Trade Secrets Litigation: Do Damages Awarded in Texas Case Have Broader Ramifications?

 Operator:  Welcome to The Federalist Society's Practice Group Podcast. The following podcast, hosted by The Federalist Society's Litigation Practice Group, was recorded on Tuesday, December 17, 2019, during a live teleforum conference call held exclusively for Federalist Society members.          

 

Wesley Hodges:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is titled, "Trade Secrets Litigation: Do Damages Awarded in Texas Case Have Broader Ramifications?" My name is Wesley Hodges, and I am the Associate Director of Practice Groups at The Federalist Society.

 

      As always, please note that all expressions of opinion are those of the experts on today's call.

 

      Today, we are very fortunate to have with us Mr. Curt Levey, who is President of The Committee for Justice, and Ashley Baker, who is Director of Public Policy for The Committee for Justice. After our speakers give their remarks, we will have time for your questions.

 

Thank you very much for sharing with us today. Curt, I believe the floor is yours to begin.

 

Curt Levey:  Thank you. The case that we’re discussing today is Title Source v. HouseCanary. It was tried in a Texas State Court in San Antonio, and it's notable and interesting because of the outrageous verdict involved—I'll get to that in a second—and the larger problem of wild, punitive damage awards and the growing problem of trade secret litigation abuse and other systemic problems that are highlighted by this case.

 

      It involves two companies: Title Source, who is now called Amrock, and HouseCanary. They're both in the real estate appraisal and data market. And originally, they were working together, but that went south. And the result was one of the biggest trade secret cases and largest punitive damage awards on record.

 

      In March of last year, the jury awarded HouseCanary a really jaw-dropping judgment of $705 million in compensatory and punitive damages after accepting wholesale HouseCanary's claim that Amrock had misappropriated trade secrets. The case is now on appeal in the Texas Court of Appeals.

 

      The technology involved is something called automated valuation models or AVMs. They're computer models that are often based on AI, and they're used to appraise property values by analyzing the characteristics of the property, comparable properties, basically like a human appraiser would do. And you may have used this online, Zillow or a website like that, to see what the value of your house is. It's a readily available technology.

 

      And I got interested in the case, as I say, partly because of the verdict and the growing problem of trade secret litigation abuse but also because I built similar AVMs before law school when I was working as a scientist at an AI start-up company in California. My job was building AI, or as we called it at the time, neural network models for various domains, mostly financial and military. And that's actually where I got my first exposure to IP before law school. I invented and patented a new technology for explaining the decisions made by these neural network models, which are otherwise black boxes. And being very familiar with the technology, I realized how outrageous the jury's decision had been.

 

      I guess I should review the law governing trade secrets. This particular case was litigated under Texas Uniform Trade Secrets Act. The basis for the Texas law and other state laws is the Uniform Law Commission's Uniform Trade Secrets Act. It's been adopted, I believe, by all but New York and North Carolina. Texas was actually one of the last to adopt it in 2013. There's also a federal statute on this: the Defend Trade Secrets Act of 2016, which was designed to be similar to the Uniform Act.

 

      In all of these laws, there's basically three prongs: the claimed trade secret must not be generally known or readily ascertainable through proper means—that should be obvious why that's a prong; the trade secret must have economic value due to its secrecy—it should also be obvious why that's a prong; and then the trade secret holder must use reasonable measures to protect the secrecy of the info. So in other words, the fact that it was misappropriate shouldn't be the fault of the plaintiff.

 

      Give you a little history of the case, in 2015, Amrock agreed to license an appraisal app that HouseCanary was developing. But then they strung Amrock along saying, "We're working on it. We're working on it." Amrock ultimately filed a breach of contract dispute for $5 million, which is small change now given how big the case wound up being.

 

And then HouseCanary countersued, primarily with trade secret claims, and the jury awarded $235 million in compensatory damages. Double that to add another $470 million for punitive, and then the Court added another $35 million for interest and attorney fees, and you've got a total of $740 million.

 

      The judge denied Amrock's motion for judgment notwithstanding a verdict and for a new trial. And then as a sort of interesting twist, immediately after judgment, HouseCanary sued Quicken Loans, which has the same parent as Amrock, in federal court in Texas. So they sued under both the Texas law and the federal Defend Trade Secrets Act.

 

And the claim there is that Quicken was also responsible for the trade secret theft. That's a real stretch, a real stretch. But the goal there seems to be to make sure there's enough pockets or insurance coverage to pay the $740 million or whatever portion of it survives on appeal. There's no trial yet. I will focus my remarks on the state case.

