New York’s Court of Appeals Orders the Production of Source Code for Risk Analytics Software

New York’s Court of Appeals Orders the Production of Source Code for Risk Analytics Software
September 24, 2014 RPJ Law

September 24, 2014

This article was written by Mark H. Moore, a Partner in the Firm.

New York’s Court of Appeals, in a recent decision, MSCI Inc. v. Jacob, ___ N.Y.3d __, __ N.Y.S.2d __, 2014 WL 4637883 (Sept. 18, 2014), ordered the production of a defendant software company’s latest versions of its source code for a risk analytics product.  The Court of Appeals carefully weighed the defendant company’s legitimate concern for confidentiality against claims that it had misappropriated plaintiffs’ source code.  The case demonstrates that courts in the State of New York will order the production of even highly sensitive information if such information appears necessary for a litigant to prove its claims.

Plaintiff MSCI Inc. (“MSCI”) produces a multi-asset class risk analytics software product called “RiskManager,” and contends that it is the market leader in the field because of the superiority of its proprietary software. MSCI contends that defendant employees, former senior-level employees at MSCI who had been intimately involved in the development of RiskManager, left MSCI for defendant Axioma, Inc. (“Axioma”), with the aim of creating a competing product.  To that end, MSCI contends, the individual defendants misappropriated the entire source code underlying MSCI’s RiskServer and other products.  In the lawsuit, a key evidentiary issue is whether Axioma’s software incorporated MSCI’s source code in Axioma’s newly developed risk analytic product.

The parties negotiated a court-ordered confidentiality stipulation (the “CSO”) that provided that MSCI and Axioma would jointly retain a third-party neutral with whom they would deposit their respective source codes and that only the parties’ experts and attorneys would receive or see the material.  This sort of confidentiality order is the norm for parties engaged in litigation over software products.  Under the order, the parties were to provide source code for the products, including “all versions of such source code created from inception in buildable, runnable, native text format and in a file organization that retains the original directory structure of the code and any source code repository; and source code documentation.”  In essence, this meant that each party’s expert would be able to run the software and review how and when it was developed.

Axioma deposited all versions of its source code created from February 24, 2011 through April 3, 2012—a fourteen–month period that included four months preceding the action’s commencement and ten months afterward. The deposited material contained 5,552 “unique source code revisions and even substantially more individual source code file versions.”  Upon reviewing the code with MSCI’s expert, MSCI’s counsel learned that Axioma had not deposited any versions of source code created or modified after April 3, 2012; as a result, counsel sought the versions of the source code created or modified after that date.  Defendants stated that nothing in the CSO mandated that Axioma continually update its source code information.

The Court of Appeals ordered the production of the more recent versions of Axioma’s source code.  The Court was swayed by MSCI’s expert, who stated that without versions of the code made after April 3, 2012, he could not provide a meaningful comparison of the parties’ respective source codes so as to determine misappropriation, because Axioma’s code as of April 3, 2012 was in a “nascent state” and that “later versions of the code were crucial to his analysis, because they reflected a more complete and closer-to-final version of Axioma’s. . .product.”  The expert was unable to produce any “smoking gun” which suggested that later versions of the software would in fact include MSCI’s source code.  However, the Court of Appeals nevertheless bent over backwards to permit the plaintiff to attempt to prove its case.

This article is intended only as a general discussion of these issues.  It is not considered to be legal advice or relied upon.  We would be pleased to consider providing additional details or advice about specific situations.  For additional information on this topic,  please feel free to contact Mark Moore who regularly counsels and litigates for clients in connection with business disputes.