The Return of Jackpot Justice

COMMENTARY
The Return of Jackpot Justice

Recently, RealClear held a dinner discussion on the issue of Jackpot Justice — a big problem of the '90s, which, we thought, had been addressed. News Alert: A recent Texas decision just might bring back this practice of seeking whopping judgments unconnected to the cost of actual damages, or an underlying crime, or negligence.

Jackpot Justice was brought to frightening scale by such pioneers as Dickie Scruggs and Peter Angelos. These “selfless” champions of the little man developed such a well-oiled technique that it was browning out our economy — until it was brought to legal and political heel.

Scruggs was even so brazen to go on the record with “the joke”:

"What I call the 'magic jurisdiction' . . . [is] where the judiciary is elected with verdict money. The trial lawyers have established relationships with the judges that are elected; they’re State Court judges; they’re populists. They’ve got large populations of voters who are in on the deal, they’re getting their piece in many cases. And so, it’s a political force in their jurisdiction, and it’s almost impossible to get a fair trial if you’re a defendant in some of these places. The plaintiff lawyer walks in there and writes the number on the blackboard, and the first juror meets the last one coming out the door with that amount of money. . . The cases are not won in the courtroom. They’re won on the back roads long before the case goes to trial. Any lawyer fresh out of law school can walk in there and win the case, so it doesn’t matter what the evidence or the law is.”

After hearing about this new case, we have public reason for concern. Past success in curbing the practice of forum shopping was not a cure, but a long remission to this peculiar version of mad cow disease, which causes folks to go hunting in particular forums for cash cows to slaughter.

The basic elements of the case are boring: Back in 2015, Amrock, a company which specializes in real estate valuation, contracted HouseCanary, a housing data software company, for an app which HouseCanary never delivered. The application was supposed to revolutionize the way housing values are estimated. Instead, they delivered a “completely unusable” product and Amrock sued for breach of contract. HouseCanary then countersued, claiming Amrock was after their trade secrets all along.

The outcome was not one that Amrock expected. They did not get their $5 million back. Nor did they recover any legal fees. They didn’t even get to send the wholly appropriate message that a company with an idea but no substance can’t just “fake it until you make it” in our legal system.  Instead, it was HouseCanary who was successful in their countersuit. They were awarded a $706 million judgment —which was goosed up by the judge to $740 million — for the supposed intellectual property theft of a service that they were contracted and paid to deliver to Amrock.  

But there is a deeper reason for why the system is gamed in these favorable climes: the system cries out for gaming! The factual elements of cases like these are too esoteric for a normal jury. It’s too esoteric for even someone with a PhD in political science to reason through. This decision is a central casting example for professional juries.

Outside awards like these often get overturned on appeal — but we should all be scandalized and flabbergasted if the verdict isn’t vacated. It turns out that immediately after this judgment a whistleblower from HouseCanary — former director of appraiser experience Anthony Roveda — told a story much worse than a run of the mill “fake it till you make it” fraud.   Someone at our table compared the situation to Theranos — the billion-dollar fraud of a blood testing company that fleeced some Silicon Valley’s leading lights and featured in an HBO documentary called Out for Blood.

HouseCanary seems similar to Theranos. Both businesses exist in markets whose intellectual property often does not extend past the creativity of what’s in the PowerPoint deck. Both convince very wealthy, savvy Americans to invest in them.  Theranos famously raked in investors and supporters like James Mattis, George P. Shultz, Henry Kissinger, Joe Biden, and the Clintons.  HouseCanary raked what has been called a “bottomless pit” of $64 million in investment from the tech sector back in 2017 and attracting such notable investors as  Kobe Bryant, Eric Schmidt, and Penny Pritzker.  

But out of the discussion came notable differences that make HouseCanary unique and uniquely dangerous — particularly if the company’s practice is taken to scale, an effect that tends to follow big jury awards.  HouseCanary elevated the conflict of interest to high chutzpah art. Not only did the startup repackage intellectual property that was developed by another company and claimed it as its own.  It compromised Amrock’s Vice President and Chief Appraiser, getting him to conceal the dysfunctional nature of HouseCanary’s tech — including not only signing off on the Texas location for adjudication “if” things broke down, and then gave “surprise” sympathetic, testimony at the trial for HouseCanary, which surely influenced the massive jury verdict against Amrock.

In light of what the whistleblower has said, HouseCanary’s apparent business model is based on a modest gamble: At best they build and deliver the product to a satisfied customer. At worst — but not likely—they wind up in court, lose, and are required to refund the clients money. But, with the opposing Vice President and Chief Appraiser in HouseCanary’s pocket, and a favorable judicial forum that likes to side with the “little guy” and send messages to big companies, there is a huge upside and little risk. It’s practically an incentive to seek jackpot justice.

What separates HouseCanary from Theranos is that Theranos — to my knowledge — never had a legal strategy to deliver the cash when its R&D did not deliver on its promise, making HouseCarnary a Sneaky Pete con at a 9-figure price point. Elizabeth Holmes — the sociopathic founder of Theranos — and Dickie Scruggs surely were impressed.

Last time we went through this legal farce, the targets were big, graying companies with real problems and financial exposure. Now — if the HouseCanary ruling is not fully rebuked — not only will it give incentive to empty the pockets of existing American companies that have done nothing wrong. Letting it stand will unintentionally but necessarily contribute to a legal climate in which a sizable portion of our GDP will never be seen — because it will never be made.

Every client of HouseCanary, as well as every deep pocketed company engaging the tech industry in pursuit of 2.0 ambitions, needs to read the fine print of their agreement for signs of jackpot hunting — and be on the lookout for internal conflicts.

David DesRosiers is the publisher of RealClearPolitics.

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