Signal Financial Holdings LLC et al v. Looking Glass Financial LLC et al
Filing
79
OPINION AND ORDER Signed by the Honorable Joan H. Lefkow on 1/31/2018: The preliminary injunction, as modified, stands.Mailed notice(mad, )
IN THE UNITED STATES DISTRICT COURT FOR THE
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
SIGNAL FINANCIAL HOLDINGS LLC, and )
SIGNAL FUNDING LLC,
)
both Delaware limited liability companies,
)
)
Plaintiffs,
)
)
v.
)
)
LOOKING GLASS FINANCIAL LLC,
)
a Delaware limited liability company, and
)
FARVA JAFRI, and individual,
)
)
Defendants.
)
Case No. 17 C 8816
Judge Joan H. Lefkow
ORDER AND OPINION 1
The court held an evidentiary hearing regarding Signal Financial Holdings LLC and
Signal Funding LLC’s (together, Signal) preliminary injunction, during which the parties
presented testimony and documentary evidence as well as final arguments to the court. Based on
the evidence received, including the testimony of witnesses and the exhibits introduced by the
parties and the arguments of counsel, the court enters the following findings of fact and
conclusions of law under Rules 52(a) and 65(d) of the Federal Rules of Civil Procedure. These
findings are preliminary in nature and are not binding as the case progresses. Michigan v. U.S.
Army Corps of Engineers, 667 F.3d 765, 782 (7th Cir. 2011)
FINDINGS OF FACT
Litigation funding, also called pre-settlement funding or legal funding, involves lending
money to a plaintiff against the potential value of a verdict or settlement. Signal, a subsidiary of
777 Partners, is a member of the industry that focuses on bodily injury claims resulting from
motor vehicle accidents, the majority of which end in settlement. Established on July 1, 2016, it
1
The court’s jurisdiction rests on 28 U.S.C. § 1331. Venue is proper in the Northern District of
Illinois, Eastern Division, pursuant to 28 U.S.C. § 1391.
1
originally had only two employees: Gary Chodes, then acting Chief Executive Officer (CEO),
and Farva Jafri, who was hired on July 25, 2016. Throughout her time at Signal, Jafri was a
member of the executive team working under several titles, including chief operating officer,
chief financial officer, chief information security officer, executive vice-president of operations,
and general counsel.
To attract potential investors and raise capital, Signal creates Power Point presentations,
known as “slide decks,” to present in a compelling manner its specific business model and
explain why it is an attractive investment. Jafri, Chodes, and Juan Arciniegas, who joined 777
Partners in August 2016, worked together to create one such slide deck.
At some point, Jafri’s relationship with Signal soured, and on September 28, 2017, she
submitted a resignation letter, effective immediately. Signal and Jafri then attempted to negotiate
a transition agreement, but it never came to fruition, and she received no compensation for any
time at Signal after September 28. During the negotiations, however, Jafri continued to have
access to her Signal email account. On October 7, 2017, Jafri logged into her Signal email,
searched for specific emails and files and forwarded them to her personal email account. These
files included the previously mentioned slide deck, an EXCEL spreadsheet containing a financial
model of projected operations, draft employment agreements, and underwriting guidelines.
Shortly thereafter, Jafri founded Looking Glass, a litigation funding company and competitor of
Signal. Using the forwarded slide deck as a “template,” Jafri created a Looking Glass slide deck.
She then sent her slide deck to approximately ten separate potential investors.
Signal soon came into possession of a copy of the Looking Glass slide deck. It
immediately began an internal investigation and soon discovered that Jafri had forwarded the
documents to herself. Signal alleges that those documents, including the slide deck, are trade
secrets. It filed counts of trade secret misappropriation under both the Defend Trade Secrets Act
2
(DTSA) and the Illinois Trade Secrets Act (ITSA) against Jafri and Looking Glass. 2 Signal then
sought and received a temporary restraining order enjoining Jafri and Looking Glass from using
the forwarded documents. It later moved for a preliminary injunction on the same grounds. When
presenting its motion for preliminary injunction on January 3, 2018, Signal argued that an
evidentiary hearing was unnecessary because defendants had not mounted any factual defense.
