Elmagin Capital, LLC v. Chao Chen

555 F.Supp.3d 170

ELMAGIN CAPITAL, LLC

v.Chao CHEN, Karl Petty, Entergrid LLC and Entergrid Fund I LLC

CIVIL ACTION NO. 20-2576

United States District Court, E.D. Pennsylvania.

Filed August 17, 2021

Robert S. Silver, Langer, Grogan and Diver, PC, Douglas Panzer, Manny D. Pokotilow, Caesar Rivise Bernstein Cohen & Pokotilow Ltd., Philadelphia, PA, for Elmagin Capital, LLC.

Nicole D. Galli, ND Galli Law LLC, Philadelphia, PA, for Chao Chen, Karl Petty, Entergrid LLC, Entergrid Fund I LLC.

MEMORANDUM OPINION

Savage, District Judge

In this action for misappropriation of trade secrets and breach of contract, plaintiff Elmagin Capital, LLC claims that defendant Chao Chen, one of its founders and former employee, used its algorithmic trading strategies in wholesale electricity markets to develop and use similar strategies at his new trading company, Entergrid LLC and Entergrid Fund I LLC (collectively, "Entergrid"). Elmagin also contends that Chen and defendant Karl Petty, its former consultant, breached their non-disclosure agreements, disclosing its confidential trade secret information. The defendants argue that Elmagin's trading strategies are not protectable trade secrets and were not misappropriated. They contend that the agreements are unenforceable. They deny disclosing Elmagin's confidential information.

The parties have moved for summary judgment. There are fact issues concerning whether Elmagin's trading strategies constitute protectable trade secrets and whether the defendants misappropriated them in developing their own trading strategies. We conclude that the defendants’ non-disclosure agreements are valid and enforceable, but fact issues remain as to whether they were breached. Therefore, we shall deny the cross-motions for summary judgment.

Factual Background

In 2014, Richard Gates, Kevin Gates, and Chao Chen founded Elmagin Capital, LLC.¹ Elmagin was established to trade in financial transmission rights ("FTRs")² in wholesale electricity markets.³ In 2020, Elmagin generated approximately three million dollars in revenue on an accrual basis.⁴

Elmagin uses computer algorithms to predict variable prices in order to calculate advantageous bids in the highly volatile and competitive electricity markets.⁵ Algorithms are essentially a precise set of instructions to a computer to accomplish a result.⁶ Algorithms are often expressed in words, and those words are translated into code, also known as a program, to implement the algorithm.⁷

Utilizing his educational and professional background in electricity, programming, network design, and algorithmic trading, Chen developed trading strategies for Elmagin.⁸ During his tenure at Elmagin, he developed or participated in developing the three trading strategies at issue in this case: "Breck," "Chloe," and "Faber."⁹

While at Elmagin, Chen engaged defendant Karl Petty as a consultant to provide historical data analysis services.¹⁰ The contemplated project involved creating a software tool to analyze the profitability of public FTR bids based on public data.¹¹ Before doing any work for Elmagin, Petty signed a Consulting Agreement that prohibited him from using, exploiting, or disclosing Elmagin's "confidential information."¹²

In 2016, Chen informed the Gates brothers that he wished to leave Elmagin.¹³ He sold his 20% membership interest to the Gates brothers and remained with Elmagin through the end of 2017.¹⁴ He signed a Membership Interest Agreement ("MIA") selling his interest, effective January 1, 2018.¹⁵ Under the MIA, Chen was to be paid as an 8% owner of Elmagin in 2018 and a 6% owner in 2019 and 2020.¹⁶ To date, Chen has received $15,000 for his ownership stake in Elmagin.¹⁷ He also signed a Non-Disclosure and Non-Competition Agreement ("NDNC") that prohibited him from engaging in a competing business for one year and from ever using, exploiting, or disclosing Elmagin's confidential information, including its trading strategies.¹⁸ He left Elmagin on December 31, 2017.¹⁹

Chen spent the next year investing in real estate and small businesses and developing trading strategies for digital currencies.²⁰ On January 10, 2019, he formed Entergrid, LLC and Entergrid Fund I, LLC for the purpose of trading in FTRs in wholesale electricity markets.²¹ He used algorithms to develop FTR trading strategies and wrote computer codes to implement the strategies.²² These strategies included "Hydra" and "Gryphon."²³

Petty joined Entergrid in spring 2019.²⁴ Chen recruited other consultants and employees, none of whom had ever worked for Elmagin.²⁵ Entergrid began trading in wholesale electricity markets around May or June 2019.²⁶

Elmagin filed suit on June 1, 2020, claiming the defendants misappropriated Elmagin's trade secrets and breached their contractual obligations by using Elmagin's trading strategies in developing their own algorithms.²⁷ Both sides have moved for summary judgment.²⁸

Legal Standard

Summary judgment is appropriate "if the movant shows there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). Judgment will be entered against a party who fails to sufficiently establish any element essential to that party's case and who bears the ultimate burden of proof at trial. See Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In examining the motion, we must draw all reasonable inferences in the nonmovant's favor. InterVest, Inc. v. Bloomberg, L.P. , 340 F.3d 144, 159-60 (3d Cir. 2003).

