Quantlab Technologies Ltd v. Godlevsky

• Decision Date: 23 June 2010
• Docket Number: Civil Action No. 09-cv-4039.
• Citation: 719 F.Supp.2d 766
• Parties: QUANTLAB TECHNOLOGIES LTD. (BVI), et al., Plaintiff, v. Vitaliy GODLEVSKY, et al., Defendant.
• Court: U.S. District Court — Southern District of Texas

719 F.Supp.2d 766

QUANTLAB TECHNOLOGIES LTD. (BVI), et al., Plaintiff,

v.Vitaliy GODLEVSKY, et al., Defendant.

Civil Action No. 09-cv-4039.

United States District Court,

S.D. Texas,

Houston Division.

June 23, 2010.

COPYRIGHT MATERIAL OMITTED.

COPYRIGHT MATERIAL OMITTED.

Fazila Issa, Timothy Allen Rybacki, Allan Huddleston Neighbors, IV, Littler Mendelson PC, John Timothy Headley, Law Offices of Tim Headley, Houston, TX, for Plaintiff.

Joseph Y. Ahmad, Kinan Hab Romman, Todd W. Mensing, Ahmad, Zavitsanos & Anaipakos, P.C., David C. Holmes, Law Offices of David C. Holmes, James M. Cleary, Jr., Martin Disiere et al., Houston, TX, Amy L. Lindner, Mark A. Cameli, Ryan S. Stippich, Reinhart Boerner Van Deuren S.C., Milwaukee, WI, David G. Hanson, for Defendant.

Ping An, pro se.

MEMORANDUM AND ORDER

KEITH P. ELLISON, District Judge.

Pending before the Court are the following motions against Plaintiffs Quantlab Technologies, Ltd. (BVI) (“QLT”) and Quantlab Financial, LLC (“QLF”):

• Motion to Dismiss for Lack of Subject Matter Jurisdiction and for Failure to State a Claim Upon Which Relief can be Granted, filed by Defendants Andriy Kuharsky and Anna Maravina (Doc. No. 27) (“Kuharsky Motion”),

• Motion to Dismiss filed by Defendant Vitaliy Godlevsky (Doc. No. 33) (“Godlevsky Motion”), and

• Motion for Rule 11 Sanction filed by Defendants SXP Analytics, LLP (“SXP”) and Emmanuel Mamalakis (Doc. No. 46) (“SXP Motion”).

Having considered the parties' filings, all responses and replies thereto, and the applicable law, the Court finds that the Kuharsky Motion should be granted in part and denied in part, the Godlevsky Motion should be granted, and the SXP Motion should be denied.

I. BACKGROUND ¹

Plaintiffs QLT and QLF (collectively, “Quantlab”) filed a Complaint in this court on December 18, 2009, alleging violations of the Copyright Act, 17 U.S.C. § 101 et. seq. (“Copyright Act”) and the Computer Fraud and Abuse Act, 18 U.S.C. § 1030 et. seq. (“ CFAA ”), as well as misappropriation of trade secrets, conversion, civil conspiracy, and numerous other state causes of action against various combinations of six named defendants. All the claims in the case arise from an alleged conspiracy by former employees, who later formed or joined a competitor of Quantlab, to steal Quantlab's proprietary algorithms and computer software.

Quantlab and its affiliated companies comprise a high-frequency trading organization which rapidly trades various assets in financial markets around the world. To accomplish its goals, Quantlab developed mathematical models and computer algorithms to forecast the prices of assets and identify improper pricing that would allow profitable trades. Quantlab translated these models into proprietary computer software and hardware configurations that it uses to execute its trades. Quantlab considers the models, the algorithms, and the software implementing them to be confidential trade secrets.

Four of the defendants in this case are former employees of Quantlab. Defendants Kuharsky and Godlevsky hold doctorates in mathematics, and were hired by QLF in 2001 to work on its proprietary models and algorithms. Defendants Maravina and Ping An are software engineers hired by QLF in 2004 to work on the computer programs implementing those algorithms. Each employee signed an agreement to keep Quantlab's proprietary information confidential and to refrain from copying or accessing the software except for legitimate business purposes.

On March 9, 2007, QLF terminated Kuharsky and Godlevsky. According to the Complaint, before they left, each of them copied confidential information from Quantlab's computer system, including some or all of the source code for Quantlab's proprietary software. Some time after leaving, Kuharsky and Godlevsky joined with defendant Mamalakis to form SXP, the corporate defendant named in the Complaint. In addition, Kuharsky allegedly threatened to disclose Quantlab's trade secrets unless Quantlab paid him $25 million. Quantlab filed a separate lawsuit in response, asking a Texas state court to enjoin Kuharsky from revealing those secrets. That suit was later non-suited.

An left QLF in May 2007. According to the Complaint, he also copied software and other confidential materials before leaving, and provided those materials to SXP. In addition, Quantlab believes that An later became an employee of SXP.

