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IPOX Schuster, LLC v. Lazard Asset Management, LLC

United States District Court, N.D. Illinois, Eastern Division

January 20, 2018



          MATTHEW F. KENNELLY, District Judge:

         IPOX Schuster LLC is a small financial services firm, founded by Dr. Josef Schuster, that produces "indexes" of companies with recent initial public offerings (IPOs). An IPO is what takes place when a company starts to sell stock to the public, and an index is a collection of stocks grouped together to measure the performance of a market. IPOX claims that the indexes it offers can serve as a "pure proxy for economic growth and innovation"-an appealing service for the investing industry.

         Nikko Asset Management Co., a Japanese investment trust, wanted to issue a financial product composed of the stocks of American companies that experienced an IPO in the past five years-the "Nikko Fund." Though they both aim to approximate the same market, there is a distinction between an index, a measurement of a market, and a fund, a product comprising the stocks of companies within that market.

         Nikko contracted with Lazard Asset Management (LAM) and Lazard Japan Asset Management (LJAM), together "Lazard, " to identify the companies that should be included within the Nikko Fund. IPOX alleges that the defendants violated its rights in various ways during the development and marketing of the Nikko Fund.

         Nikko and Lazard have moved for summary judgment on the thirteen counts in IPOX's complaint and on IPOX's request for punitive damages. IPOX has cross-moved for summary judgment on the defendants' affirmative defenses.


         Nikko is a financial services corporation organized under the laws of Japan. Several years prior to this litigation, it operated the Nikko Growing Venture Fund, an investment trust that invested in Japanese companies with IPOs in the previous five years. In late 2013, the company wanted to create an analogous fund that would invest in American companies with recent IPOs. This fund, the subject of this litigation, is referred to as the Nikko Fund.

         To set up this fund, Nikko asked LJAM and LAM to select and trade the stocks in the Nikko Fund. Unlike some passively-managed funds, whose composition is determined by an index, the Nikko Fund is an actively managed fund whose composition is based upon the research and advice of investment advisors. In an agreement between Nikko and LAM establishing their relationship, they agreed that LJAM would provide services to LAM to help form the Nikko Fund.

         LAM and LJAM both contend they were unfamiliar with IPOX before beginning work on the Nikko Fund. But by August 2014, prior to any direct contact with IPOX employees, LAM employees were acquainted with the IPOX indexes. LAM employees utilized information about the IPOX index to guide their own investment decisions. In one e-mail sent in early August, an analyst described how he compared the Nikko Fund model against the performance of the IPOX index. IPOX Ex. 101 at LAM00020446. Another e-mail expressed concern that the weighting of the Nikko Fund-the proportion of certain investments relative to others-disfavored large corporations as compared to the IPOX index. IPOX Ex. 69 at LAM00016478. The record does not identify the source of the information used by the LAM employees. At the same time these e-mails were exchanged, Erik Miller, a LAM employee, e-mailed a question to Schuster about how he compiled the IPOX index. Schuster provided information to Miller that he later conceded was confidential.

         Michael Krenn, the LAM employee responsible for securing licenses for services like the IPOX index, e-mailed Schuster to request a license for the index. Lazard Ex. 96 at IPOX00000493. IPOX offered prospective customers the option of a data license, which authorizes the licensee to use the IPOX indexes internally, and a product license, which permits use of the IPOX indexes to create a new product. IPOX LR 56.1 Stmt. ¶¶ 11-12. IPOX charges data licensees a flat cost and product licensees a percentage of the value of IPOX-based products that they sell. Id. Schuster provided Krenn, and several other LJAM employees, a free trial: "Happy to extend this for one month. Please note that a license is required, should you be interested in using the index etc. for a product." Lazard Ex. 97 at LAM00000416. Schuster also protected the confidentiality of his information by including, in some attachments, notices like "Confidentiality Disclaimer applies." See, e.g., Lazard Ex. 85 at IPOX00004904.

         LJAM employees began to contact Schuster with specific questions about the inner workings of the IPOX index. Schuster provided detailed information on how the IPOX index was compiled. See, e.g., Lazard Ex. 87 at IPOX00006888 (e-mail from Schuster describing "the index construction process"). At one point, Shintaro Kambara, an LJAM employee, mentioned in an e-mail that he had been involved in an IPO fund with Kosaka, who was already corresponding with Schuster. Lazard Ex. 142 at IPOX00006875. Kosaka, Kambara's manager, told Kambara not to mention the existence of the IPO fund. IPOX Ex. 130 at LAM00061607. Schuster e-mailed Kambara back to confirm that an IPO fund was being formed. In response, Kambara stated: "Actually, we don't decide to launch a IPO fund now and we are conducting due diligence of relevant IPO Index." Lazard Ex. 89 at IPOX00001755. Schuster and Lazard employees continued to correspond.

