715 F.Supp.2d 542 (S.D.N.Y. 2010), 10 Civ 2491(DLC), Quantlab Financial, LLC, Quantlab Technologies Ltd. (BVI) v. Tower Research Capital, LLC

Docket Nº10 Civ 2491(DLC).
Citation715 F.Supp.2d 542
Opinion JudgeDENISE COTE, District Judge:
Party NameQUANTLAB FINANCIAL, LLC, QUANTLAB TECHNOLOGIES LTD. (BVI), Plaintiffs, v. TOWER RESEARCH CAPITAL, LLC, Defendant.
AttorneyAndrew P. Marks, David S. Warner, Littler Mendelson, P.C., New York, NY, for Plaintiffs. Peter L. Altieri, David J. Clark, Epstein, Becker & Green, P.C., New York, NY, for Defendant.
Case DateMay 28, 2010
CourtUnited States District Courts, 2nd Circuit, Southern District of New York

Page 542

715 F.Supp.2d 542 (S.D.N.Y. 2010)

QUANTLAB FINANCIAL, LLC, QUANTLAB TECHNOLOGIES LTD. (BVI), Plaintiffs,

v.

TOWER RESEARCH CAPITAL, LLC, Defendant.

No. 10 Civ 2491(DLC).

United States District Court, S.D. New York.

May 28, 2010

Page 543

Andrew P. Marks, David S. Warner, Littler Mendelson, P.C., New York, NY, for Plaintiffs.

Peter L. Altieri, David J. Clark, Epstein, Becker & Green, P.C., New York, NY, for Defendant.

OPINION & ORDER

DENISE COTE, District Judge:

This action arises out of an alleged noncompete agreement between plaintiff Quantlab Financial, LLC (" QLF" ), an automated high-frequency trading firm, and its former employee, Dr. Yongzhong Xu (" Xu" ). Defendant Tower Research Capital, LLC (" Tower" ), a competitor of QLF, has offered employment to Xu. On March 19, 2010, QLF filed this action against Tower, alleging that Tower's employment of Xu would violate the noncompete agreement. The same day, QLF brought an order to show cause to enjoin Xu's employment at Tower. After a conference with both parties, QLF's application was granted and a temporary restraining order was entered. On April 5, having been informed that there may not be complete diversity between the parties, the Court sua sponte ordered QLF to show cause why this action should not be dismissed for lack of subject matter jurisdiction (the " April 5 Order" ). On April 13, Tower separately moved to dismiss this action for failure to join an indispensable party, namely Xu, or, in the alternative, to vacate

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the temporary restraining order. The same day, QLF filed a first amended complaint (" FAC" ) which added as a plaintiff, Quantlab Technologies Ltd. (BVI) (" QLT," collectively with QLF, the " plaintiffs" ).

This Opinion addresses the parties' submissions in response to the April 5 Order and Tower's April 13 motion to dismiss. For the following reasons, plaintiffs' request to drop QLF as a plaintiff to preserve diversity jurisdiction is granted. Because Xu may now be joined as a defendant without destroying diversity, Tower's motion to dismiss for failure to join an indispensable party is denied. Tower's request to vacate the temporary restraining order is also denied.

BACKGROUND

The following facts are taken from the FAC and the relevant submissions of the parties. See St. Paul Fire and Marine Insurance Company v. Universal Builders, 409 F.3d 73, 80 (2d Cir.2005) (" It is ... well established that when the question is subject matter jurisdiction, the court is permitted to rely on information beyond the face of the complaint." ) (" St. Paul Fire " ).

1. Quantlab and the Noncompete Agreement

QLF and QLT are two of a number of " affiliates" that comprise the Quantlab group of companies (" Quantlab" ). QLF employs a team of scientists and other professionals to research, develop, maintain, and operate a proprietary, high-frequency automated trading strategy on behalf of Quantlab.1 Quantlab's trading strategy consists of confidential and proprietary analytical models that were developed over a period of years at substantial expense. In addition to the strategy, Quantlab has developed proprietary trading technology that consists of highly confidential, internally created software and hardware configurations used to implement Quantlab's strategy and to execute trades. The success of Quantlab's business is largely dependent on the confidentiality of its trading strategy and technology, i.e., its trade secrets.

