The DTSA's Jurisdictional Nexus, Three Years In

Skepticism of the jurisdictional element has largely given way to acceptance. The Northern District of Illinois expressed concern “whether pleading this specific aspect of a DTSA claim [(use or intended use in interstate commerce)] is required,” before deciding the case without deciding the issue. Well's Lamont Indus. Group v. Mendoza, 17-C-1136, 2017 WL 3235682 at 3 (N.D. Ill. July 31, 2017). But, the weight of authority now holds that the DTSA's jurisdictional nexus forms a part of the prima facie case for trade secret theft. See, e.g., Yeiser Research & Development v. Teknor Apex Co., 2018 WL 3993370 at 4 (S.D. Cal. Aug. 21, 2018) (“interstate commerce requirement” forms element of prima facie case for trade secret theft under the DTSA); Arctic Energy Servs., LLC v. Neal, 18-CV-00108-PAB-KLM, 2018 WL 1010939 at 2 (D. Colo. Feb. 22, 2018) (same); GEICO, 262 F. Supp. 3d at 172; DLMC, 2019 WL 309754 at 2. See also, SolarCity Corp. v. Pure Solar Co., No. 16-01814-BRO (DTBx) (N.D. Cal. Dec. 27, 2016) (alleging a nexus with interstate commerce is “a threshold requirement for a DTSA claim”).

These cases — DLMC among them — suggest that courts take seriously the conditional nature of a federal cause of action: “An owner of a trade secret that is misappropriated … if the trade secret is related to a product or service used in, or intended for use in, interstate of foreign commerce.” 18 U.S.C. 1836(b)(1). There is no appellate law interpreting this jurisdictional provision. However, the Second Circuit has addressed a previous, parallel provision in the Economic Espionage Act, holding that it contained two requirements: first, that the trade secret is related to a product or service; and second, a connection between the product or service and interstate commerce. United States v. Agrawal, 726 F.3d 235, 244, 248 (2d. Cir. 2013); id. at 263 (Pooler, C.J., dissenting) (agreeing on the two requirements); United States v. Aleynikov, 676 F.3d 71, 79-80 (2d Cir. 2012). Elsewhere, I have referred to these as the Relationship Requirement and the Nexus Requirement. See, Conor Tucker, The DTSA's Federalism Problem: Federal Court Jurisdiction Over Trade Secrets, 28 Fordham Intell. Prop. Media & Ent. L.J. 1, 9-10 (2017); see also, id. at 10 n.39 (the Second Circuit uses different terms). The district courts have been primarily concerned with the Nexus Requirement (i.e., the connection between the product or service and interstate commerce), but as cases progress the Relationship Requirement may come into greater focus.

Implications of the Jurisdictional Element

District court decisions during the first three years of the DTSA show that the jurisdictional element is not a paper tiger; it has teeth. Certainly, the cases demonstrate that plaintiffs must sufficiently plead the jurisdictional element to avoid dismissal for failure to state a claim. But, the jurisdictional element cannot simply be plead and forgot: the “interstate commerce requirement is jurisdictional.” GEICO, 262 F. Supp. 3d at 172 (quotation marks omitted). If the present focus on the jurisdictional element of the DTSA continues, a number of implications arise.

Subject Matter Jurisdiction: A Silent Claim Killer?

Failure to satisfy the jurisdictional element can have significant implications for a case. A defect in subject matter jurisdiction, among other things, is not waivable, not consentable, not subject to estoppel, and can be raised at any time (including the eve of trial or on appeal). See, e.g., United States v. Ceja-Prado, 333 F.3d 1046, 1049 (9th Cir. 2003). As a practicality, this means that an undiscovered jurisdictional defect could sink a case when it comes to light. Such situations are not uncommon where discovery raises defects in subject matter jurisdiction. See, e.g., Advanced Video Techs., LLC v. HTC Corp., 103 F. Supp. 3d 409, 415, 424-26 (S.D.N.Y. 2015) (dismissing patent claims for lack of subject matter jurisdiction after discovery revealed defect in patent title); Tokio Marine Nichido Fire Ins. Co. v. United States, No. 06-929-JE, 2009 WL 1011590 at 8 (finding lack of subject matter jurisdiction after discovery revealed applicability of sovereign immunity); cf. Tankship Int'l, LLC v. El Paso Merchant Energy-Petroleum Co., 03:04-cv-753 (JBA), 2006 WL 2349603 at 1 (D. Conn. July 25, 2006) (discovery that diversity of citizenship was lacking resulted in dismissal). In addition, a material dispute as to the jurisdictional element may not prevent summary judgment on the matter as courts have inherent power to decide facts related to their own jurisdiction and a jurisdictional nexus may not be subject to trial by jury. Berardinelli v. Castle & Cooke, Inc., 578 F.2d 37, 38-39 (9th Cir. 1978) (prior jurisdictional nexus in Sherman Act need not be submitted to jury); Advanced Video Techs., 103 F. Supp. 3d at 424-25 (finding jurisdictional facts need not be submitted to jury). (Defendants would be advised, however, to raise the issue in a timely manner, as delay risks sanctions. See, Basso v. Utah Power & Light Co., 495 F.2d 906, 911 (10th Cir. 1974) (affirming award where defendant “waited until after the adverse judgment had been rendered against it before it launched its jurisdictional attack”).).

