A data-analytics start-up, HouseCanary, recently obtained the largest IP jury verdict of 2018, totaling more than $706m in compensatory and punitive damages. Curiously, HouseCanary did not initiate the lawsuit, but rather obtained this award after filing a counterclaim in a suit brought by a much larger company, Title Source.
HouseCanary ultimately turned the tables on Title Source and presented such a compelling case that a Texas state court jury asked whether it could award more than $403.2m in punitive damages, and "if so what would be the max amount we can give?" While the total award may or may not hold up on appeal, this case provides a cautionary tale about carefully controlling information obtained from licensees and respecting contractual provisions regarding the use and protection of that information. It also highlights the need to get your own house in order before setting foot in court.
Background
Title Source, now known as Amrock, describes itself as "the nation's largest independent company offering title insurance, valuations, and closing services."1 The company provides valuation services for sister company Quicken Loans, enabling it to determine whether to grant home loans, refinance loans and the like.
For its valuation services, Title Source began working with HouseCanary, a San Francisco start-up firm specialising in real estate appraisal software that includes an automated valuation model that can quickly predict property values, expected changes to those values, and associated risks. HouseCanary is one of several companies attempting to use technology to automate home appraisals, which have traditionally relied on manual processes and in-home inspections.
In connection with their collaboration, Title Source and HouseCanary entered into two key agreements. First, in 2013, they executed an NDA prohibiting, among other things, disassembling or decompiling software, reverse engineering the design and function of any shared confidential information, and developing any software product or business system derived from the confidential information.2 Secondly, in 2015, they entered into an agreement providing Title Source a licence to HouseCanary's appraisal software for $5m per year. Like the NDA, the licence agreement forbade reverse engineering and any unauthorised use of HouseCanary's appraisal data.3
The relationship between HouseCanary and Title Source deteriorated. Although HouseCanary provided software and information to Title Source over an 18-month period, it was not paid for its work. According to Title Source, it never received any working software from HouseCanary, prompting Title Source to develop its own in-house appraisal tool.4
But HouseCanary has a different take on things. According to HouseCanary's counsel, Title Source kept seeking more and more details about their appraisal model, all the while assuring House Canary that Title Source was not using the information to develop its own model.5 And those assurances proved false.
The Lawsuit and Trial
Title Source filed suit in Texas state court on 12 April, 2016, alleging nonperformance under the licence agreement and breach of the NDA based on HouseCanary having revealed its confidential licensing relationship with Title Source. HouseCanary then counterclaimed for breach of contract, fraud, and misappropriation of trade secrets.
During the course of litigation, HouseCanary learned that Title Source had, in fact, developed its own automated appraisal model. For example, HouseCanary found online a document that had not been produced by Title Source, specifically, a presentation from a Quicken Loans Technology Conference that took place in September 2016 titled: "Title Source Automated Valuation Model". And discovery revealed that Title Source downloaded over 150,000 HouseCanary home value reports between 6 January, 2016 and 19 May, 2016, and that even before this time, Title Source had planned several potential projects based on using the HouseCanary data. According to HouseCanary's theory of the case, this and other evidence showed that Title Source violated their agreements by downloading thousands of confidential data files to reverse engineer HouseCanary's products.
The trial lasted seven weeks, with the first half focusing on Title Source's claims against HouseCanary, and the second half on HouseCanary's trade secret and contract claims against Title Source. After completion of the trial, the 12-person jury unanimously found that Title Source misappropriated trade secrets, violated the companies' agreements, and engaged in fraud by assuring HouseCanary that it was not developing its own competing valuation models.
The jury awarded HouseCanary $201.6m for trade secret misappropriation, twice that amount ($403.2m) as exemplary damages for misappropriation, $33.8m for fraud, and twice that amount ($67.6m) as exemplary damages for the fraud. Additionally, the jury rejected all of Title Source's claims against HouseCanary, finding, inter alia, that HouseCanary did not commit fraud or fail to comply with its contractual obligations with Title Source. Amrock has indicated that it will appeal.
Lessons
The Title Source case illustrates the extreme care that must be taken when receiving confidential information from licensees. It also exemplifies a situation where reverse engineering, normally a perfectly appropriate activity, cannot be performed due to contractual restrictions. Last, it teaches that a company should conduct thorough due diligence before filing a lawsuit and continue to monitor activities, including with an eye towards settlement, as a case proceeds.