The court, recognizing that the preliminary injunction could be dissolved at any time, granted
Signal’s motion and allowed Looking Glass one week to submit a memorandum identifying
contested issues of fact that would be clarified at an evidentiary hearing. 3 After reviewing the
memorandum, the court scheduled a hearing for January 18. The hearing was limited in scope to
issues raised by defendants in their memorandum. 4 Those issues included the history and
intended applicability of an employee handbook, whether certain draft employment agreements
are trade secrets, and, most important to the preliminary injunction, whether the slide deck is a
trade secret. 5
An evidentiary hearing was held on January 18, 19, and 24. Each side presented
documentary evidence, which included the verified complaint, as well as testimonial evidence.
Signal produced two witnesses. The first was David Hough, Signal’s current CEO on whose
2
Signal also brought a count for violation of the Computer Fraud and Abuse Act, 18 U.S.C. §
1030, et seq., but that claim is not at issue here.
3
“[T]he court need not conduct an evidentiary hearing unless one is called for as a result of a fact
issue created by the response to a motion for a preliminary injunction.” Dexia Credit Local v. Rogan, 602
F.3d 879, 884 (7th Cir. 2010) (collecting cases). Indeed, “in any case in which a party seeks an
evidentiary hearing, he must be able to persuade the court that the issue is indeed genuine and material
and so a hearing would be productive—he must show in other words that he has and intends to introduce
evidence that if believed will so weaken the moving party's case as to affect the judge's decision on
whether to issue an injunction.” Ty, Inc. v. GMA Accessories, Inc., 132 F.3d 1167, 1171 (7th Cir. 1997).
4
At the time the memorandum was filed, Jafri was not represented. Looking Glass’s counsel later
filed an appearance on her behalf, and the court assumes that the motion was also applicable to her
defense.
5
The court also included the origin of an employee and vendor list that defendants claimed did
not originate with Signal. Prior to the hearing, Signal voluntarily withdrew its trade secrets claims as to
that document.
3
declaration it relied for its preliminary injunction motion. 6 Hough has nearly twenty-five years of
professional experience in finance, as well as thirteen years of experience specific to presettlement financing. Signal’s second witness was Arciniegas, the 777 Partners employee who
had participated in creating the slide deck. He holds an MBA from Duke University and spent
ten years on Wall Street advising private equity firms on their acquisitions of targets, including
advising on the structure of those acquisitions, evaluating the merits of the acquisitions, and
raising capital to finance those acquisitions. Jafri testified on behalf of the defendants. She
received an MBA and JD from the University of Illinois in 2015. After receiving those degrees,
Jafri worked for a year at a start-up that focused on healthcare IT. Signal was her first foray into
litigation funding.
Regarding the history and intended applicability of an employee handbook, the parties
offered relatively little evidence, which may be because the issue is somewhat of a red herring to
the litigation. The parties agree that Jafri took part in drafting it and knew its contents, though
she never signed a certificate of receipt acknowledging that she was bound by it. As to the two
draft employment agreements, which also received relatively little attention, the court finds that
they were likely red-lined by Signal’s counsel as evidenced by Hough’s testimony and the Latera
Change Pro summary reports at the end of each agreement. The court also finds that the red-lined
draft agreements, which are marked “CONFIDENTIAL” on their first pages, were sent to the
third-parties, that is, the prospective employees or their counsel.
The slide deck necessitates greater discussion. As previously stated, Chodes, Jafri, and
Arciniegas worked together on the slide deck. According to Arciniegas, the original distribution
of work was for Jafri to source industry statistics and Arciniegas to digest that information and
present it in a compelling manner. At some point, Chodes decided that Jafri should no longer be
6
Chodes was terminated from Signal in late March 2017. Hough took over as interim CEO that
April and became permanent CEO on September 1, 2017.
4
involved in preparing the slide deck and instructed her to transfer the whole project to
Arciniegas, which she did. It is undisputed that the slide deck contains, in part, publicly available
information, including citations to where that information originated. Indeed, Jafri testified
regarding information she retrieved from a public report by Colonnade Ltd. and used in the slide
deck. The display of that information in the slide deck, however, differs from the presentation
format in the Colonnade report. Additionally, though information taken from public sources was
cited to in footnotes in the slide deck, the Colonnade report is not listed as a source, and
Arciniegas testified that he had not seen the report until this litigation. All witnesses agreed that
the public information in the slide deck was organized and presented in a manner to best pitch
Signal to potential investors.