 

      What makes this such an outrageous decision by the jury? Well, I think most outrageous or most shocking is that right after the verdict, four whistleblowers, all of whom were former HouseCanary executives, came forward, and they did so as a matter of conscience. And they told Amrock that the verdict was based on lies and spin and that HouseCanary employees have been instructed to lie to Amrock about the app that they were developing and never delivered. And the whistleblowers said there are no trade secrets to steal. There's nothing proprietary, let alone anything worth hundreds of millions of dollars.

 

      They also disclosed there had been collusion between an Amrock employee and HouseCanary management, which promised the Amrock employee a very good job. And they corroborated their testimony with documentation. They all, all four, came to testify at the hearing for a new trial, but the standard for a new trial was very high and the judge denied it, giving no reasons for denying it.

 

      So another outrageous part of it is that -- well, to some degree, you'd have to have worked on these things to know how laughable the trade secret claims are, but for one thing, HouseCanary never provided Amrock with source code or algorithms for the purported trade secrets. So it's just not clear how HouseCanary could've stolen them even if it had wanted to. And, in fact, because HouseCanary knew this, they told the jury that Amrock must've gotten the technology through reverse engineering using what it called a "magic machine." That's what they told the jury and I guess what the jury believed.

     

      Like I said, trade secret claims are technical, so if you want the details and why they're laughable, look for an article I had in IPWatchdog a couple of months ago called, "The Curious Case of the Trade Secrets that Weren't."

 

      Also outrageous is just the size of the judgment that bears no relationship to economic reality. It was arrived at just by buying HouseCanary's claim that the trade secrets were worth $200 million. They just bought it hook, line, and sinker. The $235 was doubled to become $470 in punitive. The whole AVM industry is just worth $70 million a year, and HouseCanary is just a tiny part of that so it's just ridiculous that the AVM trade secrets were worth $200 million.

 

      In fact, HC is just a struggling start-up. It's not profitable. Its total revenues for all of its products during the period in question is one-hundredth of what they're claiming of the $200 million figure. HouseCanary may have been dreaming of a bright future, but under Texas law, speculative damage awards are just not permitted.

 

      What, again, shocked me most is just my experience. You can imagine my surprise when I heard that HouseCanary's attorneys had convinced a jury that AVM technology that was indistinguishable from models that I had built 20-plus years ago had been invented by a company that was founded just six years ago. AVMs, again, are publicly available today. They're widespread. I'll go beyond that. They're really a dime a dozen. There are free ones available online. They're hardly worth millions of dollars.

 

      The bottom line is that all the technology for which HouseCanary claimed trade secrets fall far short of being a trade secret and/or is something that Amrock had no opportunity or need to steal. Add in the astronomical judgment here, and this is just one of the worst jury decisions that I've ever seen. I think the chances are good on appeal. Having four whistleblowers is quite unusual. There are top notch attorneys involved on appeal that should be able to right the wrongs that were done at trial.

 

      Trials can be theater and the counsel for HouseCanary put on a good show, but I don't think they're going to be able to fool an appeals court. So I expect the judgment will, at very least, be reduced in court or by settlement. And, again, I think this case is interesting beyond its own details because of the systemic problems that are involved like wild punitive damage awards, the experts here really weren't qualified in many cases; that is HouseCanary's experts were seemingly willing to testify to anything. And it's just really easy, especially for good plaintiff attorneys, to confuse juries in highly technical IP cases.

 

      And last but not least, this is a sign of the growing abuse of trade secret litigation that threaten innovation among other things. And I'm going to turn it over to Ashley to discuss just that: trade secret litigation abuse.

 

Ashley Baker:  Sure. I'm going to take a step back from that, so then look at the trade secrets law of the past year or two. And you hear a lot particularly with civil suits like oh, this settlement -- this judgment will lead to a lens light of former litigation. And as we all know, sometimes that's hyperbole, sometimes it's not.

 

      And this case, it's really not. There are a couple of factors that really compound that. We see a rise in the number of trade secret suits across the nation, so this isn't limited to just Texas. In 2018, there was actually a 30 percent increase in the number of trade secret claims filed. So we see this huge increase in the number of trade secrets claims. We actually see a decrease in the number of patent claims, and there are a few reasons for that. A few reasons for the number of trade secret suits that I'm going to kind of get into.

