A Texas Trade Secrets Case May Have Broader Implications for U.S. Companies

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 Thursday, March 7, 2019, during a live teleforum conference call held exclusively for Federalist Society members.     

 

Micah Wallen:  Welcome to The Federalist Society's teleforum conference call. This afternoon's topic is entitled "A Texas Trade Secrets Case May Have Broader Implications for United States Companies." My name is Micah Wallen, and I'm the Assistant Director of Practice Groups at The Federalist Society.

 

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

 

Today we are fortunate to have with us Randy Mastro, who is a Partner at Gibson, Dunn & Crutcher. After our speaker gives his remarks, we will then to go audience Q&A. Thank you for sharing with us today. Randy, the floor is yours.

 

Randy Mastro:  Thank you very much, and it's an honor to be here today and tell you about one of the most shocking experiences I've ever had in more than 35 years as a litigator, former federal prosecutor, and former public official. In fact, I've never had a case before, and that's saying something because I've had some shocking cases where, literally, a jury got it so wrong and was so mislead that the ramifications of its verdict to standing are profound for corporate America. And I say that having been the lead lawyer for Chevron in exposing a litigation fraud involving a U.S. lawyer, Steven Donziger, in Ecuador, perpetrated against Chevron a multi-billion dollar judgment. And we were able to expose that fraud in a racketeering case that we brought in the Southern District of New York, and The Wall Street Journal called it the "litigation fraud of the century."

 

Well, this case is in that category. And I want to tell you a little bit more about it. Last year, 2018, the Ides of March, a Texas state court jury returned a more than $700 million judgment in a trade secrets case against a company called TSI, now known as Amrock, in favor of a company called HouseCanary over what started as a breach of contract dispute for no more than $5 million. That morphed into HouseCanary claiming trade secrets violations and fraud, and convincing a Texas state court jury to award one of the largest trade secrets verdicts in Texas history, if not the largest trade secrets award in Texas history. Over $470 million of the award were in so-called punitive damages.

 

How did a $5 million breach of contract case brought by TSI against HouseCanary because HouseCanary's products – an appraisal app and an AVM – didn't work, how did that morph into a more than $700 million award in HouseCanary's favor? Well, let me start by saying what was involved in the underlying case.

 

Appraisal apps, AVM, these are terms used in an industry involving real estate, home values, comparable values, and how to quickly asses the value of a property and whether there's the potential for a mortgage comparing it to comparables in the field. The apps help you get the information quickly. The AVM – that's the data that goes into the app that's supposed to give you a good sense of comparables. This is well-traveled territory. Not much is new. People have been working with apps and working with data.

 

But HouseCanary claimed to be developing the state-of-the-art appraisal app, and claimed to have its own uniquely minted database to make that appraisal app generate the most reliable comparables and the best possible appraisal. And it sold that concept for TSI, and over a couple of year periods convinced TSI to stay the course while it continued to develop its product. And finally, TSI, realizing that that products weren't working, that the data wasn't unique or special, and that the product didn't work, pulled the cord and sued HouseCanary for $5 million in breach of contract damages. The contract itself was capped originally at $2 million in potential damages, and later at $5 million in potential damages.

 

What happened next is one of those "only in our jury system" circumstances that is really inexplicable. HouseCanary lawyers countered the breach of contract suit with a trade secrets violation and fraud case of their own. And even though HouseCanary literally had nothing to show for itself in terms of products, or sales, or revenues, it somehow convinced the jury at the end of the day to award of $700 million dollars.

 

There were no HouseCanary insiders who testified at that trial as whistleblowers. Only HouseCanary witnesses testifying in HouseCanary's favor. And the case ended up being a "he said, she said". HouseCanary claimed its products worked, and TSI ripped it off. TSI's witnesses claimed that HouseCanary's products didn't work, and that it has been ripped off. At the end of the day, that Texas jury sided with HouseCanary in a shocking way.

