Bison Advisors LLC v. Kessler et al
Filing
64
ORDER denying 12 Motion for Preliminary Injunction (Written Opinion). Signed by Senior Judge David S. Doty on 10/30/2014. (PJM)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Civil No. 14-3121(DSD/SER)
Bison Advisors LLC, a Minnesota
limited liability company,
Plaintiff,
ORDER
v.
Irvin Kessler, Peter Goddard and
Walleye Trading Advisors LLC, a
Minnesota limited liability company,
Defendant.
Jeffrey J. Bouslog, Esq. and Oppenheimer, Wolff &
Donnelly, LLP, 222 South Ninth Street, Suite 2000,
Minneapolis, MN 55402, counsel for plaintiff.
William Z. Pentelovitch, Esq. and Maslon, Edelman, Borman
& Brand, 90 South Seventh Street, Suite 3300,
Minneapolis, MN 55402, counsel for defendant.
This
matter
is
before
the
court
upon
the
motion
for a
preliminary injunction by plaintiff Bison Advisors, LLC (Bison).
Based on a review of the file, record, and proceedings herein, and
for the following reasons, the court denies the motion.
BACKGROUND
This business dispute arises out of the alleged breach of and
interference
with
a
noncompete
agreement
by
defendants
Kessler, Peter Goddard, and Walleye Trading Advisors LLC.
Irvin
Kessler
and Goddard were founding members of Bison, a computer-based
commodities and equities trading firm.
Am. Compl. ¶¶ 9, 16, 18.
Bison was jointly created in 2010 by Kessler and Ephraim Gildor, a
specialist in quantitative, math-driven, and computer-executed
trading strategies.
Id. ¶ 16; Gildor Decl. ¶ 23.
In 2003, and before forming Bison, Gildor founded Axiom, a
hedge
fund
focused
on
computer-executed
trading
of
foreign
currencies. Amend. Compl. ¶ 14. Axiom’s founding members included
Gildor, professor Kevin Murphy, and physicist Linling Wu.
Id.
Axiom, Murphy, and Wu were also founding members of Bison.
Id.
¶ 18.
Defendant Walleye Trading Advisors LLC, and its affiliated
entities Walleye Trading LLC, Walleye Investments Fund LLC, and
Walleye Software LLC (collectively, Walleye) were formed in 2005 by
Kessler and Goddard.
Kessler Decl. ¶ 23.
Before forming Walleye,
Kessler founded Deephaven Capital Management and Deephaven Market
Neutral Fund (collectively, Deephaven). Id. ¶ 4. In 1997, Kessler
hired Tom Rectenwald to develop a pairs trading framework for
Deephaven.1
Id. ¶ 6.
Kessler eventually left Deephaven, and the
pairs traders that Rectenwald and Kessler hired followed Kessler to
1
Pairs trading involves tracking the prices of two
historically correlated equities.
When the prices diverge, a
trader buys the underperforming equity and sells the overperforming
equity, betting on a return to the historical correlation. Am.
Compl. ¶ 41.
2
Walleye.2
Id. ¶¶ 8, 12-19, 37.
The Deephaven and Walleye traders
regularly achieved average daily turnover rates of 25 percent or
higher.3
Id. ¶¶ 20, 36.
Kessler approached Gildor in 2010 with a proposal that would
implement pairs trading through Gildor’s and Axiom’s expertise in
computer-executed trading strategies.
Decl. ¶ 29.
Am. Compl. ¶ 16; Kessler
Bison was formed as a result.
Am. Compl. ¶ 16.
Kessler and Goddard provided Bison with historical pairs trading
data from Deephaven and Walleye so that Gildor, Murphy, and the
rest of the Axiom team could develop the models to be employed at
Bison.
Id. ¶¶ 20, 22; Kessler Decl. ¶¶ 34, 36, 43; Goddard Decl.
¶¶ 10, 11.
Bison began trading in June 2011.
Goddard Decl. ¶ 23.
Every evening, Bison electronically provides Walleye with pairs
trading instructions, which Walleye automatically executes the
following morning.
Kessler Decl. ¶ 40.
On December 21, 2010, the Bison members signed an Operating
Agreement, which included the following noncompete covenant:
(a) During the period of time that
Member of [Bison] and for two (2)
date of withdrawal or removal of
Person will not directly or
any Person is a
years after the
a Member, such
indirectly ...
