talk soon, bye now.