 

      And each of those reasons are one, you see these astronomical settlements, such as the one that we're talking about here in the HouseCanary v. Amrock case. Another is a federal law called the Defend Trade Secret Act, which gives them standing in federal courts as well as state courts. And another is limits on where you can file patent claims. Patent eligibility is another issue. And then just the digitization of the American economy and workplace mobility in the 21st century is another issue.

 

      As of the other large settlements, 69 percent of the time, the jury sides with the plaintiff. And any sort of trade secret case that is settled -- sorry, not settled, that's where the jury reaches a verdict, which is a pretty large amount, particularly considering that they tend to -- the jury tends to really strongly go one way or another in these cases, as we can see with this settlement. They very much believed one side and not the other.

 

      So in the past year, the top five verdicts were all worth over $100 million. We saw one in California. There was the one involving Waymo, and that was $245 million, which is pretty large. These are some pretty large companies which it's still a large settlement. And then there was a verdict in -- another verdict in California that was $223 million. There was a large one in Massachusetts as well.

 

      We saw these cases and they're kind of catching the attention of the Plaintiff's Bar because there's a lot of money at stake in this overall. And then, so we have the Defend Trade Secrets Act, which was passed in 2016, which was an attempt to bring some uniformity to state law and make it easier to bring a claim in federal court with a federal civil cause of action for a trade secret misappropriation.

 

      There was no preemption in that bill so essentially what it did was you now have standing in both state and federal court, and it defines a trade secret very broadly. It actually defines trade secret as “all forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulations, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether how stored, compiled, or memorialized physically, electronically, graphically, photographically, or in writing.” So pretty much anything that you, in their words, go through a reasonable effort to maintain its secret.

 

      There was also some litigation now that should decide what is a reasonable effort and what is not. So that's vague as well. So that makes it pretty easy to file a claim under the DTSA, and the number of filings have increased from 900 -- within one year, from 900 cases per year in 2016 to around 1,134 cases months after. So we already see a sharp rise in litigation following the DTSA, and that's only going up. We'll have to see where that lands us next year.

 

      But also, we have some reforms to IP law that’s leading to this as well, particularly limits on where you can file patent claims. There's this U.S. Supreme Court case from 2017—that was the TC Heartland—case that held that defendants in patent lawsuits may only be sued where they are incorporated or have a physical place of business.

 

      So this limited the ability of litigants to pick a plaintiff differently than you, leading to a shift in where cases are filed. As we know the Eastern District of Texas was the jurisdiction with the largest patent docket in the country. It actually had a 72 percent decrease in new patent lawsuits over the year following the TC Heartland decision.

     

      On the other hand, patent lawsuits in the U.S. District Court for the District of the Illinois rose by 72 percent, and the U.S. District Court for the Northern District of California rose by 118 percent. So essentially, you're seeing, in Texas specifically, you see these patent trolls being replaced by what are essentially trade secret trolls in this case. Plaintiffs aren't really benefitting from patent suits anymore to the extent that they used to. And the damages are a lot larger in these trade secret cases, especially with this case. And that's why this is a particularly dangerous settlement is if you let this stand, then, of course, we're going to see a lot of copycat suits.

 

      Also patent eligibility is an issue, particularly following the Supreme Court's decision in Alice. So, I mean, this is a broader problem than how it kind of connects to this case specifically. But knowing the trends in patent law, many companies, they are opting for trade secret protection instead of patent protection. But applying for a patent means exposing the trade secrets or confidential information anyway, so there's kind of some tension between disclosure for patent purposes and preservation of trade secrets.

 

      But it is just generally -- with software, it's harder to get patents and more inventions are considered patent ineligible. More inventions are considered obvious in view of prior art. It's easier to challenge patent validity. Many patents are eliminated by the USPTO, and many are eliminated through litigation in federal court. So it's also harder to prove patent infringement. And many patent infringement suits are thrown out of court early. So that kind of leads us to more litigation on trade secrets.

     

      We also have digitization and workplace mobility. With a digital economy, it's easier to just walk away from your former employer with something on a thumb drive or email yourself copies of whatever it is on their computer that might be considered a trade secret. So digital evidence is a lot easier to take away, to take with you.

 

      And workforce mobility, it was a long time ago that you'd graduate from college and have the same career, work for the same employer for 20-something years. And now, most people expect to have a new job within the next 2-3 years. So if you combine those two factors, that makes it particularly easy to transfer trade secrets.

 

      So we also have a -- particularly over the past year with the federal state level legislation, restricting non-compete with certain confidence. So we see more people going from tech company to tech company and taking their data with them. So all of those issues kind of compound the danger we see here with this large settlement and makes it easier, for the Plaintiff's Bar particularly, to see that a lot of money is at stake. And these suits are already on the rise, so it's just accelerating that trend.