 

And what happened next is reality being stranger than fiction. The very next day after the jury's award, a whistleblower, a former HouseCanary executive, wrote to TSI's president and literally said, quote, "Your recent loss was based on fallacies and spin. You need to be aware that there was collusion among some of your people and HouseCanary. Like Jeremy Sicklick"—that's the CEO of HouseCanary—"and Jorden Petkovski," who had been an executive at TSI but was no longer there. Returning to the whistleblower's anonymous email: "You also need to know that you are correct in your comment that you were presented wireframes and apps that didn't function. You were lied to repeatedly. The HouseCanary AVM you're accused of stealing, started out as an overlay on the Black Knight AVM" – Black Knight having been an existing company that would sell its data for use as an AVM. And the whistleblower concluded, "HouseCanary never had any proprietary anything. It's all a lie."

 

Well, at that point TSI turned to our law firm to investigate after the jury verdict whether there was anyone who would come forward and tell the truth of what was really going on at HouseCanary. And in fact, based on our investigation, four former HouseCanary executives, shocked by the jury verdict and as a matter of conscience, came forward to tell the truth about HouseCanary – that its products didn't work; that it never had functioning products. It had no IP to steal because it had no IP. And that HouseCanary was able to hide this from TSI because of the collusion between its CEO and a former TSI executive to keep the truth from TSI. And that HouseCanary officials were told to lie to TSI about the progress they were making on their products when their products were not working.

 

We immediately went back to court. We filed a motion for a new trial because the jury never heard any of this evidence. It never heard that HouseCanary had a secret co-conspirator within TSI; that that secret co-conspirator within TSI had been induced to collaborate because job prospects were dangled in front of him, equity prospects at HouseCanary as an ultimate reward if he kept TSI's secrets that its products didn't work; that HouseCanary, aided by that secret co-conspirator within TSI, was able to keep doing business with TSI and at the same time hide from TSI that its app and AVM didn't work; that HouseCanary employees were ordered to mislead TSI and lie to TSI about the functionality and marketability of its products; and that HouseCanary even offered witness, not only before and during trial, but after trial when they already had their verdict in hand, lucrative consulting contracts to try to buy their cooperation and silence and keep them from telling the truth posttrial.

 

It's a shocking story. It's something that should never happen in American justice, but it did. And we were fortunate enough to receive a several day hearing. The trial judge gave us the opportunity to put these whistleblower witnesses on the stand. People who had no skin in the game. They no longer worked at HouseCanary. They hadn’t wanted to get involved in the first place. They thought it was just a $5 million breach of contract case. But when the jury rendered this shocking verdict, they felt compelled to come forward as a matter of conscience. And each of them came to San Antonio, Texas, to tell the truth on the stand. And it was blockbuster, shocking testimony.

 

But the legal standard is very high to obtain a new trial. And while I feel that we clearly met that standard, at the end of the day, the trial judge permitted us to make our record. He declined to order a new trial. But we were able to preserve a record to take on appeal in the Texas courts to get this shocking, wrong jury verdict overturned. It was a jury verdict that was supported by the use of so-called experts who testified way out of their expertise on subjects that they should have never been allowed to speak to the jury about. It was predicated on grossly inflated damages requests that the jury bought completely. HouseCanary had its damages experts testify that it should have been dated a rate of $11 every time the app was used, causing a huge, nine-figure compensatory damage award. Shortly after the trial, HouseCanary was posting on websites that its app could be used at $1 a use. HouseCanary somehow convinced the jury to award it six times the capped award for breach of contract, which started out at $2 million and could go as high as $5 million. And then, of course, it convinced the jury, piggybacking on those inflated compensatory damage awards, to award $470 million in punitive damages – a multiple of the compensatory damage award, but what a jury.

