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In re PrairieSmarts LLC

Court of Appeals of Texas, Second District, Fort Worth

January 23, 2014


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[Copyrighted Material Omitted]

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PANEL: GARDNER, WALKER, and MEIER, JJ. MEIER, J. filed a concurring opinion.


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I. Introduction

Relators PrairieSmarts LLC and Casey Rockwell seek a writ of mandamus directing Respondent to vacate a September 18, 2013 order granting Real Party in Interest TD Ameritrade, Inc.'s rule 202 petition. See Tex. R. Civ. P. 202. Because we hold that Respondent abused his discretion by granting the rule 202 petition and because Relators possess no adequate remedy at law, we will conditionally grant the writ.

II. Factual and Procedural Background

Four former employees of TD Ameritrade subsequently became employed by PrairieSmarts.[1] Those four individuals are Dr. Renaud Piccinini, Michael Chochon, Chris Nagy, and Casey Rockwell. Dr. Piccinini obtained a Ph.D. in finance in 2004 and wrote his dissertation on risk and volatility in financial markets or so-called " Black Swan Events." Prior to working for TD Ameritrade, Dr. Piccinini helped develop risk models for the holdings of First National Bank of Omaha. Dr. Piccinini began working for TD Ameritrade in February 2010, and TD Ameritrade terminated Dr. Piccinini on May 2, 2012, after the Portfolio Margin model that he had helped to design received approval from the federal regulators at the Financial Industry Regulatory Authority (FINRA).[2] Chochon began working for TD Ameritrade in 2003, and he was the person who had hired Dr. Piccinini to perform the above-described work at TD Ameritrade. TD Ameritrade terminated Chochon on March 31, 2011. Nagy joined TD Ameritrade in August 1999 and served as Managing Director of Order Routing, Sales, and Strategy. TD Ameritrade terminated Nagy on May 26, 2012. Rockwell, a software developer and computer programmer, began working for TD Ameritrade in

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March 2004 and voluntarily left in October 2012 to work for PrairieSmarts.

In January 2013, PrairieSmarts filed a patent application[3] for a program that PrairieSmarts calls PortfolioDefense[TM] and began beta testing the program. TD Ameritrade thereafter filed a rule 202 petition asserting that it appeared likely that PrairieSmarts's employees Dr. Piccinini, Chochon, Nagy, and Rockwell had--in designing PortfolioDefense[TM]--misappropriated confidential and proprietary assets of TD Ameritrade in violation of the nondisclosure provisions in their respective employment contracts. By its rule 202 petition, TD Ameritrade sought to depose PrairieSmarts and Rockwell and to have PrairieSmarts and Rockwell produce various documents at their depositions. PrairieSmarts and Rockwell filed answers to the rule 202 petition, denying all allegations in the petition and objecting to the depositions and production of the documents sought by TD Ameritrade on the ground that both sought privileged trade secret information belonging to PrairieSmarts. PrairieSmarts's answer also objected to venue in Tarrant County.[4]

Respondent set a hearing on TD Ameritrade's rule 202 petition; a week before the hearing, PrairieSmarts filed affidavits from Dr. Piccinini, Chochon, Nagy, and Rockwell, asserting that no confidential information belonging to TD Ameritrade was utilized in creating the code for PortfolioDefense[TM] and claiming that the information sought by TD Ameritrade constituted trade secret information belonging to PrairieSmarts.

At the hearing on TD Ameritrade's rule 202 petition, TD Ameritrade argued that the facts as set forth below constituted " smoke," " red flags[,]" or " the indicia of a potential appropriation of trade secrets case" sufficient to justify the requested discovery. TD Ameritrade provided Respondent with three demonstrative exhibits that it had created utilizing information from the four affidavits filed by PrairieSmarts. The three exhibits are one-page typed sheets titled, " Facts About PrairieSmarts's Principals," " Timeline," and " Facts Justifying Investigation." The documents show the dates the four former TD Ameritrade employees left TD Ameritrade and began employment with PrairieSmarts, provided a comparison of the time it took to create the Profit Margin model at TD Ameritrade versus the time it took to create PortfolioDefense[TM] at PrairieSmarts, and stated that the following facts justified TD Ameritrade's investigation via the discovery it had requested from PrairieSmarts: the fact that three of the four PrairieSmarts principals were directly responsible for TD Ameritrade's confidential risk analysis; the fact that PrairieSmarts's principals have thirty-one combined years of TD Ameritrade tenure; the fact that five days after Dr. Piccinini left TD Ameritrade, he co-founded PrairieSmarts; the fact that three months after Rockwell started working at PrairieSmarts, a patent application was filed for PortfolioDefense[TM], while it took fourteen months after