2
Before joining Walleye, the traders were transferred from
Deephaven to Provident, another Kessler firm. Kessler Decl. ¶¶ 10,
12-19.
3
Turnover rate refers generally to the rate at which
securities are bought and sold. It is determined by dividing the
dollar value of securities traded over a particular period by the
total value of the portfolio. Kessler Decl. ¶ 20.
3
(i) engage in, have an interest in or become
associated with any entity, firm, business,
activity or enterprise which trades or plans on
trading equity or commodity markets with a strategy
that has an average daily turnover of 25 percent or
more.
Am. Compl. Ex. 1 at ¶ 6.4.
The members further agreed that
“irreparable injury will result to [Bison]” in the event the
covenant is breached, and that money damages would be impossible to
measure for such a breach.
Id. ¶¶ 6.4(d); 10.12.
Walleye’s individual pairs traders operate separately from
Bison’s automated platform and do not have access to the models and
algorithms used by Bison.
Kessler ¶ 41.
Trading at Walleye became
more automated and systematic during the summer of 2013, however,
and over the next year and a half the turnover rates and trading
patterns at Walleye began to closely match those of Bison.
Compl. ¶ 38; Kessler Decl. ¶ 45, 56, 57; Gildor Decl. ¶ 40.
Am.
Gildor
and the other members4 of the Axiom team were made aware of this
change around May or June 2014.
Gildor Decl. ¶¶ 36, 39, 40.
Moreover, Bison alleges that this was the first time it became
aware that the pairs traders at Walleye were using strategies with
average daily turnover rates in excess of 25 percent.5
Am. Compl.
4
Kessler and Goddard withdrew from Bison around the summer or
fall of 2013. Am. Compl. ¶ 33; Kessler Decl. ¶ 51. Although the
parties disagree as to the validity of this withdrawal, the court
need not consider those arguments at this time.
5
Defendants argue that, by providing pairs trading data to
Gildor and the rest of the Axiom team, Bison was notified much
(continued...)
4
¶ 40.
Bison alleges that defendants violated the noncompete
agreement by using Bison’s confidential information to implement
trading strategies at Walleye with average daily turnover rates of
25 percent or more.
Gildor Decl. ¶ 41; Gildor Suppl. Decl. ¶ 29.
On August 7, 2014, Bison filed suit, alleging (1) breach of
noncompete covenant, (2) breach of fiduciary duties, (3) aiding and
abetting breach of fiduciary duties, (4) fraud, (5) tortious
interference
with
a
contractual
(6) misappropriation of trade secrets.6
relationship,
and
On September 5, 2014,
Bison moved for a preliminary injunction, limiting the motion to
the noncompete claim.
DISCUSSION
A preliminary injunction is an extraordinary remedy, and the
movant bears the burden of establishing its propriety.
Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003).
considers
injunction
four
factors
should
issue:
in
determining
(1)
the
whether
likelihood
of
a
Watkins
The court
preliminary
the
movant’s
ultimate success on the merits, (2) the threat of irreparable harm
5
(...continued)
earlier as to the turnover rates of Walleye’s pairs traders. See
Kessler Decl. ¶ 36. Because Bison has not shown a likelihood of
success on its noncompete claim, as explained below, the court does
not consider arguments as to notice at this time.
6
Bison submitted an amended complaint on September 25, 2014.
The court considers these amended allegations in deciding the
instant motion.
5
to the movant in the absence of relief, (3) the balance between the
harm alleged and the harm that the relief may cause the non-moving
party and (4) the public interest.
Dataphase Sys., Inc. v. C.L.
Sys., Inc., 640 F.2d 109, 114 (8th Cir. 1981) (en banc).
No single
factor is determinative. Id. at 113. Instead, the court considers
the particular circumstances of each case, remembering that the
primary question is whether the “balance of equities so favors the
movant that justice requires the court to intervene to preserve the
status quo until the merits are determined.”
I.
Id.
Likelihood of Success on the Merits
The court first considers the “most significant” Dataphase
factor: likelihood that the movant will prevail on the merits.
S &
M Constructors, Inc. v. Foley Co., 959 F.2d 97, 98 (8th Cir. 1992).
Bison argues that it will succeed because defendants are engaging
in activity clearly prohibited by the noncompete agreement, that
is, pairs trading with an average daily turnover rate of 25 percent
or more.
The court disagrees.
Noncompete agreements are not favored under Minnesota law
because they operate as restraints of trade.