In addition to the publicly available information, the slide deck also contains financial
calculations performed by Arciniegas. For example, Arciniegas testified that he calculated
potential returns under different market scenarios and included his results in the slide deck in an
effort to entice potential investors to commit capital to Signal. Jafri testified that she knew
Arciniegas’s financial analysis was included in the slide deck. (Tr. 1/19/2018 at 172:23–25.)
Hough testified that standard practice at Signal required all third parties to sign a nondisclosure agreement (NDA) before Signal sent out a slide deck. He has personally sent out five
or six NDAs for signature. Arciniegas testified that, during his time on Wall Street, he created
close to two hundred slide decks used to market various companies to investors, and he was
personally responsible for ensuring that potential viewers agreed to an NDA before a deck was
distributed. His responsibility at Signal was the same. Arciniegas testified that Jafri was expected
to do this also because she was a member of the “investment team,” and all members were
required to get NDAs, but the investment team was apparently a 777 Partners team, not a Signal
team. Jafri, on the other hand, testified that she was never informed that slide decks being sent to
investors required NDAs. On cross, however, she was asked whether one of her responsibilities
5
at Signal was drafting NDAs, and she responded, “I don’t recall drafting an NDA.” (Tr. 1/19/18
175:5.) She was then presented with a print-out of her LinkedIn page, which she admitted she
created. When describing her job experience at Signal, the first of numerous responsibilities
listed on her LinkedIn page is “[d]rafted NDAs . . . .” (Pls.’ Hearing Ex. Q at 3.) She was not
rehabilitated on re-direct. Accordingly, the court sees Jafri’s credibility as impugned and finds
Hough and Arciniegas are more credible in stating that Signal’s practice was to require NDAs be
signed before sending out slide decks.
FINDINGS OF LAW
A party seeking a preliminary injunction must demonstrate that (1) its claim has some
likelihood of success on the merits; (2) traditional legal remedies would be inadequate; and (3)
absent injunctive relief, it will suffer irreparable harm in the period prior to final resolution of its
claim. Girl Scouts of Manitou Council v. Girl Scouts of the U.S. of Am., Inc., 549 F.3d 1079,
1086 (7th Cir. 2008). If the moving party satisfies these threshold requirements, the court must
balance the threatened injury to the moving party with the threatened harm the injunction may
inflict on the nonmovant. Id. The court also must consider the public interest in either the grant
or denial of the injunctive relief. Id. In applying these criteria, the court uses a “sliding scale”
approach: if a claim is very likely to succeed on the merits, less harm to the plaintiff will be
required to justify injunctive relief and vice versa. Abbott Labs. v. Mead Johnson & Co.,
971 F.2d 6, 12 (7th Cir. 1992).
I.
Likelihood of Success on the Merits
A.
The Slide Deck
To succeed on a request for a preliminary injunction, the plaintiff must demonstrate a
“‘better than negligible’ chance of success on the merits of at least one of his claims.” Girl
Scouts, 549 F.3d at 1096. The court finds that Signal’s claims as to the slide deck far surpass
“better than negligible.”
6
The Defend Trade Secrets Act of 2016 (DTSA) creates a private right of action in favor
of the “owner of a trade secret that is misappropriated . . . if the trade secret is related to a
product or service used in, or intended for use in, interstate or foreign commerce.” 18 U.S.C.
§ 1836(b)(1). Under the DTSA, a trade secret includes
all forms and types of financial, business, scientific, technical, economic, or
engineering information, including patterns, plans, compilations, program
devices, formulas, designs, prototypes, methods, techniques, processes,
procedures, programs, or codes, whether tangible or intangible, and whether or
how stored, compiled, or memorialized physically, electronically, graphically,
photographically, or in writing if—
(A) the owner thereof has taken reasonable measures to keep such information
secret; and
(B) the information 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[.]