Trade Secret Information
Title Source could have, and should have, taken greater care with how it treated the confidential information it received from HouseCanary. For context, this case involved the version of the Uniform Trade Secret Act (UTSA) applicable under Texas state law, which broadly defines a trade secret as any information that derives independent economic value by virtue of its secrecy (more specifically, by virtue of not being generally known or readily ascertainable by proper means by one who could obtain value from its disclosure), and that is the subject of reasonable efforts to maintain such secrecy.
Tex Civ Prac & Rem Code § 134A.002(6).6 The "Appraisal, analytics, metrics, reports or Data" at issue in Title Source squarely fall under this definition. Both the NDA and licence agreement contain contractual requirements for the keeping this information confidential. Given this backdrop, Title Source received trade secret information that should have been very carefully handled.
What Title Source did with that information was hotly contested during the trial. For example, Title Source contended that it did not "use" HouseCanary's information when making its own appraisal model. But after seeing the evidence during a lengthy trial, the jury found otherwise. Title Source could have protected itself from potential misappropriation (or the appearance of such misappropriation) by preventing their data science team from accessing HouseCanary's confidential information and explicitly instructing those with access to HouseCanary's information not to work on competing products.
Reverse Engineering
Many companies engage in reverse-engineering activities involving competitors' products or services, and these activities are usually permissible.7 Indeed, the Texas UTSA specifically provides that reverse engineering is considered a "proper means" of acquiring information "unless prohibited", Tex Civ Prac & Rem Code § 134A.002(4). But that was the point in Title Source—reverse engineering was expressly forbidden in the NDA and licence agreement. By engaging in this prohibited activity, Title House exposed itself to liability for both breach of contract and trade secret misappropriation.
Absent contractual prohibitions on reverse engineering, such activities may contribute to independent development of information that would otherwise be protected as a trade secret. In Texas Advanced Optoelectronic Solutions, Inc v. Renesas Electronics America, Inc, the appellate court held that while the defendant, Intersil, had misappropriated TAOS's design for a 1:1 interleaved photodiode array with information obtained during unsuccessful merger discussions, that design later became accessible to Intersil through proper means, specifically, reverse engineering.8
The court concluded that "[s]ecrecy protection terminated at the end of the period of time it would have taken Intersil, after Intersil's permissible discovery of the photodiode structure, to recreate that structure in its own products."9 As a result, the court determined that the vast majority of damages attributable to that misappropriation (over 90%) had been improperly awarded.
Litigation Due Diligence
Title Source also provides a cautionary lesson about being careful what you wish for when litigation is involved. While it is difficult to know what Title Source's counsel knew at the beginning of the case about how HouseCanary's information had been handled, they certainly would have known that nationwide Title Source represented a much wealthier target than start-up HouseCanary. Indeed, as noted by HouseCanary's counsel following trial, "I don't think the irony should be lost on anyone: They sued us first. There probably would never have been a lawsuit but that they sued us first."10
Furthermore, as the case progressed, it seems highly likely that at least some opportunities for settlement presented themselves, perhaps in conjunction with a creative business arrangement. Waiting until positions harden after trial, and perhaps for years during the appellate process, raises the stakes and diverts management's attention from more productive business activities.
Summary
Title Source will be remembered as a monster intellectual property case that might have been avoided. It demonstrates the unique and threatening nature of trade secret law. While juries might miss some complexities of modern technology, they feel competent about deciding the issue of theft. For this reason, companies should protect themselves when receiving confidential information from outsiders by carefully safeguarding and properly using that information.
Footnotes
1 See https://www.amrock.com/about/#about-us (last visited 9 May, 2018).
2 Plaintiff's Tr Ex 1.
3 Plaintiff's Tr Ex 3.
4 "Payout in Gilbert Title Company Case Likely to Be Far Less Than Jury's $706 million," Crain's Detroit Business (16 Mar, 2018).
5 "Susman Team Wins $706.2M Trade Secret Verdict for Real Estate Valuation Client," Texas Lawyer, (16 Mar, 2018).
6 The UTSA has been adopted by 48 of the 50 states, with only New York and Massachusetts still relying on their common law definitions. The definition of a "trade secret" under the federal Defend Trade Secret Act is substantially the same as the UTSA definition.
7 See Kewanee Oil Co v. Bicron Corp, 416 U.S. 470, 476 (1974) ("A trade secret law, however, does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture.").
8 -- F.3d --, 2018 WL 2011463, *9 (Fed Cir 1 May, 2018).
9 Id
10 See n.5, supra.
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