April 08, 2019 Practice Points

    District Court Assesses Interstate Commerce Nexus Under Defend Trade Secrets Act

    The decision serves as a good reminder that practitioners seeking to bring claims under the DTSA in federal court must be careful to allege a sufficient nexus between the trade secret at issue and a product or service used in interstate commerce.

    By Jarred A. Klorfein

    A District Court in the United States District of Hawai’i recently reviewed a motion to dismiss and, in doing so, assessed the interstate nexus prong of the federal Defend Trade Secrets Act, 18 U.S.C. § 1836 (DTSA). First effective May 11, 2016, the DTSA created a civil federal cause of action for misappropriation of trade secrets in the United States. The Defend Trade Secrets Act: One Year Later, Business Law Today, A.B.A. Bus. L. Sec. (June 29, 2017), https://www.americanbar.org/groups/business_law/publications/blt/2017/04/02_newman/. The DTSA provides for a private right of action where “the trade secret is related to a product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C. § 1836(b)(1).

    In DLMC, Inc. v. Flores, DLMC brought claims under the DTSA and Hawai’i’s state trade secrets act against its former office manager, Bendicta Flores, and a competing business, Loving Care Health Provider, Inc. (LCHP). DLMC, Inc. v. Flores, No. CV 18-00352 DKW-RT, 2019 WL 943382, at *1–3 (D. Haw. Feb. 26, 2019), order amended and superseded, No. CV 18-00352 DKW-RT, 2019 WL 985275 (D. Haw. Feb. 27, 2019). Both DLMC and LCHP are Hawai’i-based companies that provide healthcare services to Hawai’i’s elderly and infirm residents. Id. *1. DLMC terminated Flores’s employment, and Flores subsequently began working at LCHP. Id.

    Flores, joined by LCHP, moved to dismiss based on lack of subject matter jurisdiction. Id. The court lacked diversity jurisdiction and the DTSA claim was the only federal claim in the complaint. Id. at *1–2. Thus, jurisdiction depended entirely on the DTSA claim. Id. Flores argued DLMC failed to allege a nexus between the alleged trade secret and interstate or foreign commerce. Id. at *1.

    DLMC failed to respond to the motion to dismiss, but the court considered arguments raised in previous briefing related to the TRO. Id. at *1 n.3. Specifically, DLMC argued that all of its clients—including the patients that Flores and LCHP had allegedly misappropriated—had federal identification numbers which provided for the receipt of federal funding associated with services that DLMC provided. Id. at *2. In addition, DLMC argued that its “very existence relies on and is conditioned upon federal application, certification and approval. [DLMC’s] services are subject to federal law relating to receipt of federal funds.” Id. (internal citations and quotations omitted).

    The court noted that DLMC’s services were apparently regulated by the federal government, falling under Medicare and Medicaid. See id. at *1. Indeed, the court remarked that federal funding comprised the majority of DLMC’s income. Id. But involvement with federal funding and oversight was not enough; the court explained that DLMC failed to allege how the misappropriation related to the provision of interstate services. Id. at *2. The court clarified: “These dots are neither connected in the Complaint nor in any of DLMC’s other submissions to the Court, and, indeed, it appears that DLMC does not offer any interstate services.” Id.

    The court granted leave to amend, to which DLMC failed to respond and the action was dismissed. Id. DLMC, Inc. v. Flores, No. CV 18-00352 DKW-RT, 2019 WL 985275 (D. Haw. Feb. 27, 2019).

    The DLMC decision serves as a good reminder that practitioners seeking to bring claims under the DTSA in federal court must be careful to allege a sufficient nexus between the trade secret at issue and a product or service used in interstate commerce. Such allegations could be critical to surviving a motion to dismiss. Compare Wells Lamont Indus. Grp. LLC v. Richard Mendoza & Radians, Inc., No. 17 C 1136, 2017 WL 3235682, at *1–3 (N.D. Ill. July 31, 2017) (finding complaint sufficient where former employee allegedly traveled in interstate commerce to present replicas of former employer’s products and where the former employer also intended to market its products in interstate commerce) with Gov’t Emps. Ins. Co. v. Nealey, 262 F. Supp. 3d 153, 172–73 (E.D. Pa. 2017) (dismissing DTSA claim where the “complaint [did] not allege any nexus between interstate or foreign commerce and the alleged trade secrets”) (citing Hydrogen Master Rights, Ltd. v. Weston, 228 F. Supp. 3d 320, 337–38 (D. Del. 2017)).

    Jarred Klorfein is an associate of Caplan Cobb LLP in Atlanta, Georgia.

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