Notwithstanding the exigencies inherent in the first days of a trade secret case, early effort should be put into grasping and defining the trade secret, the products or services to which they relate, and the flow of those products or services in interstate commerce. Confirming such will help establish firmer jurisdictional footing and avoid jurisdictional issues down the line.

The Advantages of Jurisdictional Discovery; and Whether to Plead Around It

Relatedly, defendants should consider the advantages of seeking jurisdictional discovery on DTSA claims, particularly if it is the only basis for federal jurisdiction. Such discovery has strategic advantages: it is one-sided, creates early contours to the case, can be potentially dispositive, and may force the plaintiff to define its trade secret early and with specificity. Indeed, jurisdictional discovery could provide defendants with a foil to vague or overbroad trade secret allegations and may force the plaintiff to define its trade secret early and with specificity. The current general approach to seek specificity of trade secrets — i.e., a motion to dismiss for failure to state a claim — has met with mixed success at best. (Many district courts have declined to require specific identification of trade secrets on a motion to dismiss, regardless of whether state-law claims might have required otherwise.)

Conversely, plaintiffs should consider clearly pleading facts relating to the jurisdictional element, to the extent feasible, to head off such one-sided discovery.

Looking Forward

The DTSA's jurisdictional element also raises some issues that have not yet been litigated.

One issue regards whether courts will, as the Second Circuit had under the Economic Espionage Act, recognize the relationship between the trade secret and the product or service as an independent requirement of the jurisdictional element. District courts have not yet distinguished between the Relationship Requirement (requiring that a trade secret be related to the product or service) and the Nexus Requirement (requiring that the product or service be offered in interstate commerce) under the DTSA. The court in DLMC did not address the question, simply dismissing the case because the service had not been offered in interstate commerce (i.e., the Nexus Requirement). Even if courts end up looking to the relationship, it might not be a stringent requirement. The Agrawal majority declined to “limit the EEA's reach through a restrictive [Relationship] provision.” Agrawal, 726 F.3d at 248. But this is not the universal view, see, id. at 267-69 (Pooler, C.J., dissenting) (the term “related to” should be more narrowly interpreted), and a close relationship between the trade secret and the product or service may end up being required.

Another issue to keep on the radar is how the Nexus Requirement might impact other trade secret doctrines. For instance, the doctrine of continuous use — which required trade secrets to be in actual use to be enforced — had been abandoned under the Uniform Trade Secrets Act (UTSA). The intent, apparently, was to allow suit on trade secrets which had been acquired but not yet put into use. Id. But the DTSA requires that the product or service be “used in” commerce. A significant open question is whether the jurisdictional element revives or rejects the continuous use doctrine. Relatedly, negative information (such as knowing what not to research) may have difficulty satisfying the jurisdictional element, as it might not be sufficiently “related” to a product or sufficiently “used in” interstate commerce. Such negative information may be sufficiently valuable as a trade secret under some state laws, but courts have not yet considered whether the jurisdictional element bars such information from federal protection.

Analysis

The evolution of the DTSA's jurisdictional element has been slow, but clear. There is no doubt that trade secret owners must plead facts sufficient to satisfy the jurisdictional element to avoid a motion to dismiss. At the same time, a failure of proof for the jurisdictional element may undermine subject matter jurisdiction. Thus, litigants should consider strategic 12(b)(1) practice while keeping an eye on how the jurisdictional element shapes substantive federal trade secret law in the future.

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Conor Tucker is an Associate at Irell & Manella's Los Angeles office. His practice focuses on complex business litigation, including intellectual property disputes. He has written and presented on various aspects of the Defend Trade Secrets Act and can be reached at [email protected]. The views expressed in the article are those of the author and not necessarily the views of his clients or other attorneys in his firm.