Disagreements over what inferences may be drawn from the facts, even undisputed ones, preclude summary judgment. Ideal Dairy Farms, Inc. v. John Labatt, Ltd. , 90 F.3d 737, 744 (3d Cir. 1996) (citation omitted). Credibility determinations, the drawing of legitimate inferences from facts, and the weighing of evidence are matters left to the jury. Anderson v. Liberty Lobby , 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

A party moving for summary judgment may use depositions and affidavits or declarations to show a fact is not genuinely disputed, and a party opposing the motion may also rely on them to demonstrate that a fact is disputed. See FED. R. CIV. P. 56(c)(1)(A) ("A party asserting that a fact cannot be or is genuinely disputed must support the assertion by ... citing to particular parts of materials in the record, including depositions ... affidavits or declarations."). Because depositions provide all parties an opportunity to probe the witness, they are preferred to declarations and affidavits that are generally prepared by attorneys rather than the declarant or affiant. See In re CitX Corp. , 448 F.3d 672, 680 (3d Cir. 2006) (citing 10A Charles Alan Wright et al., Fed. Prac. & Proc. § 2722, at 373, 379 (3d ed. 1998) ). The affiant must set forth specific facts that reveal a genuine issue of material fact.

Lujan v. Nat'l Wildlife Fed'n , 497 U.S. 871, 888, 110 S.Ct. 3177, 111 L.Ed.2d 695 (1990) (collecting cases). Because they are not subject to cross-examination, affidavits are scrutinized carefully. In re CitX Corp. , 448 F.3d at 680 (citing 10A Charles Alan Wright et al., Fed. Prac. & Proc. § 2722, at 373, 379 ).

Discussion

Misappropriation of Trade Secrets

Elmagin asserts claims for misappropriation of trade secrets under both the Defend Trade Secret Act ("DTSA"), 18 U.S.C. § 1836 et seq. , and the Pennsylvania Uniform Trade Secret Act ("PUTSA"), 12 Pa. C.S. § 5301 et seq. To prevail on a claim for misappropriation of trade secrets under DTSA and PUTSA, a plaintiff must first establish the existence of a trade secret. 18 U.S.C. §§ 1836(b)(1), 1839(3), (5) ; 12 Pa. C.S. § 5302. See also Par Pharm., Inc. v. QuVa Pharma, Inc. , 764 F. App'x 273, 278 (3d Cir. 2019) (applying the identical New Jersey Trade Secrets Act); Fishkin v. Susquehanna Partners, G.P. , 563 F. Supp. 2d 547, 581 (E.D. Pa. 2008), aff'd in part , 340 F. App'x 110 (3d Cir. 2009).

DTSA defines a "trade secret" as "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." 18 U.S.C. § 1839(3). The PUTSA similarly defines a trade secret as "[i]nformation, including a formula, drawing, pattern, compilation including a customer list, program, device, method, technique or process." 12 Pa. C.S. § 5302.

The defendants argue that Elmagin has not sufficiently identified its alleged trade secrets as a matter of law.²⁹ They claim that Elmagin only relies on vague, high-level summaries of its strategies, without examining or referencing the actual source code.³⁰ They also dispute the accuracy and completeness of Elmagin's high-level summaries of its strategies.³¹

To establish the existence of a trade secret, a plaintiff must describe it with a " ‘reasonable degree of precision and specificity ... such that a reasonable jury could find that plaintiff established each statutory element of a trade secret.’ " Syngy Inc. v. ZS Assocs., Inc. , No. 07-3536, 2015 WL 899408, at *6 (E.D. Pa. Mar. 3, 2015) (quoting Dow Chem. Canada Inc. v. HRD Corp. , 909 F. Supp. 2d 340, 346 (D. Del. 2012) ). "This identification must be particular enough as to separate the trade secret from matters of general knowledge in the trade ... or special knowledge of persons skilled in the trade." Id. See also Oakwood Lab'ys LLC v. Thanoo , 999 F.3d 892, 906 (3d Cir. 2021) (same); Givaudan Fragrances Corp. v. Krivda , 639 F. App'x 840, 845 (3d Cir. 2016) ("It is patently obvious that trade secrets must be identified with enough specificity to put a defendant on notice of what is actually alleged to have been stolen.") (citations omitted). Courts may grant summary judgment on trade secret misappropriation claims when plaintiffs do not sufficiently identify their purported trade secrets. See Givaudan , 639 F. App'x at 845 ("Givaudan failed to...