 

Had it heard the testimony of those whistleblowers who came forward for the first time, HouseCanary insiders, no axe to grind, to tell the truth about what was really going on at HouseCanary, corroborating their testimony with contemporaneous documents that had never been part of the court record because they were records retained by those four whistleblowers; what jury, had they heard that testimony, ever would have awarded HouseCanary any damages, much less over $700 million, $470 million of which were punitive? That jury never heard that HouseCanary defrauded TSI by collusion. That jury never heard that HC's own executives knew that its products didn't work. That jury never heard that HC's own executive knew that HC's consistently misrepresented the status of its products to TSI. And that jury never heard that HC offered its witnesses sham consulting agreements.

 

To us, this is a gross injustice that needs to be remedied. To us, it speaks volumes about the problems that still exist in our jury system – of excessive, punitive damage awards, of so-called expert testimony that never should reach juries, and of the most fundamental premise of our judicial system, that we aim to get to the truth in court cases in the face of jury verdicts that got it wrong, are so hard to turn around and get it right.

 

But we are very hopeful and confidant that on appeal the Texas appellate courts, and ultimately, the Texas Supreme Court, will right this wrong, this gross injustice. It has profound implications for American industry to have innovation in products, to recognize what's true innovation and what is bogus trade secret. To recognize what is common knowledge as opposed to common shakedown claims. And we remain hopeful and confident that the Texas appellate courts will right this gross injustice. So with that, I will close, and I will look forward to answering any questions that anyone has.

 

Micah Wallen:  Thank you, Randy. Not seeing any questions lined up right away, Randy, did you want to go ahead and tell us what you think is likely to happen at an appellate court level with a case like this?

 

Randy Mastro:  I think the evidence warranting a new trial is so compelling. It's unusual for one whistleblower to come forward, posttrial. That four did and that they corroborated their testimony with contemporaneous documents about the collusion, about the product failures, about the lies, about the scheme, it makes a compelling case for a new trial despite the jury verdict because it's so evident that any reasonable jury would have likely rendered a different verdict had they heard this evidence.

 

This is important. The award is so grossly excessive. This is an industry. The AVM industry nationwide it's only -- all AVM parties. The nationwide gross of that business is about $70 million. What a windfall for HouseCanary that basically had no business that was some years operating at a loss, but in any event was not a profitable company. Even if it had 100 percent of the industry, this jury award dwarfed 100 percent of the industry's growth. And it did not have, basically, any business. So I think that the appellate courts will be also very drawn to addressing, not only the gross injustice of the liability finding, but also the gross injustice of the excessive damage awards.

 

Micah Wallen:  And speaking of those punitive damages, where they amounted up to $470 million in this case, why do you think they represented such a high percentage here, and just a high amount?

 

Randy Mastro:  Because the jury got it wrong and was fed by HouseCanary's lawyers and experts a construct for measuring damages that grossly exaggerated those damages. Basically, what it did was the compensatory damages it awarded, it doubled for punitive damages. So you had about $235 million in compensatory damages, and they doubled that $470 million in punitive damages. You put the two numbers together, you're now over $700 million.

 

But in reality, when you look at the jury's told to award $11 a use of the app, their selling the use of the app for a dollar shortly after trial, that's 11 times inflate. That means the punitive damages are 22 times higher than what actual damages would've been had they had a legitimate claim, which they did not. And that flies squarely in the face of Supreme Court precedent in this area that courts, and juries, are still struggling to apply correctly. But fortunately, precedent has been established that spreads -- that exceeds 9 or 10 to 1 just offend due process. And in this case, it seems to be in a much bigger spread than that when you look at what any actual damage claim could have been had there been any legitimate damage claim, which there was not.

 

Micah Wallen:  Seeing two questions in the queue now, we will now go to our first question.

 

Betsy Clarke (sp):  This is Betsy Clarke from Columbus, Ohio. What were the reasons that the trial court gave for denying your client a new trial?

 

Randy Mastro:  That's a great question because under Texas law, there's a finite period of time for rendering that decision. And we literally had the hearing over several days, an evidentiary hearing, where each of these witnesses testified. And then we came back for closing arguments literally within days of the statutory cutoff for rendering such a decision. The trial court issued a one-line decision denying the motion. And there wasn't a rationale given for denying the motion. So I would only be speculating, but the trial court also showed us the courtesy of making sure that we had a fully developed record by having held those four days of posttrial evidentiary hearings so we could present those four witnesses. And then admitting into evidence, in that order, critical pieces of evidence that we had requested be made part of the court record.