 

      Curt, do you have anything to add?

 

Curt Levey:  Yeah. I might add, with regard to the mobility of employees, before law school, when I was working for the AI start-up, we got a few employees from another company and they, other company, immediately sued us for violations of their trade secrets.

 

      It was bogus and ultimately didn’t succeed, but that was definitely brought on simply because they panicked about losing their employees. And I guess they worried that trade secrets would be stolen, but they actually weren't.

 

Ashley Baker:  It's really easy to do that now, and I know there was another case in Texas last year, which wasn't exactly the same scenario. That does bring to mind the fact that sometimes this litigation, the attorney's fees really outweighs something that's just kind of a bogus allegation. And this case, I think, there was $4 million in actual damages and 50 times that was the attorney's fees, and that was determined on the appeal in Texas. So it's very easy to make those claims.

 

Curt Levey:  But trolls, plaintiff's attorneys will find whatever is the easiest pathway, and with new restrictions on where patents suits can be filed and it being harder to patent things, I guess it's inevitable that companies would rely more on trade secrets but also plaintiff's attorneys would see it more and more as something -- I'm sure they wouldn't use the word abuse but certainly, in this and several other cases, they certainly did a good job of fooling the jury.

 

Ashley Baker:  Well, I think it's symptomatic too of a larger problem we have in the United States with software patents and patent eligibility. This wouldn't be nearly as much of a problem if it were easier to patent software. Also, you have the larger trade war and you see it on the media, this -- trade secrets kind of thrown around a lot with Huawei and with China and with Russia and has a little bit of different issues. That falls under the Economic Espionage Act.

 

      But if we were able to patent things more easily and also had tighter restrictions maybe on some of these trade issues, then maybe that would solve part of the problem.

 

Curt Levey:  I wonder if this is going to be affected at all by the outcome of the Oracle v. Google suit, which is ultimately about patenting software. Technically, they're talking about APIs, which are function calls within software, but it really is about the -- if I said patentability, I meant to say copyrightability of software. And I guess if the result of this lawsuit is to make it harder to copyright software or to make fair use easier, then there's going to be even more reliance on trade secrets, I would imagine.

 

      It's not a bad thing. I believe, and I think you, Ashley, believe too, in strong IP protection. But when it gets abused, I think it winds up having an adverse effect on people who have real IP to protect.

 

Ashley Baker:  Well, you mentioned the Oracle case. I do think that's reading a lot of tea leaves. The two questions the Supreme Court granted -- the first one of the two was just a simple whether or not software is copyrightable. And that's interesting, though, is that really hasn't been a matter of dispute at all for the past 25 years. Software, of course, is copyrightable.

 

Curt Levey:  Google's claim is that because it was the so-called API, application programming interface, that it's not copyrightable. But, again, that's just another way of saying well, it's a small chunk of computer code, so it's not copyrightable. I, personally, don't see the argument there. The fair use argument might be the more interesting one.

 

      But look, the bottom line is at the end of the day, if Google is allowed to do what it did under copyright, then I would think companies would try to rely on trade secrets.

 

Ashley Baker:  Seeing a significantly different issue, coming back to this case, what do you think are the broader ramifications immediately and in the long term?

 

Curt Levey:  Well, this case is getting a lot publicity so, unfortunately, if the verdict holds up, I think it's going to be a signal to plaintiff's attorneys everywhere that it's a lottery worth entering. Like I said, there's systemic problems here that I don't know we can necessarily address. The wild punitive damage awards, there is this Supreme Court precedent that says that if the punitive damage awards are much larger, ten times or so, the compensatory damage award, that that violates due process.

 

That's not the case here because the compensatory damage awards were $235 million. Of course, if those get reduced, then I'm sure the punitive damage awards will get reduced even without bringing in Supreme Court precedent and due process. But what can we do about wild punitive damage awards in general? I don't know.

 

It's an offense. It's a problem with the jury system, and it's a problem with the fact that it's relatively easy to get qualified as an expert even if you don't really know what you're talking about. And people that make a living being experts -- I looked at what a lot of the experts for HouseCanary testified to and it's just not true.

 

So, like I said, I don't know if there's any great solutions here. I guess really just to call attention to this, to make sure that courts themselves are educated. I won't get into details. I think there's a lot of things—decisions the court made during trial—that could've been handled differently. So, perhaps, more education is needed for judges as well.

 

Any other thoughts, Ashley?