         In mid-September 2014, representatives of Nikko, LJAM, and LAM traveled to New York City to present the Nikko Fund to SMBC Nikko, a major potential investor. At the presentation, the defendants shared a PowerPoint that touted the benefits of investing in the U.S. IPO market. The title slide included the name of each defendant. One slide stated "The Post IPO Index (IPOX-100US) Tends to Perform Well in Almost Every Market Environment." IPOX Ex. 72 at LAM00153200 (PowerPoint). Other slides also referred to IPOX's strong performance.

         Separately, Nikko introduced marketing materials onto its website around October 1, 2014, the date of the launch of the Nikko Fund. The website was targeted solely to Japanese investors, was written in Japanese, and did not provide an option to purchase into the Nikko Fund from the site itself. On the website, the IPOX trademark was used in a chart comparing the strong performance of the IPOX index against three other indexes that did not measure the IPO market.

         While using a search engine directed towards Japanese websites, Schuster learned of the materials on the Nikko website on October 16, 2014. By the end of October, Schuster, suspecting that Lazard was not merely conducting due diligence of the IPOX index, e-mailed Krenn to "retract" the "data license proposal" he extended to LAM in order to secure a license with Nikko directly, the "funds sponsor." Lazard Ex. 106 at IPOX00002949. In his response e-mail, Krenn implied he did not know which fund Schuster was talking about. Id. Schuster and Krenn never reached an agreement on a license.

         In August 2014, Schuster had separately begun negotiations with Nikko for a license after Ronald Cajetan, an IT professional employed by Nikko, requested a data license. Nikko Ex. N at IPOX00007060. Schuster sent Cajetan a proposal, to which Cajetan stated "we are OK to move forward with the signing." But Cajetan responded to his own message to inform Schuster that the Nikko "business side" asked Cajetan not to sign the license. On October 16, 2014, after learning of Nikko's use of the IPOX mark on its Japanese website, Schuster e-mailed Cajetan and instructed him to direct Nikko's legal counsel to reach out to IPOX regarding the alleged infringement. Cajetan and Schuster began to negotiate an agreement again.

         Schuster insisted that Nikko take a product license. Cajetan responded: "After your product's license infringement by us, I know I should not ask you but would it be possible to . . . revert back to [the data license] you first quoted for me." IPOX Ex. 91 at Nikko0000058. Cajetan e-mailed Schuster a marked-up proposal, to which Schuster agreed. To ensure Schuster had adopted the marked-up proposal, Cajetan wanted to see the revised agreement before assenting to it. On October 28, Schuster responded: "Let me know if you are OK with countersigning then I will mail the original documents to you." This document, which Schuster e-mailed to Cajetan on October 29, 2014, is the one IPOX alleges is the basis of an express contract between Nikko and IPOX. The "business side" of Nikko again intervened to instruct Cajetan to reject the agreement. Nikko also removed all reference to IPOX on its website by February 2015.

         Under the terms of the purported agreement formed at the end of October, IPOX was responsible for sending Nikko daily updates on the performance of the IPOX indexes. It began sending data updates in February upon advice of its counsel.

         The current version of IPOX's complaint in this lawsuit asserts fourteen claims against Nikko, LJAM, and LAM. IPOX alleges the defendants committed misappropriation under Illinois common law (Count 1) and the Illinois Trade Secrets Act (ITSA), 765 ILCS 1065/2 (Count 2), and infringed IPOX's trademark under Illinois common law and the Lanham Act, 15 U.S.C. § 1114 (Count 3). The Court previously dismissed the fourth count of IPOX's amended complaint. IPOX also alleges the defendants violated the Illinois Deceptive Trade Practices Act, 815 ILCS 510/2 (Count 5), and the Illinois Trademark Registration Protections Act, 765 ILCS 1036/65(a) (Count 6). Against LJAM and LAM, IPOX alleges fraud (Count 7) and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, 815 ILCS 505/2 (Count 8). IPOX also asserts against Nikko a claim for breach of express contract (Count 9) and a claim for breach of implied contract (Count 10). IPOX also alleges LAM breached an implied contract (Count 11), interfered in IPOX's contract with Nikko (Count 13), and interfered with a prospective business relationship (Count 14). IPOX also asserts an unjust enrichment claim against all defendants (Count 12).

