“Aloha” to Federal Jurisdiction Over Trade Secrets Claims

As two recent cases show, how one pleads its case under the Defend Trade Secrets Act can be the difference between whether “aloha” means hello or goodbye to federal jurisdiction.

A district court in Hawaii recently dismissed a plaintiff’s claim under the DTSA because it failed to establish subject matter jurisdiction.  In that case, DLMC, Inc., a health care service provider for elderly and infirm residents of Hawaii, accused a former employee of stealing client lists.  The cause of action under the DTSA was the only federal claim in the complaint and, therefore, the only basis for federal jurisdiction.  However, to plead a cause of action under the DTSA, the trade secret must be “related to a product or service used in, or intended for use in, interstate or foreign commerce.”  The only argument DLMC made as to this required nexus was that its clients “have federal patient identification numbers so as to allow for their receipt of federal funds for the services provided to them by [DLMC].”  DLMC also argued that because it was an entity whose very existence relies on and is conditioned upon federal application, certification and approval,” its services “are subject to federal law….”  Neither of these arguments persuaded the court as they both failed to show whether and how the alleged trade secrets themselves (as opposed to DLMC’s business generally) related to interstate commerce.  The court granted defendants’ motion to dismiss, however, with leave for DLMC to amend its complaint to allege a DTSA (or other federal) claim.

Conversely, a district court in Louisiana exercised jurisdiction over a case, despite granting defendants’ summary judgment motion on the DTSA cause of action, the only federal claim in the suit.  The plaintiffs were Advanced Applied Research, LLC, a chemical technology research and development company, and one of its managers.  The defendants were the other two managers of AAR, as well as three companies they owned that did business with AAR.  Plaintiffs alleged that Defendants misappropriated and misused certain chemical technologies and processes that AAR had developed.  The court disagreed, granting Defendants motion for summary judgment on Plaintiffs’ DTSA claim.  Because there were no remaining federal claims, the court had to decide whether to exercise supplemental jurisdiction under 28 U.S.C. Section 1367 over the remaining state law claims.  The court found that Plaintiffs’ amended complaint “was drafted in such a way as to interweave all predicate facts in the fabric of each and every legal claim,” therefore, the federal and state claims clearly formed part of the same case or controversy satisfying Section 1367(a).  The court then used its discretion to find that although all claims over which it had original jurisdiction had been dismissed, the remaining claims did not raise a novel or complex issue of state law, the federal claim constituted “the heart of this case,” and there were no compelling reasons to decline jurisdiction.  Accordingly, the court decided to exercise jurisdiction over the remaining state court claims in the case.

These two cases are a reminder that attention to how a DTSA claim is actually pleaded can be the difference between whether the federal court will exercise jurisdiction in the first instance, or continue to exercise jurisdiction, over that claim.