IP Law Daily, TRADE SECRETS—5th Cir.: Quantitative trading firm’s victory in trade secrets suit affirmed, (Jun 26, 2017)

By Peter Reap, J.D., LL.M.

A federal district court’s judgment in favor of quantitative financial research and trading companies Quantlab Financial and Quantlab Technologies (hereinafter, Quantlab) on its trade secret misappropriation claims against Quantlab’s former employee Andriy Kuharsky and a competitor’s co-founder, Emmanuel Mamalakis, including a permanent injunction and the entry of a jury’s imposition of damages against Kuharsky in the amounts of $1,800,000 for direct misappropriation and $5,400,000 for conspiracy to misappropriate, and against Mamalakis in the amounts of $1,000,000 for direct misappropriation and $4,000,000 for conspiracy to misappropriate has been affirmed by the U.S. Court of Appeals in New Orleans. The jury reasonably concluded that Quantlab proved the existence of a trade secret, the jury was not improperly restricted on damages, and sufficient evidence supported the jury’s damages award against Kuharsky for direct misappropriation (Quantlab Technologies Ltd. V. Kuharsky, June 22, 2017, per curiam).

Quantlab employs software engineers, mathematicians, physicists, and others to create highly confidential and proprietary mathematical models, algorithms, and formulas to discover trading strategies based on market data. In 2001, Quantlab hired Kuharsky, a Ph.D. mathematician. Quantlab fired Kuharsky in March 2007 for what Quantlab characterized as "serious performance deficiencies." Kuharsky was not given a bonus for his 2006 performance.

In July 2007, Kuharsky and Mamalakis, a licensed Wisconsin attorney, were among the founders of SXP Analytics (SXP), which was formed to do the same type of high-frequency trading as Quantlab. In 2009, Quantlab sued Kuharsky, Mamalakis, and others in federal court, asserting claims for misappropriation of trade secrets and conspiracy to engage in same, among other claims. All of the defendants other than Kuharsky and Mamalakis settled before trial. Kuharsky asserted a counterclaim for Quantlab’s refusal to pay him a bonus in 2006.

The district court granted summary judgment on the counterclaim in Quantlab’s favor. The court also entered a finding of liability against Kuharsky on Quantlab’s direct claim of misappropriation of trade secrets, based on Kuharsky’s wide-ranging destruction of evidence. The jury found the defendants liable on all four claims. Both Kuharsky and Mamalakis appealed.

Mamalakis’s arguments. Mamalakis first argued that Quantlab’s vague witness testimony failed to establish the existence of a trade secret under Texas’ six-part test for a trade secret. This argument was without merit, the appellate court held.

Quantlab presented to the jury a great deal of evidence identifying the trade secrets the defendants stole. For instance, Quantlab’s Chief Scientist and Chief Technology Officer testified as to the stolen materials’ functions and value, as well as the fact that the defendants possessed the then-current version of Quantlab’s trading platform source code and other files which described the functions and structure of Quantlab’s trading system and generally explained how to keep it running properly. Viewing the facts in the light most favorable to the verdict, the jury could have reasonably concluded that Quantlab proved the existence of a trade secret, the Fifth Circuit reasoned.

Next, Mamalakis challenged the district court’s denial of Kuharsky’s motion to compel discovery relating to the financial relationship between Quantlab and SXP’s receiver, which was appointed in Wisconsin. Other than a single citation to a Wisconsin case for the proposition that a receiver may not act against the interests of the estate it is administering, Mamalakis failed to cite to any relevant law or portions of the record supporting his contention that the district court abused its discretion in denying the motions to compel. Moreover, Mamalakis waived this argument by failing to raise it below, according to the appellate court.

Finally, Mamalakis asserted in his original brief that he was joining in the arguments raised in Kuharsky’s brief, even though Kuharsky’s brief was written solely from Kuharsky’s perspective. Quantlab argued that Mamalakis waived those arguments because he failed to flesh them out with his own briefing. Because Kuharsky’s arguments had no merit, however, the point was moot, the appellate court held.

Kuharsky’s arguments. Kuharsky first attacked the award of damages on the direct misappropriation claim against him on two grounds: (1) it was improper to instruct the jury on "value to Quantlab" damages because Quantlab sprang that theory on the defendants at the last minute, and it was not supported by the evidence; and (2) because Kuharsky left SXP in early 2008 before SXP had started making money, Quantlab could not show that Kuharsky himself either avoided costs or earned profits, so there was no basis for damages. The Fifth Circuit rejected both arguments.

Quantlab never surprised Kuharsky with a separate "value to Quantlab" theory of damages, the court ruled. Kuharsky suggested that the new "value to Quantlab" theory of damages was contained in the testimony of Quantlab CEO Bruce Eames, but the only sum Eames ever discussed was the approximately $55 million it cost Quantlab to development its trading platform. Kuharsky failed to point to a single example of the "value to Quantlab" that is not simply the development costs. In sum, including the "value to Quantlab" in the jury instruction did not prejudice Kuharsky, so there was no reversible error.

Kuharsky next argued that the jury could not have found damages against him on the direct misappropriation claim because only SXP avoided costs and earned profits from the misappropriation. However, the jury heard evidence that Kuharsky individually avoided costs and earned profits, in that there was evidence that (1) Kuharsky used Quantlab’s stolen trade secrets to avoid his own development costs in other ventures, as well as to find investors for those ventures, and (2) Kuharsky boasted in a later startup proposal years after leaving SXP that his strategies had led to $150,000-200,000 per day in trading revenues in 2011. Thus, there was a sufficient basis for the jury to award damages against Kuharsky for direct misappropriation of Quantlab’s trade secrets.

Kuharsky raised a number of other arguments regarding the misappropriation claims against him, but none of them had merit, the court ruled. Kuharsky also challenged the district court’s entry of an injunction against him, barring him from working in the high frequency trading industry for two years. Because that injunction will expire on or about July 27, 2017, there would be no practicable way to grant relief, even if he was entitled to it, before it terminates on its own. Thus, the court declined to reach that issue as moot.

Finally, Kuharsky argued that the district court erred in granting summary judgment against him and in favor of Quantlab on his counterclaim for payment of his 2006 bonus. However, Kuharsky failed to present any competent summary judgment evidence creating a genuine dispute as to a material fact, and Quantlab was entitled to judgment in its favor on Kuharsky’s counterclaim, the court held.

The case is No. 16-20242.

Attorneys: Lee Landa Kaplan (Smyser Kaplan & Veselka, L.L.P.) for Quantlab Technologies, Ltd. (BVI) and Quantlab Financial, LLC. David Charles Holmes (Law Offices of David C. Holmes) for Andriy Kuharsky.

Companies: Quantlab Technologies, Ltd. (BVI); Quantlab Financial, LLC

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