Scott McDonald, Littler Mendelson shareholder
Scott McDonald, Littler Mendelson shareholder (courtesy photo)

Scott McDonald‘s client Quantlab took a rough road to protect its trade secrets, spending years in litigation in a case that involved wide-ranging destruction of evidence and an FBI investigation before winning a $12.2 million verdict from a Houston federal jury.

But after defendants appealed the award by questioning whether the high-frequency automated financial trading company proved it even had a trade secret, McDonald convinced the U.S. Court of Appeals for the Fifth Circuit that Quantlab deserved to keep every cent of the jury’s verdict. That ruling came June 22.

McDonald, shareholder in the Dallas office of Littler Mendelson, is happy he was able to protect both his client’s award and its trade secrets in the process.

“Part of the issue was that we didn’t put the trade secrets literally into the record at trial. We described it. And they took issue that you couldn’t prove it up unless you put it into the record,” McDonald said. “But the court ruled that’s not the case. You don’t have to put it into evidence.”

“That’s important for trade secret defenders,” McDonald said. “Because if that were the case, they’d be in constant risk of losing their trade secrets by figuring out a way to put it into evidence.”

The background to his recent victory in Quantlab v. Kuharsky is as follows. Quantlab is a computer analytic company that employs software engineers, mathematicians and others to discover trading strategies based on market data.

The company hired mathematician Andriy Kuharsky in 2001 and had him sign an agreement that he would not disclose Quantlab’s proprietary information. Kuharsky was fired in 2007 by the company for performance issues and later threatened to use Quantlab’s confidential information, a threat he ultimately carried out.

Kuharsky later met Emmanuel Mamalakis, a Wisconsin attorney, and they formed SXP Analytics — a company created to do the same type of high-frequency trading as Quantlab. Both Kuharsky and Mamalakis destroyed a great deal of evidence. After a falling out with Mamalakis, Kuharsky departed from SXP. He later informed Quantlab’s CEO that SXP was using Quantlab’s computer code, prompting an FBI investigation.

The FBI seized hundreds of computers and hard drives from SXP and evidence showed the defendants were able to retain some or all of Quantlab’s information after the FBI raid. No federal criminal charges have been filed in the matter.

Quantlab later sued both Kuharsky and Mamalakis for misappropriation of trade secrets in a Houston federal court. The trial judge entered a finding of liability against Kuharsky for a direct claim of misappropriation of trade secrets based on his wide-ranging destruction of evidence. Mamalakis also destroyed evidence but it was not as egregious and the trial court sanctioned him with an adverse inference instruction to the jury.

After presenting a great deal of evidence about the trade secrets Kuharsky and Mamalakis stole, Ouantlab presented an expert that estimated the defendants avoided $55 million in startup costs by using the misappropriated trade secrets. A jury found them liable on four other trade secrets claims and awarded a total $12.2 million in damages against both of them.

Kuharsky and Mamalakis both appealed to the Fifth Circuit, questioning whether Quantlab had established at trial that it had a trade secret and the validity of the damage model they presented to the jury.

The Fifth Circuit affirmed the award against the defendants in all respects.

“Mamalakis claims Quantlab’s vague witness testimony failed to establish the existence of a trade secret,” the court wrote in a per curiam opinion, noting the lengths to which the company went to show its trade secrets had been stolen, including proving the defendants were using their information even after an FBI raid. “He is wrong.”

Kuharsky argued there was no basis for damages in the case, which the Fifth Circuit also rejected.

“The record shows that the jury never heard of any amount of damages other than the approximately $55 million in development costs or the profits the defendants earned, so the jury could not have based its damage award on anything else,” the court concluded in its decision.

Mamalakis, who represented himself on appeal, vows to continue fighting the case.

“This thing isn’t anywhere near over,” Mamalakis said. “We’re only at halftime of the game.”

David Holmes, a Houston attorney who represents Kuharsky, did not return a call for comment.