Nasdaq v. IEX Group: Nasdaq sues (again) a fledgling stock-exchange operator

Digest Reports Patent

Complaint and Demand for Jury Trial, Nasdaq, Inc. et al. v. IEX Group, Inc. et al., No. 3:18-cv-03014 (D.N.J., Mar. 1, 2018), hosted by IPWatchdog.

On March 1, 2018, Nasdaq Inc., a company that owns the Nasdaq stock market, sued another stock exchange operator, IEX Inc, in the United States District Court for the District of New Jersey, alleging seven counts of patent infringement. The patents involved mainly deal with electronic stock trading.  

In the complaint, Nasdaq alleged that since IEX’s foundation in 2012, it had hired at least four former Nasdaq employees, whose names were not disclosed in the complaint. The technologies involved were IEX’s primary trading platform and closing auction process. Nasdaq claimed that at least one of the employees, who participated in the filing of one or more of the seven patents-in-suit, disclosed the knowledge of the patents to IEX.

From 2010 to 2013, Nasdaq was awarded seven patents from the United States Patent and Trademark Office (USPTO) regarding its order book process, closing auction process, matching engine performance and data feed optimizations with US Patent Nos. 7,647,264, 7,895,112, 7,933,827, 8,117,609, 8,244,622, 8,280,797, 8,386,362. In the complaint, Nasdaq claimed that IEX knew that these patents were filed. According to Nasdaq, IEX acknowledged that its own closing auction process was “based on extensive review of the auction designs of” exchanges including Nasdaq’s and its process was designed to be “substantially similar to” that of Nasdaq. Due to these alleged infringements, Nasdaq sought a judgment that IEX has infringed Nasdaq’s patents, an injunction against IEX, royalties as compensatory damages for the use made by IEX, and treble damages for willful infringements pursuant to 35 U.S.C § 284 (2012).

In the past decade, the US exchange market has been dominated by the NYSE and Nasdaq, which had a combined market share of 40.9% in 2017, as reported by the Wall Street Journal.  Although highly prized in Michael Lewis’s 2014 best-seller, “Flash Boys,” IEX has not been very “flashy” after its appearance. Since the approval by the SEC in 2016 to be an official exchange, IEX has only acquired an additional market share of 0.7%.  Even though its market share reached a total of 2.2% in 2017, it was still much lower than a previously projected value of 8%. Founded by former RBC Capital Markets trader Brad Katsuyama, IEX was formed with a mission to deter high-speed traders, whom it claimed are favored by both the NYSE and Nasdaq. As a response, the NYSE and Nasdaq have rejected such accusation and criticized IEX’s speed bump.

However, this is not the first time Nasdaq sued an exchange operator. On the other hand, lawsuits alleging trade secrets disclosure from former employees are not uncommon among technology companies, as shown in a lawsuit filed by Tinder against Bumble last month. On September 1, 2017, Nasdaq sued Miami International Holdings Inc., alleging that the latter infringed Nasdaq’s patents and stole trade secrets also with the help of former Nasdaq employees. Complaint and Demand for Jury Trial, Nasdaq, Inc. et al. v. Miami International Holdings, Inc. et al. No. 3:17-cv-06664 (D.N.J., Sep. 1, 2017), hosted by Justia. In that lawsuit, Nasdaq claimed that at least 15 of its employees left and joined MIAX and four of them retained trade secrets improperly. Bloomberg reported earlier this month that, as a response, Miami International filed petitions before the Patent Trial and Appeal Board, arguing that the ideas of Nasdaq’s patents were too abstract and therefore the patents should be invalidated. 

Yang Yu is a 1L student at Harvard Law School.