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The DTSA's 'interstate commerce requirement': Has it had an impact?
2024 PRINDBRF 0219
• Practitioner Insights Commentaries
• April 24, 2024
(April 24, 2024) - Finnegan attorneys Dan Roland and John Williamson explain how courts have interpreted a condition of the federal law that provides a cause of action for the misappropriation of trade secrets.
Unlike with typical State trade secret statutes, to bring a misappropriation claim under the federal Defend Trade Secrets Act (DTSA), the trade secret must be "related to a product or service used in, or intended for use in, interstate or foreign commerce."1
This so-called "interstate commerce requirement" did not garner significant attention when the DTSA was enacted, which may not be surprising given that it seems like a low bar and appears to be a hook for jurisdiction in federal court.
In the years that followed, the requirement has remained relatively non-controversial, and it generally has not hindered litigants from bringing trade secret claims in federal court. Regardless, with ample decisions on the books, some trends have emerged, and we offer insights on those developments below.
Litigants should not ignore the interstate commerce requirement
Soon after the DTSA's enactment, it became clear that plaintiffs should not ignore the interstate commerce requirement. Early decisions showed that courts will dismiss DTSA claims where plaintiffs completely fail to address this element.
For example, in Hydrogen Master Rts., Ltd. v. Weston2 the court dismissed two counts of misappropriation under the DTSA because, among other things, the complaint failed to allege "any nexus" between interstate or foreign commerce and the products or services at issue.3 Recent decisions have followed this practice.4
Consistent with well-settled pleading principles,5 some courts have deemed that merely reciting this element of the statute also is insufficient. In W. Chester Design Build LLC v. Moses6 the court ruled that plaintiff's conclusory allegation that its trade secrets were "used or intended to be used in interstate commerce" did not suffice to plead a DTSA claim.
The court also noted that the Pennsylvania-based plaintiff did not even generally allege that it serves clients in other states, much less identify a specific client or project it had outside of Pennsylvania.
On the other hand, numerous cases demonstrate that successfully pleading a nexus to commerce may not require much. One court rejected a challenge at the pleading stage where the complaint had only alleged that the trade secrets were used in connection with refineries and facilities of "clients located throughout the United States."7
Although this allegation provides little detail, the court ruled that "[n]othing more is required." This may be expected given that some courts have stated that the nexus to commerce "seems presumed."8In fact, numerous courts have inferred that the interstate commerce requirement is satisfied, even where the complaint did not explicitly address the issue.
For example, in Revolution FMO, LLC v. Mitchell,9 the court denied a motion to dismiss on the ground that plaintiff had failed to plead the interstate commerce requirement. In denying the motion, the court inferred from the complaint that plaintiff (a California company) had developed its trade secrets for use in interstate commerce because it had licensed materials to an individual in Missouri and alleged that its trade secrets had been reviewed to ensure compliance with various State regulations.
Similarly, in TK Elevator Corp. v. Shropshire,10 the court determined that it was sufficient for plaintiff to simply allege that it "provides services throughout the United States." Given this allegation, the court explained, it was reasonable to infer at the motion to dismiss stage that the alleged trade secrets implicate interstate commerce.
The TK Elevator court added that its "reasonable inference" was bolstered by the types of trade secrets TKE had identified — including shipping and packing lists — which relate to information used across the company and not necessarily exclusive to TKE's operations in Virginia. Other courts have found similar allegations sufficient too.11
A final example further illustrates how courts may require little factual detail at the motion to dismiss stage. In Wells Lamont Indus. Grp. LLC v. Richard Mendoza & Radians, Inc.12 plaintiff alleged it had scheduled a business meeting across state lines that was subsequently cancelled. Based on this lone cancelled meeting, the court held it was reasonable to infer that plaintiff's goods, and thus trade secrets, were intended for use in interstate commerce.
Notably, in reaching this decision, the court also considered plaintiff's assertion in briefing that its goods were meant for interstate commerce. The Wells Lamont court stated that dismissing the DTSA claim and granting leave "to include this fact" — i.e., a factual allegation showing that the trade secrets implicate interstate commerce — would be "an inefficient use of the Court's and the parties' time and resources."
These cases show that the detail needed at the pleading stage may vary depending on the facts of the case and the views of the presiding judge. Some courts seem more inclined than others to dismiss a claim for failing to adequately plead the interstate commerce requirement.
But other decisions, in particular Wells Lamont, reveal that courts may be reluctant to dismiss a claim for failing to plead a nexus to commerce if it appears that the putative defect could easily be cured. Either way, plaintiffs should still address this requirement in the complaint, which, in today's economy, often will be a straightforward task.13
Explicitly addressing the nexus to commerce should also decrease the likelihood of a challenge from the other side or, at the very least, reduce the time and costs spent briefing the issue.
