Making a Federal Case Out of It: What Does the DTSA’s “Interstate Commerce” Limitation Mean?

We’ve blogged a lot about the Defend Trade Secrets Act in the roughly year-and-a-half period since the law was enacted.  Our coverage has run the gamut:  from the first jury verdict under the DTSA, to the U.S. Patent and Trademark Office’s emerging interest in trade secrets, to the once-controversial ex parte seizure provision that, so far, has been used very little in practice.

But one aspect of the DTSA has received little attention: the DTSA only authorizes trade secret claims if they are “related to a product or service used in, or intended for use in, interstate or foreign commerce.”

Although courts in other contexts have employed broad definitions of what constitutes “interstate commerce” it is not a foregone conclusion that plaintiffs will be able to clear this hurdle and establish subject matter jurisdiction.

In fact, at least three courts have dismissed DTSA claims for failure to allege a sufficient connection between the trade secrets at issue and interstate commerce:

  • First, in January 2017, the Delaware federal district court in Hydrogen Master Rights Ltd. v. Weston dismissed a DTSA claim because (among other reasons) “the complaint fails to allege any nexus between interstate or foreign commerce and the Confidential Recordings, Hydrogen Technology” or the purchase agreements related to those items.
  • In June 2017, in Government Employees Insurance Co. v. Nealy, a Pennsylvania federal district court dismissed plaintiff’s trade secrets claims “because the complaint failed to allege any nexus” between the alleged trade secrets (which included information about various insurance claims received by plaintiff) and interstate commerce (among other reasons). Of note, the court raised this issue on its own, reasoning that it must address this jurisdictional question even though the defendant had not moved to dismiss on that basis.
  • Later that month, in Search Partners, Inc. v. MyAlerts, Inc., the Minnesota federal district court granted defendant’s motion to dismiss plaintiff’s DTSA claims because (among other reasons) the trade secret at issue (the identity of an individual on an executive recruiting list) did not constitute “a product or service used in, or intended for use in, interstate or foreign commerce.”

In contrast, other courts have denied motions to dismiss based on an allegedly insufficient connection between the trade secrets and interstate commerce:

  • In Grow Financial Federal Credit Union v. GTE Federal Credit Union, the plaintiff’s alleged trade secrets included “list of members, its operating policies and procedures, customized reports and documents, lending strategy materials, and internal procedures” related to the plaintiff’s business. In August 2017, a Florida federal district court held that plaintiff had pleaded a sufficient nexus between those trade secrets and interstate commerce because plaintiff alleged it “is a federally chartered credit union” that “uses the trade secrets at issue ‘in connection with the provision of its products and services in interstate U.S. commerce.’”
  • In Marimar Textiles Inc. v. Judge Clothing & Accessories Corp., the plaintiff’s alleged trade secrets consisted of “highly confidential information” used to create various textile patterns. In October 2017, the New Jersey federal district court held that the plaintiff had “made sufficient allegations to assert a nexus between the violation and interstate commerce” concluding that the plaintiff “clearly alleges that Defendants improperly used Plaintiff’s trade secrets to create infringing goods, which were meant to be sold, at the very least, throughout the United States.”

Finally, at least one court has questioned whether allegations regarding interstate commerce are required to adequately plead a DTSA claim.  In July 2017, an Illinois federal district court denied the defendants’ motion to dismiss in Wells Lamont Indus. Grp. LLC v. Mendoza, a case involving alleged trade secrets that consisted of “business information such as product costs, vendor and customer lists… unpublished price lists… and other financial information.”  The court began its analysis of the interstate commerce issue by noting that “Defendants have not provided any support for their assertion that such pleading is required.”  The court then reasoned that, assuming such a requirement existed, the plaintiff had satisfied it because the goods sold by the parties in the case “were intended to cross state lines and thus intended for use in interstate commerce.”

The takeaway? In the rush to prepare a complaint to put a stop to trade secret misuse, it may be easy for a plaintiff to forget to allege a connection to interstate commerce.  This requirement should go on a checklist for plaintiffs (and their counsel) when preparing a complaint asserting a DTSA violation.  Of note, the decisions dismissing complaints based on failure to meet the interstate commerce requirement cited it as but one of a number of defects in the complaints; that is, we have yet to see a case where failure to plead a connection to interstate commerce was the sole basis for dismissing a DTSA claim.  We suspect that courts not otherwise inclined to dismiss a DTSA claim most likely will find a sufficient connection to interstate commerce, at least at the motion to dismiss stage, to keep the claim alive provided that the plaintiff has put forth some theory connecting the violation to interstate commerce—even if it is tangential.