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The U.S. District Court for the Eastern District of Texas recently denied a challenge to its subject-matter jurisdiction over a misappropriation of trade secrets claim under the Defend Trade Secrets Act (DTSA), rejecting the defendants’ argument that the DTSA’s interstate commerce requirement limits the jurisdiction of federal courts.

Defendants Truly Title, Inc., and several former employees of plaintiff filed a Rule 12(b)(1) motion to dismiss for lack of subject-matter jurisdiction, claiming that plaintiff Providence Title Company—which operates only in Texas—failed to adequately allege misappropriation of any trade secret relating to a product or service in interstate commerce.

At first glance, this might seem an argument better suited for a strict Rule 12(b)(6) motion, since the interstate commerce requirement is an element of a DTSA claim. Instead, the defendants asserted that this shortcoming destroyed the federal court’s subject-matter jurisdiction, including its supplemental jurisdiction over the plaintiff’s related state law claims for trade secret misappropriation, breach of fiduciary duties, breach of various employment and shareholder agreements, and civil conspiracy.

The court rejected the defendants’ interpretation, finding that 28 U.S.C. § 1331 confers federal-question jurisdiction unless a federal claim is “frivolous” or “patently without merit.” Accordingly, a defendant challenging the adequacy of a plaintiff’s nonfrivolous federal claim, under the DTSA or otherwise, “must move under Rule 12(b)(6), not Rule 12(b)(1).” The court explained that other district courts that dismiss DTSA claims for lack of subject-matter jurisdiction after finding the interstate commerce requirement lacking “mischaracterize[] … elements of a cause of action as jurisdictional limitations” and ignore U.S. Supreme Court guidance that elements of a cause of action are not jurisdictional limitations unless the statute “clearly states” as much. Put another way, “the DTSA’s interstate-commerce requirement constrains a plaintiff’s entitlement to relief under the statute—not the adjudicatory authority of federal courts.”

The court then went on to consider the defendants’ Rule 12(b)(6) objections to the plaintiff’s DTSA claim because, “the DTSA claim being the only federal claim on which to base supplemental jurisdiction, dismissal of the DTSA claim could be dispositive of this entire action.” The court first held that the plaintiff had read the DTSA’s interstate commerce requirement too narrowly, as the requirement applies to underlying products or services, not the related trade secrets. Thus, even if Providence Title Company provides title insurance and services only for properties in Texas, and its customer lists and financial information are similarly confined to Texas, real estate transactions are nonetheless “interstate transactions” where funds for purchasing the real estate originate outside the state. And because the plaintiff had pleaded as much, the court declined to dismiss the DTSA claim under Rule 12(b)(6).

Defendants hoping to leverage the DTSA’s interstate commerce requirement to dispense with state law claims in federal court might face an uphill battle where, as here, district courts reject Rule 12(b)(1) challenges under the act and favor a broad reading of the “in commerce” test.

Providence Title Co. v. Truly Title, Inc., No. 4:21-CV-147-SDJ, 2021 WL 2701238 (E.D. Tex. July 1, 2021)