IP Law Daily, TRADE SECRETS—N.D. Ill.: A defendant’s use of a trade secret in interstate commerce is enough for a DTSA claim, (Apr 1, 2024)

By Matthew Hersh, J.D.

The plaintiff did not have to show its own use in commerce in order to bring the federal trade secrets action.

The owner of exercise machine-related software was entitled to rely on a competitor’s alleged use of its trade secrets in interstate commerce in order to assert a federal trade secrets claim—even if it could not establish interstate commerce based on its own use of the information, the federal court for Chicago has held. But the court, in allowing the trade secrets claim to go forward, found that a related tortious interference claim was preempted by state trade secrets law—and expressed strong doubts about the software owner’s ability to hale its competitor’s foreign parent into court (Nextpulse, LLC v. Life Fitness, LLC, March 31, 2024, Maldonado, N.).

The lawsuit involves a tangled web of companies and allegations, but the most simplified version follows. Nextpulse LLC is the owner of the rights to various software applications, content delivery systems, and network-based services related to exercise equipment. It licensed the technology to Brunswick, a company that (at the time) manufactured and sold exercise equipment through its Life Fitness Division. The licenses contained anti-assignment, anti-sublicensing, and anti-transfer provisions.

The companies found themselves at odds when Brunswick spun off its Life Fitness division to Lumus, a Dutch holding company. The software owner, believing that Life Fitness and its new Dutch parent had acted in contravention of the anti-transfer provisions of the licenses, sued for copyright infringement, misappropriation of trade secrets, and tortious interference. The two companies (along with their private equity investor) moved to dismiss, leading to this opinion.

Copyright infringement. The court quickly dispatched the motion to dismiss the copyright infringement claim. The defendant companies, pointing out that Nextpulse was itself a successor to the entity that developed the software, claimed that it had not established ownership of the intellectual property. But this was a motion to dismiss, the court observed—making this claim premature. The software company had a valid registration to the software, the court noted, which is all it needed for now. “Rebuttal is inappropriate at the motion to dismiss stage,” the court noted.

Nor would the claim for statutory damages be dismissed at this stage, the court found. A copyright owner is not entitled to claim statutory damages unless the infringement took place after the registration. The software owner adequately claimed just as much, the court noted, and there was no reason at this stage to find the claim implausible. All of the copyright claims would go forward as a result.

Trade secrets preemption. The court found the software owner’s claim of tortious interference to be preempted under the Illinois Trade Secrets Act. In deciding whether ITSA preemption applies, the court noted, “the court asks whether a plaintiff’s claim would stand regardless of whether trade secrets were at issue.” That tripped up the software owner here. Nextpulse alleged that Life Fitness induced its then-corporate parent, Brunswick, to transfer its “confidential and proprietary information … and/or violate the confidentiality clause.” The claim would not stand,” the court noted, “if the information disclosed by Brunswick were not confidential.” That said, the court dismissed the claim without prejudice to give Nextpulse an opportunity to amend its pleadings “in the event Nextpulse can show that it is seeking redress for wrongs that do not hinge on confidential information.”

DTSA statute of limitations. The court found that the lawsuit was timely. Under the federal Defend Trade Secrets Acts, claims must be brought within three years after the plaintiff “discovers or by the exercise of reasonable diligence should have discovered the alleged misappropriation.” To be sure, the court noted, Brunswick terminated its contract with Nextpulse and spun off Life Fitness into a wholly owned subsidiary in 2018, four years before the filing of the complaint. But the actual injury to the software owner, the court noted, came only when the Dutch holding company acquired Life Fitness in 2019. The 2022 lawsuit was therefore timely, the court found.

Interstate commerce. The court refused to dismiss on grounds of interstate commerce. The DTSA, as with any federal statute enacted under the commerce clause, applies only to trade secrets used in interstate commerce. But does that mean the plaintiff must use the trade secrets in interstate commerce, or may the plaintiff rely on the defendant’s use in interstate commerce? The statute did not specify, the court noted, but at least one other court had analyzed the interstate commerce element by also looking at defendants’ use of the trade secrets. The court would follow that rule here.

Economic value. The court also found that the software company had adequately pleaded the independent economic value elements of a DTSA claim. The DTSA protects only information that “derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, another person who can obtain economic value from the disclosure or use of the information.” The software owner met this requirement—at least at the pleading stage—by claiming that it invested time and money in developing the software and that the trade secrets were “not generally known to the public or to other persons who could obtain economic value from their disclosure.” That was enough for the DTSA claim to go forward.

Personal jurisdiction. The court’s decision also came with a strong warning to the software company about personal jurisdiction. The Dutch company had moved to dismiss the tortious interference claim against it not only under preemption grounds but also on personal jurisdiction grounds. Even if the software company amended its complaint to avoid preemption, the court warned, assertion of personal jurisdiction over these companies seemed “doubtful” because there was no allegation that the company knew that the effects of its conduct would be felt in Illinois (and much less that they deliberately aimed their conduct at Illinois). Nonetheless, the software company would be given another chance to cure this pleading shortcoming.

The Case is No. 1:22-cv-03239.

Attorneys: Edward David Marks (GCALaw Partners) for Nextpulse, LLC. Jason J. Keener (Irwin IP LLP) for Life Fitness, LLC, KPS Capital Partners, LP and Lumos International Holdings, B.V.

Companies: Nextpulse, LLC; Life Fitness, LLC; KPS Capital Partners, LP; Lumos International Holdings, B.V.

Cases: TradeSecrets IllinoisNews