 

So we have a strong and substantial record on appeal. And we don't have any explanation for why a new trial wasn't granted.

 

Micah Wallen:  We'll now go to our next question.

 

Cortney Alexander:  Cortney Alexander, intellectual property litigator with Kent and Rissley in Atlanta. So I have a question about your concern about the jury system because it sounds like a lot of your concern has to do with what the jury was allowed to base its decision on as well as then the trial court's decision on a motion for a new trial. So it sounds to me like your beef is really with the trial court judge, both how he handled the evidence that was presented to the jury and then the decision on the new trial. So what changes to the jury system would you propose, if I understood you -- you have some concerns about the jury system?

 

Randy Mastro:  Well, that's a very perceptive question from a trial lawyer. So I appreciate it. And, of course, we'll never be before that jury again, but we will be before the judges that we appear before on a regular basis, although I don't practice in San Antonio. The jury was allowed to hear a lot of evidence that it shouldn't have been allowed to hear. The jury was allowed to have damage theories, expert testimony, and other prejudicial material statements, evidence put before it that it shouldn't have. So in all those respects, we are appealing decisions made in the first instance by the trial court that then went to the jury.

 

The problem with the jury system in a case like this, of course it wouldn't have been as severe a problem had the judge been more attuned to the potential implications of some of the rulings by just allowing the jury to hear or be presented with certain evidence or arguments. The problem is that a jury can decide with one side or the other and go all in with that side. And in this case, HouseCanary's lawyers, having fed them a bill of goods but the jury having been convinced to go on that ride, went all in and came up with this grossly excessive jury award.

 

I'm not blaming the jury system entirely for that mistake because arguments and evidence and theories were allowed to be put before the jury that never should have been. And had they not been presented to the jury, the jury couldn't have gone where it did. But the problem in a case like this, particularly you're an IP practitioner, and while I have done a lot of IP cases over the years and we were not trial counsel in this case, we were hired posttrial to investigate the allegations of fraud from the whistleblower. And then we tried the posttrial evidentiary hearing for a new trial.

 

But the problem in these kinds of IP cases is that they are easier to confuse a jury. The dollars tend to be high. The concepts tend to be more complex. And I think that skillful plaintiff's lawyers are in a better position in a complex case like this, and you know the area well, it is easier to bamboozle a jury, I think, in a case like this. Of course, it's up to the defense to make sure that doesn't happen, and unfortunately, that didn't happen in this case. And unfortunately, it was only posttrial that anyone who had been a HouseCanary insider was willing to come forward and tell the truth.

 

Micah Wallen:  Randy, not seeing any more questions in the queue, did you want to offer any closing remarks for us? And if a question does come up to us in the meantime, I'll jump back in.

 

Randy Mastro:  Great. Thank you very much. First, thank you for the opportunity to address this group for which I have the greatest respect. There have been some articles written by legal scholars in Texas about what a shocking case this is and its potential, adverse ramifications in so many areas. I know this is a group that cares about the aberrations in our civil jury system, cares about punitive damages and the excesses that can occur in this context, and cares about the effect on innovation when cases that don't involve genuine innovation result in excessive jury verdicts like this one. I hope that more of you will be seized by this case, want to write about it, bring scrutiny on it, and focus on it because it is a true injustice of the American jury trial system. And it's so important that we remedy those mistakes when they happen so we have the best justice system we possibly can. And again, thank you for giving me the opportunity to speak to you today about this truly shocking case.

 

Micah Wallen:  All right. And on behalf of The Federalist Society, I want to thank our expert for the benefit of his valuable time and expertise today. We welcome listener feedback by email at [email protected]. Thank you all for joining us. We are adjourned

 

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