Ambiguous Intellectual Property Rights Means Litigation Abuse

Ambiguous Intellectual Property Rights Means Litigation Abuse

A legal case worthy of a TV drama is unfolding in Texas — with much at stake for American companies and consumers. The dispute over trade secrets — which resulted in a massive $706 million jury award last year and has since been reportedly exposed as an elaborate fraud — has now been appealed. But the rippling effects of the case, and continuing problems with intellectual property protections in the United States, will be felt for years to come.

The case pitted a struggling housing data analytics startup, HouseCanary, against Amrock (then known as Title Source), a company specializing in real estate valuation. Back in 2015, the two signed a contract for the use of a revolutionary new app for mobile devices HouseCanary claimed to have developed that would better estimate real estate values. After HouseCanary delivered nothing but “completely unusable” products, Amrock sued for breach of contract. HouseCanary filed a countersuit, alleging that Amrock had exploited their agreement to gain unauthorized access to HouseCanary’s proprietary algorithms, data, and other trade secrets.

HouseCanary’s case was weak from the outset. Since Automated Valuation Models (AVMs) have been widely used in the real estate industry since the 1980s and all tend to be highly similar, a company claiming to be the victim of intellectual property theft should have a high burden of proof in order to show that specific features of its AVM have been misappropriated. HouseCanary claimed the information Amrock allegedly stole was worth hundreds of millions of dollars, despite the fact that it had agreed to give Amrock access to the purported trade secrets for only $5 million per year.

In addition, Amrock already had its own robust trove of data based on years of business before its agreement with HouseCanary, and had easy access to other free AVMs in the public domain. So, it defies logic that Amrock would have ripped off HouseCanary’s products in the first place.

By almost any standard, HouseCanary’s lawsuit was a frivolous waste of time and a vindictive, long-shot effort to make some money. Incredibly, HouseCanary’s emotional appeals and half-truths were enough to convince the jury that it had been the victim of an egregious violation of its intellectual property rights and Amrock was ordered to pay $706 million in damages, one of the largest sums in recent history.

It didn’t take long for the case to unravel. Within hours of the verdict, a whistleblower — later revealed to be Anthony Roveda, HouseCanary’s former director of appraiser experience — admitted that HouseCanary’s entire legal case was built on a mountain of lies. Roveda revealed that the AVM HouseCanary claimed as its own was actually developed by another company and merely repackaged to make it seem like a new product. Several other former HouseCanary employees also came forward with shocking details about HouseCanary’s deceptions, misrepresentations, and even collusion with an Amrock employee who was promised lucrative opportunities in exchange for helping to conceal the fact that HouseCanary lacked any propriety technology and hadn’t even developed a functioning AVM.

In light of these shocking revelations, Amrock has appealed the verdict and requested a retrial. While the ultimate outcome of the case is still uncertain, legal experts have assigned “mammoth significance” to this case for its potential to shape the future of trade secrets litigation.

The prospect of large jury awards for bogus trade secrets claims is sure to encourage other bad actors to file more frivolous lawsuits and go “court shopping” for friendly forums. The U.S. District Court for the Eastern District of Texas is widely known for favoring plaintiffs in intellectual property cases, so much so that nearly half of all patent cases in the U.S. are filed there. The court’s procedures and practices have been criticized for imposing significant and unnecessary costs on companies and individuals accused of intellectual property infringement. Companies like Apple are fleeing the area to avoid predatory patent trolls that cost the U.S. economy more than $100 billion per year. The rise of excessive verdicts will only result in more courts like the Eastern District of Texas.

A related issue is that weak patent protections and a lack of clarity over intellectual property rights discourage innovation and cause inventors to shy away from valuable research that would benefit consumers. Stronger standards in intellectual property would give entrepreneurs the incentives to develop new technologies while protecting companies like Amrock from baseless litigation. One indication that our system for resolving patent disputes needs reform is that in more than half of cases, an appellate court ends up overturning at least part of a district court’s decision — sapping money that would be better directed to research and development.

The HouseCanary case is just the tip of the iceberg of America’s dysfunctional intellectual property system.

Steve Pociask is president for the American Consumer Institute, a nonprofit educational and research organization. For more information about the Institute, visit www.TheAmericanConsumer.Org.

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