IPOX Schuster, LLC v. Nikko Asset Mgmt. Co., Ltd.

304 F.Supp.3d 746

IPOX SCHUSTER, LLC, Plaintiff,

v.NIKKO ASSET MANAGEMENT CO., LTD., Lazard Asset Management LLC, and Lazard Japan Asset Management, K.K., Defendants.

Case No. 15 C 9955

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

Signed January 20, 2018

Harry N. Arger, Edward Sidney Weil, Jordan Summers Huttenlocker, Matthew T. Hays, Melanie Jeanne Chico, Michael Frederik Derksen, Dykema Gossett PLLC, Aaron Daniel Charfoos, Jones Day, Chicago, IL, Marsha G. Gentner, Dykema Gossett PLLC, Washington, DC, for Plaintiff.

Anne E. Beaumont, David Joseph Ranzenhofer, Eric Seiler, Katherine L. Pringle, Friedman Kaplan Seiler & Adelman LLP, Mark Stewart Raskin, Michael Salvatore Devincenzo, Junio Vincent Filardo, Lana Milojevic, Mishcon de Reya New York LLP, New York, NY, Brendan J. Healey, Steven L. Baron, Mandell Menkes LLC, Kelly Virginia Milam, Michael Denny Huber, Nicholas Sean Graber, Cray Huber Horstman Heil & Vanausdal LLC, Chicago, IL, for Defendants.

REVISED MEMORANDUM OPINION AND ORDER ¹

MATTHEW F. KENNELLY, United States District JudgeIPOX 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.

Background

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 Nikko_0000058. 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 ...