Purely intrastate activity still dooms DTSA claims
Perhaps the more interesting cases involve situations where courts dismissed DTSA claims despite plaintiffs meaningfully attempting to establish a nexus to interstate commerce or because it appeared that the trade secrets only related to intrastate commerce.
For example, in DLMC, Inc. v. Flores14 a healthcare services provider sued its former employee and Loving Care Health Provider, Inc. (LCHP) for misappropriation, but the court dismissed the claim for failing to satisfy the interstate commerce requirement. The court noted that all parties were based in Hawaii and that it appeared plaintiff and LCHP only offered services in Hawaii.
Although plaintiff had argued that its services are subject to federal law and rely on federal funds received from patients with federal patient-identification numbers, the court ruled that these factual allegations alone were insufficient. As the court explained, "[a]bsent at least an argument articulating how the 'client lists' that [the former employee] allegedly stole on behalf of LCHP relate to the provision of interstate commerce, and facts in support of that argument, the Court cannot conclude that it has jurisdiction over the DTSA claim."
Another Hawaii plaintiff took a similar approach but with added detail; yet the court still dismissed its DTSA claim. In Islands Hospice, Inc. v. Duick,15 plaintiff argued that it had sufficiently pled a nexus to interstate commerce because it alleged that its trade secret "Supportive Care program" relies on medical products shipped from out-of-state.
The court was not persuaded, explaining that plaintiff failed to identify "what part of the shipping of out-of-state medical supplies is tethered to its secret information?" According to the court, accepting this argument would result in an "unlimited expansion" of the court's jurisdiction over DTSA cases, because supplies are shipped interstate in almost any business.
Plaintiff also contended that the interstate nexus was met because a substantial portion of its trade secret-dependent services are paid by Medicare and its employees are subject to "heavy federal regulation." But the court rejected this argument too, ruling that plaintiff failed to allege facts explaining how the Supportive Care program bears any relation to a "specific service or product" that relies on Medicare or is subject to federal regulation.
In other words, that plaintiff's business receives Medicare funding or is subject to federal regulation was not enough.16
In another "island" case, e-Steps, LLC v. Americas Leading Fin., LLC,17 the court dismissed the DTSA claim of a Puerto Rico-based plaintiff because its trade secret GPS software was "explicitly created for use in Puerto Rico" and it had not alleged that the software is used or intended for use in any other state or country, or that the cars tracked by the GPS software ever leave Puerto Rico. Specifically noting Puerto Rico is "an island," the court declined to infer that the software is used or intended to be used anywhere else.
Although these cases were literally on an island, they do not stand alone. In NJ Coed Sports LLC v. ISP Sports, LLC18 the complaint indicated that plaintiff ran adult recreational sports leagues out of a facility in Randolph, New Jersey, and defendant moved to dismiss on the ground that plaintiff failed to plead a nexus to interstate commerce. The court granted the motion, concluding that plaintiff's "product/service" was "entirely intrastate."
Although plaintiff submitted a sworn certification from its owner in opposition to the motion, the court ruled that plaintiff could not amend its complaint through the certification. The Coed Sports court's refusal to consider materials outside of the complaint stands in contrast to the Wells Lamont case, where the court relied on such arguments in briefing to support its decision that the interstate commerce required had been met.
These cases highlight that courts may not be inclined to infer that an interstate nexus exists where the facts tend to show otherwise. In some respects, Flores, Islands Hospice, and e-Steps are outliers because they involved businesses outside the contiguous United States. In such a situation, given the physical separation, the presumption that this element is met is naturally more attenuated.
However, Coed Sports reiterates that parties on the mainland may also have their claims dismissed if they do not establish an interstate connection. After all, the court there arguably could have inferred that the New Jersey company's leagues involve out-of-state residents based on the facility's proximity to New York.
In fact, the owner's sworn statement even indicated that the company's customers "consist of individuals residing in and out of New Jersey, including, Pennsylvania and New York."19 The court simply declined to consider this information. While plaintiff later amended its complaint to includes these allegations — and defendant did not move to dismiss again — Coed Sports shows the benefit of fully tackling the interstate commerce requirement at the outset.