Maravina remained at QLF for several more months, but, according to the Complaint, was persuaded to act as a “sleeper mole” for the conspiracy. (Doc. No. 1, ¶ 47.) In December, 2007, Maravina allegedly entered Quantlab's offices, copied confidential information from Quantlab computers onto a portable hard drive, and left with the drive. She never returned to the office, sending her resignation by electronic mail on January 3, 2008. When Quantlab uncovered evidence of her copying, it demanded that she return the drive with its contents intact. Although Maravina eventually returned the drive, its contents had been erased. During its forensic investigation, Quantlab discovered evidence that the drive had contained “large quantities” of Quantlab's confidential information, and that that information had been transferred to other computers before it was erased. (Doc. No. 1, ¶ 50.)

Quantlab eventually complained to the Federal Bureau of Investigation (“FBI”), which launched an investigation. On March 5, 2008, the FBI executed search warrants on SXP offices and the homes of Maravina and Kuharsky. The FBI remains in possession of the computers and drives seized in connection with those warrants.

The instant lawsuit was filed on December 18, 2009. Kuharsky and Maravina filed their Motion to Dismiss. (Doc. No. 27.) Godlevsky filed an Answer and Counterclaim (Doc. No. 24), then later filed his Motion to Dismiss (Doc. No. 33). SXP and Mamalakis filed separate Answers (Doc. Nos. 22-23), then later filed their joint Motion for Rule 11 Sanctions (Doc. No. 46). All motions have been fully briefed.

II. MOTION TO DISMISS STANDARDS A. Federal Rule 12(b)(1)

The court must dismiss a case when the plaintiff fails to establish subject matter jurisdiction. Fed.R.Civ.P. 12(b)(1). “It is incumbent on all federal courts to dismiss an action whenever it appears that subject matter jurisdiction is lacking.” Stockman v. Federal Election Com'n, 138 F.3d 144, 151 (5th Cir.1998). A case is properly dismissed for lack of subject matter jurisdiction when the court lacks the statutory or constitutional power to adjudicate the case. Home Builders Ass'n of Mississippi, Inc. v. City of Madison, Miss., 143 F.3d 1006, 1010 (5th Cir.1998) (internal quotation marks and citation omitted). The burden of establishing federal jurisdiction rests on the party seeking the federal forum. Stockman, 138 F.3d at 151.

B. Federal Rules 12(b)(6) and 12(c)

A court may dismiss a complaint for “failure to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). When considering a Rule 12(b)(6) motion to dismiss, a court must “accept the complaint's well-pleaded facts as true and view them in the light most favorable to the plaintiff.” Johnson v. Johnson, 385 F.3d 503, 529 (5th Cir.2004). “To survive a Rule 12(b)(6) motion to dismiss, a complaint ‘does not need detailed factual allegations,’ but must provide the plaintiff's grounds for entitlement to relief-including factual allegations that when assumed to be true ‘raise a right to relief above the speculative level.’ ” Cuvillier v. Taylor, 503 F.3d 397, 401 (5th Cir.2007) (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). That is, “a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. ----, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955).

In considering a motion to dismiss for failure to state a claim, a district court can consider the contents of the pleadings, including attachments thereto, as well as documents attached to the motion, if they are referenced in the plaintiff's complaint and are central to the claims. Collins v. Morgan Stanley Dean Witter, 224 F.3d 496, 499 (5th Cir.2000). A court can also refer to matters of public record when deciding a motion to dismiss. Chauhan v. Formosa Plastics Corp., 212 F.3d 595, 595 (5th Cir.2000).

A motion under Rule 12(b) must be filed before any responsive pleading. Fed.R.Civ.P. 12(b). However, a court may treat a motion to dismiss under Rule 12(b)(6), untimely filed after a responsive pleading, as a motion for judgment on the pleadings under Rule 12(c) based on a failure to state a claim on which relief may be granted. Jones v. Greninger, 188 F.3d 322, 324 (5th Cir.1999). In the Fifth Circuit, the standard for dismissal under Rule 12(c) is the same as that for dismissal for failure to state a claim under Rule 12(b)(6). Johnson v. Johnson, 385 F.3d 503, 529 (5th Cir.2004). Judgment on the pleadings is appropriate only if material facts are not in dispute and questions of law are all that remain. Voest-Alpine Trading USA Corp. v. Bank of China, 142 F.3d 887, 891 (5th Cir.1998).

III. KUHARSKY MOTION TO DISMISS

In the Kuharsky Motion, defendants Kuharsky and Maravina move to dismiss all claims against them, in three stages. First, they move to dismiss the copyright infringement claims against them for failure to state a claim upon which relief can be granted. Second, Kuharsky moves to dismiss the CFAA claim against him for failure to state a claim upon which relief can be granted. Finally, having sought dismissal of the only federal questions presented in the Complaint, Kuharsky moves to dismiss the other eleven state law claims against him for lack of supplemental jurisdiction. The Court will address each of these arguments in turn.

A. Copyright Infringement Claims

In its Complaint, Quantlab alleges that it owns valid and...