Bloomberg Law
Jan. 22, 2020, 9:00 AM

INSIGHT: Did HouseCanary Stretch the Limits of Trade Secret Protections Too Far?

George Nethercutt J.
George Nethercutt J.
The George Nethercutt Foundation

In the coming months, a Texas court of appeals will reconsider a lower court’s ruling that awarded the Silicon Valley-based home valuation startup, HouseCanary, a stunning $740 million in damages for alleged misappropriations of its trade secrets. The outcome will have broad legal implications on what qualifies as trade secrets and the process for valuing intangible and often ambiguous intellectual property.

The case arises from a lawsuit filed by HouseCanary accusing Amrock (then known as Title Source) of stealing proprietary technology.

In 2015, Title Source contracted HouseCanary for $5 million per year to build an automated valuation model (AVM) and a mobile app that would allow users to assess property values on location. The products were not delivered on schedule. HouseCanary claimed Title Source took technology divulged in the creation process to develop its own competing platform, thereby misappropriating its intellectual property.

Title Source noted that the product HouseCanary delivered was “completely unusable,” not the innovative app that was promised.

Largest Award of 2018

A jury ruled in favor of HouseCanary—and awarded a sum of $706 million ($235 million for the misappropriation, a whopping $471 million in punitive damages, plus interest and attorney fees). Judge David Canales, who oversaw the trial, increased the verdict to $740 million, which included interest and attorneys’ fees.

This dizzying figure made it the largest IP jury verdict of 2018 and one of the largest on record.

The decision puzzled experts, who noted that many real estate services companies offer the technology for free online. Additionally, commonalities in source code make it hard to parse what, exactly, HouseCanary claims as its intellectual property. One of the developer’s own expert witnesses testified that there were not “any fingerprints, any clues, any reference to any HouseCanary technology” in the app that was ultimately created by Title Source.

Only days after the verdict, a whistleblower—a former HouseCanary executive—contacted Title Source’s CEO claiming that HouseCanary never had the information it pledged to deliver. Eventually, three more former HouseCanary executives testified under oath that the developer did not have “any IP to steal.”

The initial whistleblower indicated that the scheme to defraud Title Source relied on collusion between HouseCanary executives and Title Source Vice President Jordan Petkovski, who was promised a senior position and equity at HouseCanary for obfuscating the development process.

Another whistleblower was offered a $250 an hour consulting job “with no specifically-defined scope of work, nor any minimum or maximum number of hours per month,” apparently in exchange for their silence.

To Seal or Not to Seal

In a perhaps suggestive move, six weeks after the trial was completed, HouseCanary sought to seal court documents, which it argued would divulge its trade secrets—even though the information was publicly available during trial. The district court that initially heard the case, concurred, and sealed the information.

However, the Texas Fourth Court of Appeals overturned the order, upholding a precedent that once information is in the public domain the public has a right to it. The decision carries two key implications.

First, it will provide another look at the technology in question, which will provide clarity whether there were trade secrets to be stolen—a point of uncertainty, at best, given the revelations from former HouseCanary executives.

Second, the order to unseal the court documents calls into question the damages that were awarded, which many experts have suggested were drastically overstated.

The $740 million judgment was reached based on the highly bloated valuation of HouseCanary’s AVM at $11 per use. Just months after the ruling though, HouseCanary would offer the technology for about $1 per use.

The appeal will be watched closely, not only by those seeking answers to the many questions and departures from logic thus far, but for the precedent it will set for future trade secret claims. The onset of the digital age has led to an increase in trade secrets litigation—30 percent between 2016 and 2017 alone—and some have drawn parallels to rises in so-called “patent trolling.”

Balancing Act

Like patent law, there is a delicate balance when it comes to trade secrets. On one hand, policies must safeguard proprietary information, which is critical to growth and innovation. By the same token, they must mitigate the risks of abuse, particularly in situations where developers can tie up patrons in costly or meritless claims.

The outcome of the appeal in this case will have a significant bearing on which direction the pendulum will swing—or, perhaps more accurately, whether it will self-correct. The new evidence against HouseCanary paints a compelling case that cloaked in enough ambiguity, trade secrets can exist with only minimal substance or novelty, which could set a dangerously low bar for future litigation.

The staggering damages also send a troublesome message that seems to advertise just how lucrative gaming the system can be.

With so much on the line, it’s likely the HouseCanary case could ultimately be decided by Texas’ highest court. The country will be watching closely to see if the judicial system overturns the landmark verdict and brings some sanity to what qualifies as protected trade secrets.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

George Nethercutt Jr. was a Republican member of the House from 1995 to 2005, representing Washington’s 5th Congressional District. During his time in Congress he served on the House Committee on Appropriations, the House Science Committee and the Energy and Space & Aeronautics subcommittees. He is the founder and chairman of the George Nethercutt Foundation and practiced law in Spokane for 18 years.

Learn more about Bloomberg Law or Log In to keep reading:

Learn About Bloomberg Law

AI-powered legal analytics, workflow tools and premium legal & business news.

Already a subscriber?

Log in to keep reading or access research tools.