 

Ashley Baker:  You just said it several -- you said it's a problem within jury system, and I agree with that to some extent. I think, really, in this case, though, it was less the jury and more so the evidence the jury was allowed to hear and the arguments the plaintiffs were really allowed to make. They were just completely detached from reality saying literally that it's a magic machine.

 

Curt Levey:  Yeah. Exactly. Exactly.

 

Ashley Baker:  And this is kind of a ridiculous case. And like I said at the beginning, this will definitely lead to more lawsuits. And you hear that argument a lot, in a lot of civil cases, in here. I really do think this is the camel's nose under the tent for these sorts of cases, and that we'll definitely see more -- it sends a clear message to future litigants that there's a lot of money here at stake.

 

Curt Levey:  The Court also allowed a lot of prejudicial statement. HouseCanary's lawyers kept referring to send a message to greedy corporate American --

 

Ashley Baker:  Corporate America, yeah.

 

Curt Levey:  -- And statements like that, which probably should not -- are totally prejudicial and probably should not have been allowed. As you said, it's not just the juries, it's courts as well and the way that the judge handled this, but that's all being pointed out.

 

      On appeal, the case has been briefed. We're going to submit an amicus brief, Committee for Justice that is. I know a bunch of other groups are submitting amicus briefs. And hopefully, things will go better in the Texas Court of Appeals.

 

Wesley Hodges:  Well, very good. Thank you so much, Curt, and thank you, Ashley. Here's our first caller of the day.

 

Howard Steele:  Hi, this is Howard Steele. I'm an attorney. I do trade secret law in Texas, and this is more just a little thought. At least in Harris County, only about .4 percent of cases go to trial. And so the fact that that case went to trial in the first place was probably lawyer strategy kind of stuff. And another issue in San Antonio, which is -- Austin's the same way. There's a circular docket. So your pre-trial motions, you won't have the same judge all the time, so sometimes that causes that problem. So that I think that might have had some impact on how the outcome went. Everybody just rolled the dice. It was just some thought that I wanted to throw out there for you. It's a little unusual procedural thing there in San Antonio.

 

Curt Levey:  Well, you know the plaintiff's law firm that represented HouseCanary, if you read their literature, they pride themselves on going to trial. That's how they distinguish themselves from all the other law firms. They're aggressive and they go to trial and they don't do a lot of -- they pride themselves on not doing a lot of pre-trial motions and focusing on the trial. And apparently, they're good at trials and appealing to juries.

 

Howard Steele:  It sure sounds that way.

 

Ashley Baker:  I think their site actually says that they prefer not to do discovery. It's pretty direct about that.

 

Howard Steele:  When you were bringing up all the facts, I was like, “sounds like somebody got outlawyered.”

 

Curt Levey:  Yeah. That's why I'm looking forward to the appeals court where the types of skill that work in front of a jury are not necessarily the skills that work in front of an appeals court.

 

Wesley Hodges:  So Curt and Ashley, I do want to turn the mic back to the both of you. Is there anything that you'd like to dive into for more detail or another topic you'd like to discuss?

 

Curt Levey:  Just point out again that for anyone who wants to know what I wasn't able to get into in detail is exactly what the trade secret claims were. Like I said, they were all revolved around these AVMs, but there were other related things such as the data used to build the AVM and various types of scores that were output by the model. And, again, they were all things that I was familiar with from my days in the industry, and I refuted them all in detail in my article in IPWatchdog. So, again, for those people in the audience who want to know more detail or who are techies and are interested in more of the technical and legal side of this, I do recommend that article.

 

Ashley Baker:  I would also chime in and say if you want to know more about this case or how to get involved or more about trade secrets in general as it relates as this, as it relates to trade secrets with China and Huawei or just the digital economy, you can go to our website and read there. You can find our contact information there as well. Our website is committeeforjustice.org.

 

Curt Levey:  Yeah, and if there's anyone in the audience who wants to write about this case or file an amicus brief, there's still time to do that. Contact us, and we'll -- we're not coordinating it, but we're happy to talk about what might be good angles to pursue. Because I know I'm worked up about this, again, just for the personal reason that I was involved with this before law school. But I hope to see others get involved because I'd like to see justice prevail here.

 

Wesley Hodges:  Wonderful. Well, thank you so much, Curt and Ashley, and for all the work you do at the Committee for Justice. On behalf of The Federalist Society, I'd like to thank you for the benefit of your valuable time and expertise today. We welcome all listener feedback by email. Thank you all for joining us. This call is now adjourned.

 

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