Courts are divided on whether the commerce requirement is jurisdictional
Another trend that has emerged, as one court recently acknowledged, is the "dispute among courts" on whether the requirement is "jurisdictional or merely an element of misappropriation claim brought under the DTSA" — an issue no circuit court has resolved.20 The division is not just across circuits either. Even district courts within the same circuit have handled this issue differently.21
From surveying the case law, it appears most courts have deemed this issue jurisdictional, or at least treated it as such. In doing so, some courts have asserted that Congress "expressly confirmed" it is jurisdictional, pointing to legislative history that called this part of the statute a "jurisdictional nexus to interstate or foreign commerce," which is "identical to the existing language required for Federal jurisdiction over the criminal theft of a trade secret" under 18 U.S.C. § 1832(a).22
Other courts have decided the requirement is not jurisdictional. The court in Providence Title Co. v. Truly Title, Inc.,23 discussed this point in depth. According to the Providence Title court, nothing in 18 U.S.C. § 1836 indicates that the interstate commerce requirement is jurisdictional. And because this requirement appears in the same sentence that establishes all the elements of a DTSA claim, the court reasoned, it merely "constrains a plaintiff's entitlement to relief under the statute — not the adjudicatory authority of federal courts."
Determining where a court stands on the issue could have meaningful implications. If the issue is not treated as jurisdictional, then defendants at the pleading stage would have to challenge the failure to allege the nexus requirement under Federal Rule of Civil Procedure 12(b)(6), for failing to state a claim upon which relief can be granted.
However, if jurisdictional, defendants can move to dismiss at the pleading stage under Federal Rule of Civil Procedure 12(b)(1), which is a defense that cannot be waived.24In fact, if the court at any time determines that it lacks jurisdiction, it must dismiss the action under Federal Rule of Civil Procedure 12(h)(3).
This is also noteworthy because it is plaintiff's burden to establish subject-matter jurisdiction, and a defendant raising a Rule 12(b)(1) attack may present extrinsic evidence for the court's consideration in challenging jurisdiction.25
However, even if jurisdictional, not every court will rule on this issue at the pleading stage. In Garfield Beach CVS LLC v. Mollison Pharmacy26 the court denied a 12(b)(1) challenge without prejudice to raising the argument later in a summary judgment motion. Defendant had presented affidavits supporting its argument that the interstate commerce requirement was not met.
But because the jurisdiction and merits issues were intertwined, the court deemed it inappropriate to resolve the factual issues in the early stages of the litigation. In the court's eyes, those issues were better addressed at summary judgment after the parties had engaged in substantial discovery.
That is what happened in Automated Mgmt. Sys., Inc. v. Rappaport Hertz Cherson Rosenthal, P.C.27 After discovery closed, defendant moved for summary judgment, arguing that the interstate commerce nexus was not satisfied. In response to the motion, plaintiff pointed to emails sent outside of New York and a business venture it had with a Maryland company. Although defendant disputed plaintiff's contentions, the court ruled that a genuine issue of material fact remained on this issue, and it denied the motion.
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In sum, the interstate commerce requirement does have some teeth, albeit not very sharp ones. While the bar for establishing this element is relatively straightforward and easy to clear, plaintiffs should not ignore it. Although some courts may be inclined to overlook a potential pleading defect, that will not always be the case.
As for defendants, they should consider whether the complaint points to anything beyond intrastate commerce. If not, moving to dismiss may be the appropriate path forward, particularly if it appears that plaintiff may not be able to cure the defect.
And all parties should remember that this element of a DTSA claim does not necessarily go away merely because a complaint survives the pleading stage. If discovery reveals that the required nexus is lacking, defendant can still raise the issue at summary judgment or even at trial.
Notes:
1 18 U.S.C. § 1836(b)(1).
2 228 F. Supp. 3d 320 (D. Del. 2017).
3 See also Search Partners, Inc. v. MyAlerts, Inc., No. 17-cv-1034, , at *2 (D. Minn. June 30, 2017) (concluding that the alleged facts do not support a DTSA claim where plaintiff did not properly allege that the purported trade secret was used in interstate or foreign commerce).
4 See also Gov't Emps. Ins. Co. v. Nealey, 262 F. Supp. 3d 153 (E.D. Pa. 2017) (concluding that failing to "allege any nexus between interstate or foreign commerce and the alleged trade secrets" is a deficiency that warrants dismissal of a DTSA claim).
5 See, e.g., Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) ("A pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'") (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)).
6 No. 22-cv-1911, , at *4 (E.D. Pa. Oct. 27, 2022).
7 Stress Eng'g Servs., Inc. v. Olson, No. 21-cv-3210, , at *5 (S.D. Tex. Aug. 4, 2022).
8 See Ranger Env't Servs. LLC v. Foehl, No. VILACTION12300297KDM, , at *16 (S.D. Ala. Oct. 19, 2023) ("Little caselaw addresses this factor, which seems presumed, and among the parties this element appears undisputed."); Singer v. Stuerke, No. 216-cv-2526, , at *3 (D. Nev. June 14, 2017) ("Petitioners have asserted ownership of trade secrets with economic value, which by presumption are used in interstate commerce.").