Medtronic, Inc. v.
Advanced Bionics Corp., 630 N.W.2d 438, 456 (Minn. Ct. App. 2001).
Such agreements are enforceable only to the extent reasonably
necessary to protect a legitimate business interest.
Webb Publ’g
Co. v. Fosshage, 426 N.W.2d 445, 450 (Minn. Ct. App. 1988).
“Legitimate interests ... include the company’s goodwill, trade
6
secrets, and confidential information.”
456.
Medtronic, 630 N.W.2d at
The court may modify an unreasonable noncompete agreement,
enforcing it only to the extent that it is reasonable.
Davies &
Davies Agency, Inc. v. Davies, 298 N.W.2d 127, 131 n.1 (Minn.
1980); Bess v. Bothman, 257 N.W.2d 791, 794-95 (Minn. 1977).
Bison’s interpretation of the agreement, prohibiting any trading
with an average daily turnover rate of 25 percent or more, is
unreasonable.
protects
a
The agreement is only enforceable to the extent it
legitimate
business
interest,
such
as
prohibiting
defendants from using Bison’s confidential information to engage in
trading with high turnover rates.
Bison
alleges
that
Kessler
and
Goddard
incorporated
the
confidential models and algorithms developed at Bison into the
trading strategies implemented at Walleye.
Gildor Decl. ¶ 41;
Gildor Suppl. Decl. ¶ 29. However, Bison provides nothing concrete
to support this allegation.
It points to the close tracking
between Bison and Walleye turnover rates and trading patterns that
started in 2013. Gildor Decl. ¶ 40.
Defendants admit that trading
at Walleye became more systematized at that time, but attribute any
similarities to the incorporation of generic and widely available
software.
Kessler
Decl.
¶¶
45,
46;
Gildor
Decl.
¶¶
58-60.
Defendants further state that the Walleye pairs traders do not have
access to Bison’s confidential information.
Kessler Decl. ¶¶ 41,
47. Because Bison speculates at this time that defendants used its
7
confidential information in violation of the noncompete agreement,
this Dataphase factor weighs against injunctive relief.7
II.
Irreparable Harm
To establish irreparable harm, “a party must show that the
harm is certain and great and of such imminence that there is a
clear and present need for equitable relief.”
F.C.C., 109 F.3d 418, 425 (8th Cir. 1996).
Iowa Utils. Bd. v.
“A mere possibility of
irreparable harm is not enough” to issue an injunction.
Superior
Edge, Inc. v. Monsanto Co., 964 F. Supp. 2d 1017, 1046 (D. Minn.
2013).
“Irreparable harm occurs when a party has no adequate
remedy at law, typically because its injuries cannot be fully
compensated through an award of damages.”
Gen. Motors Corp. v.
Harry Brown’s, LLC, 563 F.3d 312, 319 (8th Cir. 2009).
The breach
of a noncompete agreement raises an inference of irreparable harm.
Overholt Crop Ins. Serv. Co. v. Bredeson, 437 N.W.2d 698, 701
(Minn. Ct. App. 1989).
Bison has not demonstrated a substantial likelihood of success
on the merits, indicating that irreparable harm is unlikely.
At
this stage in the proceedings, however, the record is not developed
and “a decision on the merits” has not been rendered.
Hubbard
Feeds, Inc. v. Animal Feed Supplement, Inc., 182 F.3d 598, 603 (8th
7
Defendants also argue that the noncompete is unenforceable
because it has either been superseded or waived. Because the court
finds that Bison has not shown a likelihood of success on the
merits even with an enforceable agreement, the court does not
consider these arguments.
8
Cir. 1999).
As a result, the court examines the potential harm
alleged by Bison.
Bison argues that irreparable harm has occurred
because the Operating Agreement expressly provides that such harm
would result through its violation, and that the violation here has
impacted Bison’s profitability in a manner that is difficult to
quantify.
While
The court disagrees.
parties
may
agree
contractually
on
the
irreparable harm, these agreements are not conclusive.
matter
of
See VONCO
V Duluth, LLC v. Saari, No. A13-0968, 2014 WL 103443, at *3 (Minn.
Ct. App. Jan. 13, 2014); see also Allan Block Corp. v. E. Dillon &
Co., No. Civ. 04-3511, 2005 WL 1593010, at *6 (D. Minn. July 1,
2005).