18 U.S.C. § 1839(3). Under the DTSA, “misappropriation” is defined as
(A) acquisition of a trade secret of another by a person who knows or has reason to know
that the trade secret was acquired by improper means; or
(B) disclosure or use of a trade secret of another without express or implied consent by a
person who-(i) used improper means to acquire knowledge of the trade secret;
(ii) at the time of disclosure or use, knew or had reason to know that the
knowledge of the trade secret was-(I) derived from or through a person who had used improper means to
acquire the trade secret;
(II) acquired under circumstances giving rise to a duty to maintain the
secrecy of the trade secret or limit the use of the trade secret; or
(III) derived from or through a person who owed a duty to the person
seeking relief to maintain the secrecy of the trade secret or limit the use of
the trade secret; or
(iii) before a material change of the position of the person, knew or had reason to
know that-(I) the trade secret was a trade secret; and
(II) knowledge of the trade secret had been acquired by accident or
mistake[.]
Id. § 1839(5). “Improper means” is defined as “theft, bribery, misrepresentation, breach or
inducement of a breach of a duty to maintain secrecy, or espionage.” 18 U.S.C. § 1839(6)(A).
7
The definitions of “trade secret,” “misappropriation,” and “improper means” are
substantially similar under the Illinois Trade Secrets Act (ITSA). See 765 ILCS 1065/2(a), (b),
(d). “Although [ITSA] explicitly defines a trade secret . . . Illinois courts frequently refer to six
common law factors (which are derived from § 757 of the Restatement (First) of Torts) in
determining whether a trade secret exists: (1) the extent to which the information is known
outside of the plaintiff's business; (2) the extent to which the information is known by employees
and others involved in the plaintiff's business; (3) the extent of measures taken by the plaintiff to
guard the secrecy of the information; (4) the value of the information to the plaintiff's business
and to its competitors; (5) the amount of time, effort and money expended by the plaintiff in
developing the information; and (6) the ease or difficulty with which the information could be
properly acquired or duplicated by others.” Learning Curve Toys, Inc. v. PlayWood Toys, Inc.,
342 F.3d 714, 722 (7th Cir. 2003). ITSA is slightly more restrictive, however, for in addition to
showing that a trade secret was misappropriated, a plaintiff must also show that the trade secret
was used in the defendant’s business. Id. at 721.
The slide deck is a trade secret under both DTSA and ITSA. There is no dispute that the
slide deck is, in part, a compilation of publicly available information. But “[a] trade secret can
exist in a combination of characteristics and components, each of which, by itself, is in the public
domain, but the unified process, design and operation of which, in unique combination, affords a
competitive advantage and is a protectable secret.” 7 3M v. Pribyl, 259 F.3d 587, 595–96 (7th Cir.
2001). Jafri in fact admitted that she had made a suggestion to recompile certain public
information “in such a way that it presented the statistics in a way the company wanted to
present it.” (Tr. 1/19/2018 at 190:15–17.) The slide deck is not solely a compilation of public
information. Hough testified that certain slides contain financial and statistical information
7
Though the Seventh Circuit was interpreting the definition of “trade secret” under the Wisconsin
Uniform Trade Secrets Act, that definition is substantially similar to the DTSA and ITSA definitions. See
Wis. Stat. § 134.90(1)(c).
8
created by Arciniegas. Jafri admitted as much on cross examination. (See id. at 186:14–21.)
Hough and Arciniegas each credibly testified that before a third party could see the slide
deck, the third party was required to sign an NDA. A copy of a representative NDA is attached to
Hough’s declaration. Additionally, each slide in the deck is marked “CONFIDENTIAL – NOT
FOR DISTRIBUTION.” These are reasonable measures to keep the slide deck secret. 8 And for
good reason, as it is a valuable resource. There is no dispute that the slide deck was used by
Signal to acquire investor funding. Signal is one player in the litigation funding industry, and it
spent considerable time and effort creating the slide deck to best present itself and its strategies
to potential investors. There is no dispute that investors see numerous slide decks and that a slide
deck must be compelling so as to attract attention and cut through the pack. Signal’s slide deck
was apparently successful in that regard. It is telling that Jafri used the slide deck and
incorporated much of it wholesale into the Looking Glass slide deck, including each slide being
marked “CONFIDENTIAL – NOT FOR DISTRIBUTION.” The Looking Glass slide deck was
sent to potential investors, and it appears to the court that at least some of those investors have
indeed given money to Looking Glass. 9
The slide deck was also misappropriated. Jafri admittedly acquired the slide deck when
she sought it out specifically and sent it to herself. More than a week before that, she had
tendered a resignation letter that was effective immediately. Though she was negotiating a
potential transfer agreement at the time, she was, by her own doing, not employed at Signal. That
her email account had not been shut down is evidence of Signal’s negotiating in good faith and
hoping to reach a transition agreement. Under these circumstances, it is reasonable to find that
8
Defendants did not challenge Signal’s efforts to maintain the secrecy of the slide deck in their
memorandum in support of an evidentiary hearing, and the court thus considers any challenge waived.