Pursuant to various contractual service agreements, QLF provides services to the other affiliates of Quantlab, including research, development, maintenance, and operation of Quantlab's trading strategy and trading technology. The various components of Quantlab's trading strategies and technologies are owned by, and licensed between and among, Quantlab's various affiliates. Among other things, QLT owns the computer software that has been developed by Quantlab's scientists and incorporated into Quantlab's proprietary trading strategy and technology.

In January 2008, QLF hired Xu as a Quantitative Research Scientist. Xu's responsibilities included, among other things, enhancing Quantlab's trading models and strategy. This involved working with Quantlab's ideas, indicators, mathematical models, algorithms, and software; testing and research; and the integration of improvements and discoveries acquired through this work into Quantlab's models and strategy. Xu's employment was purportedly conditioned upon his acceptance of and compliance with the " Quantlab Financial, LLC Employee Loyalty, Confidentiality,

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Inventions, Non-Solicitation, and Non-Competition Agreement" (the " Noncompete Agreement" ). Plaintiffs allege that Xu signed an employment offer letter that was contingent upon his agreement to the Noncompete Agreement, and thereby agreed " to abide by the agreement." Xu disputes that he executed or entered into the Noncompete Agreement.

2. Tower's Offer of Employment to Xu

After working at QLF for approximately eighteen months, Xu's employment ended on August 10, 2009. The same day, QLF filed a lawsuit in Texas to prevent Xu from working for a competitor. See Quantlab Financial, LLC v. Yongzhong Xu, et al., No. 2009-50815 (Harris Co., Aug. 10, 2009) (the " Texas action" ). While the prospective employer withdrew Xu's employment offer after initial discovery, the Texas action remains pending between QLF and Xu. In December 2009, Tower offered Xu employment as a " Portfolio Manager." QLF learned about Tower's offer on February 8, 2010. Plaintiffs assert that Xu's prospective position at Tower would require him to develop an automated trading model involving high-frequency trading strategies. Thus, according to plaintiffs, Tower's employment of Xu would, by its very nature, violate Xu's contractual and common law obligations under the Noncompete Agreement, and inevitably lead to disclosure of Quantlab's confidential information and trade secrets to Tower.

Prior to filing this action, QLF sought a temporary injunction in the Texas action to prevent Xu from beginning employment with Tower. On March 16, 2010, the court overseeing the Texas action entered a temporary injunction enjoining Xu from directly or indirectly using or disclosing Quantlab's proprietary financial models, source code, and backtesting results that contain Quantlab's trade secrets or confidential information. The temporary injunction entered in the Texas action does not, however, prevent Xu from beginning his employment at Tower.

3. This Litigation

On March 19, QLF brought this action against Tower. The original complaint included claims for tortious interference, unfair competition, misappropriation, unjust enrichment, negligence, and civil conspiracy. The sole basis for federal jurisdiction asserted in the complaint was diversity of the parties. Also on March 19, QLF brought an order to show cause to enjoin Xu's employment at Tower, which was scheduled to begin on March 22. After hearing from both parties, and having found, inter alia, that Xu's employment at Tower would cause irreparable harm to QLF, a temporary restraining order was entered to prevent Xu from beginning work at Tower. Pursuant to the Court's discussions with the parties, the March 19 Order provided that Tower was free to ask for a preliminary injunction hearing and expedited discovery, but until it did so, the parties consented to the temporary restraining order remaining in place with the exception that " the parties with the consent of this Court may litigate the merits of this action before the courts of Texas."

On March 30, Tower filed an " Original Petition in Intervention" in the Texas action. On April 13, QLF moved to strike Tower's petition to intervene in the Texas action. After hearing oral argument on April 22, the Texas court denied Tower's petition to intervene on April 23. At the time Tower's petition was denied, trial in the Texas action was set to begin in approximately sixty days ( i.e., late June).

On April 5, after having requested and received letters from QLF and Tower concerning the citizenship of their respective members, QLF was ordered, sua sponte, to show cause why this action should not be dismissed for lack of subject matter

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jurisdiction since it...

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