Apart from pointing to the Operating Agreement, Bison
merely speculates that defendants’ pairs trading activity has
caused it harm.
substantially
Bison shows that Walleye’s profits increased
after
its
trading
became
more
automated,
while
Bison’s profits decreased markedly during the same time frame.
Gildor Decl. ¶¶ 44, 45; Gildor Suppl. Decl. ¶ 43.
However, Bison
fails to connect its decline in profits to Walleye’s trading.
See
Travel Tags, Inc. v. UV Color, Inc., 690 F. Supp. 2d 785, 800 (D.
Minn. 2010) (finding no irreparable harm where plaintiff failed to
link a decrease in profits to defendant’s conduct and offered only
unsupported statements that defendant’s competition caused harm).
Even if Walleye’s trading injured Bison, the court is not
convinced that Bison could not be adequately compensated through
9
money damages.
Lost profits that are difficult to quantify may
constitute irreparable harm.
See Perkins v. City of St. Paul, 982
F. Supp. 652, 655 (D. Minn. 1997); Animal Fair, Inc. v. AMFESCO
Indus., Inc., 620 F. Supp. 175, 191 (D. Minn. 1985).
Bison argues
that its lost profits cannot be reasonably calculated because of
the complexity of the strategies it uses and the difficulty in
measuring the market disturbance caused by Walleye’s trading.
Gildor Decl. ¶ 45, 46.
Defendants respond by setting forth common
methods that they allege could be used to calculate damages to a
reasonable degree of certainty.
Mayhew Decl. ¶¶ 9, 10, 18-40.
In
light of this disagreement, the court finds that Bison has not met
its burden of showing, at this time, that money damages would be
difficult to quantify.
As a result, this Dataphase factor weighs
against injunctive relief.
III.
Balance of Harms
Under this factor, “a court should flexibly weigh the case’s
particular circumstances to determine whether ... justice requires
the court to intervene to preserve the status quo.”
United Indus.
Corp. v. Clorox Co., 140 F.3d 1175, 1179 (8th Cir. 1998) (citation
and internal quotation marks omitted).
As explained above, Bison
fails to show that it has suffered any harm due to Walleye’s
trading.
On the other hand, harm would likely be imposed on
Walleye if the injunction is granted.
10
Defendants note that the salaries of Walleye’s pairs traders
are determined primarily by the profitability of their portfolios,
which in part depends on turnover rates.
Kessler Decl. ¶ 22.
Those traders regularly achieve turnover rates between 15 and 100
percent.
See, e.g., id. ¶ 20; Doshan Decl. ¶ 2; Klammer Decl. ¶ 7;
Mickiewicz ¶ 4; Meenan Decl. ¶ 11; Schwieters Decl. ¶ 5.
Cutting
those rates would affect profitability and likely cause the traders
to leave Walleye.
Moreover, because the Walleye traders have long engaged in
high turnover pairs trading, granting an injunction here would
frustrate, rather than preserve, the status quo.
“When the status
quo is one of business activity and the alternative of ‘rest’
causes irreparable harm, we have favored the activity.”
Xyquad, Inc., 939 F.2d 627, 631 (8th Cir. 1991).
Hill v.
As a result, this
Dataphase factor weighs against injunctive relief.
IV.
Public Interest
Bison argues that there is a public interest in upholding
contractual agreements.
The court agrees.
See Med. Shoppe Int’l,
Inc. v. S.B.S. Pill Dr., Inc., 336 F.3d 801, 805 (8th Cir. 2003)
(noting that “the public interest would not be served by permitting
a party to avoid contractual obligations.”).
As explained above,
however, Bison fails to show at this stage that defendants have
breached the Operating Agreement.
in encouraging competition.
There is also a public interest
See Calvin Klein Cosmetics Corp. v.
11
Lenox Labs., Inc., 815 F.2d 500, 505 (8th Cir. 1987).
Because
there is no showing at this stage that defendants have engaged in
unfair competition, this Dataphase factor weighs against injunctive
relief.
As a result, based upon a balancing of the four Dataphase
factors, the court determines that a preliminary injunction is not
warranted.
CONCLUSION
Accordingly, based on the above, IT IS HEREBY ORDERED that
plaintiff’s motion for a preliminary injunction [ECF No. 12] is
denied.
LET JUDGMENT BE ENTERED ACCORDINGLY.
Dated:
October 30, 2014
s/David S. Doty
David S. Doty, Judge
United States District Court
12
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