         Nikko and Lazard have both moved for summary judgment. Lazard also moved for summary judgment on IPOX's request for punitive damages on several counts. IPOX cross-moved for summary judgment on Nikko and Lazard's affirmative defenses.

         Discussion [2]

         A party is entitled to summary judgment if it can demonstrate that the non-movant has not presented enough evidence for a reasonable jury to find in its favor. Fed.R.Civ.P. 56(a); Marr v. Bank of America, N.A., 662 F.3d 963, 966 (7th Cir. 2011). The Court grants the non-movant all reasonable inferences supported by the record. United States ex rel. Yannacopoulos v. Gen. Dynamics, 652 F.3d 818, 823 (7th Cir. 2011).

         Before addressing the specific claims asserted by IPOX, the Court must consider whether LJAM acted as an agent of LAM in its dealings with IPOX. The existence of an agency relationship is a question of fact to be determined by the jury, unless the relationship is "so clear as to be undisputed." Rankow v. First Chicago Corp., 870 F.2d 356, 359 (7th Cir. 1989), quoting St. Ann's Home for the Aged v. Daniels, 95 Ill.App.3d 576, 579, 420 N.E.2d 478, 481 (1989). An agent may possess express authority, which is directly granted in express terms, or implied authority, which is inferred from the conduct of the principal. Curto v. Illini Manors, Inc., 405 Ill.App.3d 888, 892, 940 N.E.2d 229, 233 (2010). There is evidence from which a reasonable jury could find that LAM conferred both express and implied authority to LJAM. Specifically, there is evidence of express authority based upon the agreement between Nikko and LAM, which stated that LJAM was an affiliate of LAM that would "provide services to [LAM] to intermediate for the conclusion of this agreement." Lazard Ex. A at LAM00000552. And there is evidence that LJAM derived implied authority from its course of conduct with LAM. Specifically, LAM described LJAM as its subsidiary. Mazzari Decl. ¶ 1. LAM did not rebuke LJAM for asking if it was interested in forming a business relationship between Nikko and LAM. Lazard LR 56.1 Stmt. ¶ 13. LJAM employees were responsible for "introduc[ing] the strategies . . . run by Lazard New York . . . to Japanese investors." Lazard Ex. 8 at 10 (Kosaka deposition). These circumstances are sufficient for a jury to reasonably conclude that LAM intended LJAM to act as its agent in dealings related to Nikko. Curto, 405 Ill.App.3d at 892, 940 N.E.2d at 233.

         I. Misappropriation

         A. Count 1: Misappropriation under Illinois common law

         IPOX alleges that Nikko, LJAM, and LAM misappropriated its index under Illinois common law. As the Court previously held, in Illinois the common law tort of misappropriation applies only to non-confidential information given the preemptive effect of the Illinois Trade Secrets Act (ITSA) with regard to confidential information. IPOX Schuster, LLC v. Nikko Asset Mgmt. Co., 191 F.Supp.3d 790, 802 (N.D. Ill. 2016).

         The "hot news" tort, first described in International News Service v. Associated Press, 248 U.S. 215 (1918), applies in cases in which "(i) a plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant's use of the information constitutes free-riding on the plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the ability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be substantially threatened." Nat'l Basketball Ass'n v. Motorola, Inc. (NBA), 105 F.3d 841, 845 (2d Cir. 1997) (interpreting New York state misappropriation law). See Chicago Bd. Options Exch., Inc. v. Int'l Sec. Exch., L.L.C., 2012 IL App (1st) 102228, ¶ 45, 973 N.E.2d 390, 404-05 (Illinois and New York law on misappropriation is the same).

         IPOX attempts to analogize its claim to the claim asserted in Board of Trade of City of Chicago v. Dow Jones & Co., 98 Ill.2d 109, 456 N.E.2d 84 (1983). In Board of Trade, the Illinois Supreme Court affirmed a declaratory judgment that the Chicago Board of Trade's plan to issue a futures contract based upon the Dow Jones Industrial Average, an index, constituted misappropriation. Id. at 121-23, 456 N.E.2d at 89-91.

         IPOX's allegations depart from Board of Trade in two ways usefully understood through the NBA elements. First is the requirement that the information be time-sensitive. NBA, 105 F.3d at 845. In Board of Trade, the proposed product was a passively-managed security, meaning that its composition was determined entirely on the most recent movements of the index on which it was based. Bd. of Trade, 98 Ill.2d at 114, 456 N.E.2d at 86. The alleged use of the IPOX index is not time-sensitive, as the Nikko fund is not passively managed via the movements of the IPOX index. Rather, the Lazard employees actively manage the fund, using information other than that provided by the IPOX index.