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Dr. Piccinini's hire at TD Ameritrade until the Profit Margin application was submitted to FINRA; the fact that similarities exist between the two products--TD Ameritrade contends four matching components are observable by comparing PrairieSmarts's website and the FINRA application for Portfolio Margin; [5] and the fact that the products have nearly identical outcomes, which TD Ameritrade explained was PortfolioDefense[TM]'s having nearly the same predictive capability as TD Ameritrade's Portfolio Margin. TD Ameritrade argued that these " red flags" concerned TD Ameritrade and established " that there is a significant advantage to be gained for [TD Ameritrade] to do some investigation, some discovery to see how these concepts that line up on both sides are actually performed and whether they are performed using confidential information [from] TD Ameritrade."

At the hearing, PrairieSmarts argued that the circumstances TD Ameritrade had characterized as smoke or red flags were nothing more than legal activities. PrairieSmarts asserted that some of its managing members--three of whom had been terminated by TD Ameritrade--had gone on to other employers before joining PrairieSmarts and had continued to work in the same area of expertise. PrairieSmarts contended that it was a mischaracterization to say that it took Dr. Piccinini and the team at TD Ameritrade fourteen months to create Portfolio Margin because twelve of the months were " simply TD Ameritrade['s] using their Portfolio Margin to then get to the one-year audit that FINRA would do." PrairieSmarts denied that PortfolioDefense[TM] was based on any intellectual property of TD Ameritrade and asserted that TD Ameritrade's Portfolio Margin is different from PortfolioDefense[TM] because Portfolio Margin was designed for use by brokers--not individual investors; was created to satisfy a government-mandated risk analysis requiring brokers to evaluate volatility and risk of only 3,000 to 4,000 specifically identified stocks; and is a calculation that computes for brokers certain margin requirements for highly leveraged portfolios so that brokers can determine when a customer's position becomes too risky and threatens the broker's margin loan. PrairieSmarts contended that, conversely, PortfolioDefense[TM] was designed for use by individual investors, is not limited in its analysis to 3,000 or 4,000 specifically identified stocks, is not required to be submitted to FINRA, and that its design constitutes trade secrets of PrairieSmarts. PrairieSmarts concluded that Portfolio Margin and PortfolioDefense[TM] are " importantly different" and that TD Ameritrade should not be allowed to take a look " under the hood" at PortfolioDefense[TM] only to determine that it is not based on TD Ameritrade's confidential or proprietary assets. PrairieSmarts also claimed that beta testing of PortfolioDefense[TM] is available through PrairieSmarts's website and that TD Ameritrade has the ability to participate in the beta testing[6] and to determine that way whether PortfolioDefense[TM] performs the same functions as the Profit Margin model.

During the hearing, Respondent decided that he would not rely exclusively on PrairieSmarts's

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affidavits in ruling on the asserted trade secret privilege but, per Texas Rule of Civil Procedure 193.4, would also conduct an in camera inspection of the documents sought by TD Ameritrade; Respondent ordered the documents' " production within one week in a Bates stamped fashion." Following the hearing, PrairieSmarts complied with Respondent's instructions and submitted documents under seal for an in camera inspection. Those documents have been filed with this court under seal.

Respondent subsequently issued a September 18, 2013 order finding that " the likely benefit of allowing TD Ameritrade to take the requested discovery to investigate one or more potential claims outweighs the burden or expense of the procedures set out herein." The order granted TD Ameritrade's rule 202 petition in toto, ordering that the requested depositions be taken within forty-five days and that " each deponent must produce . . . all of the documents requested by TD Ameritrade, Inc. as described in its Verified Petition for Rule 202 Deposition."

TD Ameritrade's rule 202 petition requested--and Respondent's order authorized--TD Ameritrade to depose Rockwell and PrairieSmarts and to elicit testimony on at least the following topics:

a. Any and all patent applications related to any PrairieSmarts tool, software, or system (including but not limited to PortfolioDefense[TM]) filed by or caused to be filed by PrairieSmarts or any one or more of its managing members, including any and all patent applications that form the basis of PrairieSmarts'[s] claims that PortfolioDefense[TM] is patent pending.
b. The time horizon, statistical distribution, and confidence interval used in any PrairieSmarts tool, software, or system (including but not limited to PortfolioDefense[TM]) and whether any one or more of the time horizon, statistical distribution, and confidence interval support ...

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