9 No. 4:17-cv-2220 HEA, , at *5 (E.D. Mo. May 10, 2018).
10 No. 7:21-cv-579, , at *5 (W.D. Va. Feb. 23, 2022).
11 See, e.g., Philips N. Am. LLC v. Hayes, No. 20-cv-1409, , at *11 (D. Md. Sept. 9, 2020) (concluding it could "easily infer" that the purported information relates to services used and intended for use in interstate and foreign commerce based on plaintiff's allegation that its business is "both national and international"); Mighty Deer Lick, Inc. v. Morton Salt, Inc., No. 17-cv-5875, , at *6 (N.D. Ill. Feb. 11, 2020) (inferring that plaintiff sold or intended to sell its products in interstate commerce or outside the United States where the parties had a contract that allowed for goods "crossing state and international borders" and plaintiff had a variety of chain stores outside of the state of Michigan).
12 No. 17 C 1136, (N.D. Ill. July 31, 2017).
13 See, e.g., Ultimate Fitness Grp., LLC v. Anderson, No. 18-cv-60981, , at *3 (S.D. Fla. Mar. 13, 2019) (ruling that plaintiff satisfied the interstate commerce requirement by alleging that its trade secrets were related to its fitness services, which are offered at "more than 900 Orangetheory franchises located throughout the United States and around the world").
14 No. CV 18-00352 DKW-RT, (D. Haw. Jan. 23, 2019).
15 No. CV 19-00202-JMS-WRP, (D. Haw. Sept. 23, 2019).
16 But see Gordon Grado M.D., Inc. v. Phoenix Cancer & Blood Disorder Treatment Inst. PLLC, 603 F. Supp. 3d 799, 808–09 (D. Ariz. 2022) (concluding complaint sufficiently pled an interstate commerce nexus where plaintiff alleged, inter alia, that it received payments through Medicare and Medicaid and that of the numerous patients it alleged were solicited by defendants using misappropriated information 20 were Medicare beneficiaries, four were enrolled in Medicare Advantage plans, and nine were Medicaid recipients).
17 No. CIVIL 19-1637CCC, (D.P.R. Sept. 25, 2019).
18 No. CV 22-06969, (D.N.J. June 14, 2023).
19 See Certification of Jay Oliva (ECF No. 23-1), NJ Coed Sports LLC v. ISP Sports, LLC, No. 22-cv-6969, (D.N.J).
20 Traverse Therapy Servs., PLLC v. Sadler-Bridges Wellness Grp., PLLC, No. 2:23-cv-1239, , at *2 (W.D. Wash. Feb. 1, 2024).
21 Cf. Yager v. Vignieri, No. 16CV9367(DLC), , at *2 (S.D.N.Y. Oct. 12, 2017), with Intertek Testing Servs., N.A., Inc. v. Pennisi, 443 F. Supp. 3d 303, 326–27 (E.D.N.Y. 2020) and M&A Metals, Inc. v. Fina, No. 21CV5570PKCPK, , at *3 (E.D.N.Y. Mar. 31, 2023).
22 Gov't Emps. Ins. Co. v. Nealey, 262 F. Supp. 3d 153, 172–73 (E.D. Pa. 2017) (quoting H.R. Rep. No. 114–529, at 9 (2016)); see also, e.g., Officia Imaging, Inc. v. Langridge, No. SACV172228DOCDFMX, , at *6 (C.D. Cal. Aug. 7, 2018); Health Care Facilities, Partners, LLC v. Diamond, No. 5:21-CV-1070, , at *6 (N.D. Ohio Nov. 14, 2022).
23 547 F. Supp. 3d 585 (E.D. Tex. 2021).
24 See Fed. R. Civ. P. 12(h).
25 See, e.g., Officia Imaging, Inc. v. Langridge, No. SACV172228DOCDFMX, , at *2 (C.D. Cal. Aug. 7, 2018) (citing Safe Air for Everyone v. Meyer, 373 F.3d 1035, 1039 (9th Cir. 2004)).
26 No. 17-cv-00879-AJB-MDD, (S.D. Cal. Aug. 22, 2017).
27 No. 116CV04762LTSKNF, (S.D.N.Y. Mar. 31, 2022).
Dan Roland is a partner at Finnegan who focuses on litigation before U.S. district courts, representing clients in both patent and trade secrets cases. He has more than 15 years of experience in intellectual property, particularly on the technology spectrum. He can be reached at [email protected]. John Williamson is co-leader of the firm's litigation section and a patent and trade secret attorney with more than 20 years of litigation experience in complex IP disputes. His litigation experience spans a wide range of technical subject matter areas, including telecommunications, robotics, software, pharmaceuticals, agrochemicals and medical devices. He can be reached at [email protected]. Both authors are based in Washington, D.C.
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