         Second, for this same reason, IPOX cannot establish that Lazard's use of its index constitutes free-riding. NBA, 105 F.3d at 845. The product that the Chicago Board of Trade wanted to sell changed whenever the Dow Jones Industrial Average changed: if the composition of the index shifted, the composition of the futures contract automatically shifted. Bd. of Trade, 98 Ill.2d at 114, 456 N.E.2d at 86. The composition of the Nikko Fund may change alongside the IPOX index, but that is only because analysts at LAM and LJAM are tasked with constructing a basket of securities that track the same market of companies with recent IPOs that the IPOX index measures. The efforts of LAM and LJAM, not the IPOX index, control the composition of the Nikko Fund.

         For these reasons, IPOX cannot sustain a common law misappropriation claim. The defendants are entitled to summary judgment on Count 1.

         B. Count 2: Misappropriation under the Illinois Trade Secrets Act

         IPOX alleges that Nikko, LAM, and LJAM misappropriated its trade secrets in violation of the ITSA, 765 ILCS 1065/2. To sustain a claim for misappropriation of a trade secret, IPOX must show (1) there was a trade secret, (2) the trade secret was misappropriated, and (3) the defendants used the trade secret in the course of business. Learning Curve Toys, Inc. v. PlayWood Toys, Inc., 342 F.3d 714, 721 (7th Cir. 2003). The defendants argue that they are entitled to summary judgment because IPOX cannot show the information at issue was a trade secret.

         The ITSA defines a trade secret as information that is sufficiently secret to derive economic value and is subject to reasonable efforts to maintain its secrecy. 765 ILCS 1065/2(d). If the plaintiff does not take reasonable steps to maintain the secrecy of the information, the law will not consider the information to be a trade secret. Rockwell Graphic Sys., Inc. v. DEV Indus., Inc., 925 F.2d 174, 177-79 (7th Cir. 1991). If the plaintiff intentionally releases the information to the public, he or she "can no longer make a successful trade secrets misappropriation claim because the information is not subject to reasonable efforts to maintain secrecy." Ho v. Taflove, 648 F.3d 489, 504-05 (7th Cir. 2011).

         As Lazard notes, Schuster has presented a great deal of information about the IPOX indexes to the public through the IPOX website, PowerPoint presentations, and a publicly-released book chapter. Any information contained in these publicly-available disclosures cannot be a trade secret. See Dkt. No. 138 (stipulation identifying all content available on the IPOX website from January 1, 2012 through December 31, 2015); Lazard Exs. 46-55 (collected PowerPoints); Lazard Ex. 73 (Josef A. Schuster, Indexing the IPO Sector with IPOXTM Indices, in Initial Public Offerings: An International Perspective (Greg N. Gregoriou ed. 2006)).

         At issue is whether IPOX took reasonable steps to protect the confidentiality of non-public information that Lazard obtained from IPOX, either through its free trial or through e-mail correspondence with Schuster. As IPOX notes, what is reasonable for one entity to take may be unreasonable for another, smaller entity. See Elmer Miller, Inc. v. Landis, 253 Ill.App.3d 129, 134, 625 N.E.2d 338, 342 (1993) ("reasonable steps for a two or three person shop may be different from reasonable steps for a larger company."). IPOX has four employees, Schuster Decl. ¶ 3, and it may be less capable than its larger peers of bearing the costs and burdens of completely securing its trade secrets.

         IPOX has produced enough evidence to permit a reasonable jury to find that it took reasonable steps to protect its non-public information. One document that Schuster e-mailed to an LJAM employee contained strategies on how the IPOX indexes were composed. It was marked with "Confidentiality disclaimer applies" at the bottom of each page. Lazard Ex. 14 at 491-92 (Schuster deposition); Lazard Ex. 85 at IPOX00004894 (e-mails between Schuster and Kosaka). Likewise, after Schuster shared a free license with LAM employees, he notified Krenn that "a license is required, should you be interested in using the index etc. for a product." Lazard Ex. 97 at LAM00000415. Schuster continued to pursue a product license after this exchange. To be clear, a reasonable jury could find in Lazard and Nikko's favor: the facts show that Schuster's efforts to protect the secrecy of the information were often less than painstaking. Erik Miller, a former employee of LAM, e-mailed Schuster with a question about the composition of the IPOX index, which Schuster answered without any effort to protect the confidentiality of that information. Lazard Ex. 84 at IPOX0003073 (e-mails between Miller and Schuster). Summary judgment, however, is ...

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