9
At the evidentiary hearing, defendants’ counsel stated that “not all ten have come up with
money.” (Tr. 1/19/2018 at 196:23.) This leads the court to infer that at least some investors have come up
with money.
9
Jafri’s actions in forwarding the slide deck, which she admits contained Arciniegas’s financial
analysis, were not authorized by Signal. Based on her education as well as her responsibilities at
Signal, she had reason to know that the slide deck was not to be shared openly and that as an
executive officer she had a duty to maintain its secrecy. “Although an employee may take
general knowledge or information he or she has developed during their employment, he or she
may not take any confidential information, including trade secrets.” Stampede Tool Warehouse,
Inc. v. May, 272 Ill. App. 3d 580, 590, 651 N.E.2d 209, 216–17 (1995), as modified (June 14,
1995) (internal citations omitted).
The court therefore finds that Signal has a much better than negligible chance of
prevailing on its misappropriation claim as to the slide deck.
B.
The Other Claimed Documents
The court finds that the draft employee agreements are not trade secrets. They do not hold
any independent economic value, and any claim of attorney-client privilege, to the extent it is
even relevant to this inquiry, was waived when the drafts were sent to third parties. Signal has
not presented any plausible argument that the draft agreements hold economic value as a result
of their not being generally known. While Signal argued at closing that the agreements can serve
as templates for future agreements, thereby saving it legal fees, that would be the case even if the
documents were public. While “the threshold for establishing likelihood of success is low,”
Michigan, 667 F.3d at 782, Signal has not met that burden.
As to the other documents claimed as trade secrets, including a financial spreadsheet and
underwriting guidelines, defendants have not offered any argument as to why they are not trade
secrets. Accordingly, for purposes of the preliminary injunction, the court finds them to be trade
secrets that were acquired by improper means.
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II.
Inadequate Remedy and Irreparable Injury
“Irreparable harm occurs in the context of trade secret misappropriation where the trade
secret misappropriation results in the intangible loss of competitive advantage, customers, and
goodwill.” Optionmonster Holdings, Inc. v. Tavant Techs., Inc., No. 10 C 2792, 2010 WL
2639809, at *9 (N.D. Ill. June 29, 2010) (citation omitted). Indeed, “Under Illinois law, there is a
rebuttable presumption of irreparable harm in cases involving misappropriation of trade secrets.”
Id.
Here, Signal is at risk of losing potential investors as well as its competitive advantage,
both irreparable injuries. Calculating damages for these types of injuries is not practicable, and
therefore no remedy at law could adequately compensate Signal. See Foodcomm Int'l v. Barry,
328 F.3d 300, 304 (7th Cir. 2003).
III.
Balance of the Hardships
Signal stands to suffer irreparable harm because of defendants’ actions. It seeks an
injunction preventing them from benefitting from its misappropriated trade secrets. Because
Signal has such a strong chance of succeeding on the merits with regard to the slide deck, any
harm suffered by the defendants as a result of an injunction carries considerably less weight.
Defendants, for their part, offer little relevant argument regarding their potential hardship. They
seem to claim that the continued existence of an injunction casts a cloud over their business. But,
as stated above, Signal’s likelihood of success is high, and that outweighs any hardship
defendants may suffer as a result of their own wrongdoing.
For all these reasons, the preliminary injunction, as modified, stands.
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Date: January 31, 2018
_____________________________
U.S. District Judge Joan H. Lefkow
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