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Saturday, October 19, 2019

Trade Secrets Litigation Could Spur a Trend as Harmful as Patent Trolling

Their View

By George Landrith | Mar 21, 2019


In the two years since Congress overhauled trade secret laws, a spike of court filings and a  record-setting judgement could signal the opening of a new frontier in  misusing intellectual property law reminiscent  of patent trolling which has become a drag on economic growth.  

Until enactment of the Defense of Trade Secrets Act (DTSA) in May 2016, trade secret litigation had been largely a matter of state court jurisdiction. Trade  secrets refers to the category of intellectual property (IP)  law pertaining to confidential business information that gives  individual companies their competition edge. The new law created a  uniform federal definition for trade secrets and makes  it much easier to bring claims of misappropriation in federal court.  However, it  largely complements rather than supplants the patchwork of 48 state statutes.  In DTSA, Congress preserved state jurisdiction but had hoped more  uniformity would strengthen enforcement mechanisms and facilitate  justice for victims of trade secret  theft. 

It will take years to fully  evaluate whether these expectations have been met but this much is  already evident: Since enactment of the DTSA, the number of cases in  state and federal dockets has risen sharply. Between 2009 and 2016, the number of trade secret lawsuit filings was  in the range of 860 to 930 cases per year. But just a year after DTSA  went into effect, the number shot up to 1,134 and likely increased even  more in 2018, according  to the legal data analytics firm Lex Machina. As plaintiffs  seize new opportunities to press claims in more and more courtrooms, the  opportunities to misuse the legal process and secure unjust and  distorting judgements could also proliferate.

Last year, a jury in Texas decided  the data-analytics firm HouseCanary was entitled to a total of $706  million from Amrock, the nation’s largest independent title-insurance  and valuation firm. Initially, Amrock,  formerly known as Title Source, claimed HouseCanary failed to deliver  promised state-of-the-art home valuation tools and applications. In the  midst of the proceedings, HouseCanary  fired back and convinced a jury that Amrock had used the  deal to penetrate HouseCanary and illegally use its data, algorithms,  and IP to create a competing product. 

The judgment was one of the largest ever in a trade secrets case, so jaw-dropping that several  former HouseCanary executives felt compelled to come forward  and assert, under oath in court, that the result was a travesty. They  admitted that HouseCanary produced nothing that Amrock could use and  dismissed as baseless HouseCanary’s trade secret  misappropriation claims. Much of HouseCanary’s supposedly proprietary  technology was actually licensed by a third party or was widely in use  by other publicly available, largely free, home valuation companies. In  light of the stunning revelations in the whistleblowers’ sworn statements, Amrock is again on the offensive. This litigation  should be watched closely.

The HouseCanary case is not the  first time that we’ve seen such an effort to make broad claims to  purported trade secrets. In fact, we’re even seeing some of the same  players involved. Jawbone, a technology wearables  company that received financial backing from activist investor Mark  Dyne, sued Fitbit when Fitbit began producing antennas that were  allegedly similar to Jawbone’s technology. Jawbone and Dyne ultimately  lost that case. Some things are just so commonplace  and ubiquitous that to call them a secret is absurd and, to steal from  Freud, sometimes an antenna is just an antenna.

But Dyne, who is now a lead  investor in HouseCanary, and his lawyers from Houston-based Susman Godfrey law firm seem to have used that as a learning experience as they  are now leading the charge against Amrock.

The prospect of billion-dollar  judgements will likely spur more and more lawsuits – some meritorious  and some just an abuse of our legal system.   This creates the risk of a  new IP cottage industry akin to what  is commonly called patent trolling, the practice of buying up patents,  not to make a product but to extract money in endless and questionable  lawsuits alleging infringement. 

In a landscape of highly technical innovation, the practice is seen as a sound  defensive strategy in some circumstances but many companies  committed to developing and making new products have found themselves  fending off bogus charges by the purchasers of patents. 

In the last ten years, the number  of companies sued by patent trolls has exploded. These suits now account for the majority of IP cases. High-profile litigation that drags on for  years has distracted inventors  and discouraged entrepreneurs from making investments and taking  risks. Several studies have independently concluded it has reduced  venture capital investment in startups and R&D spending, especially  in small firms. The tab is more than $60  billion a year in lost wealth.

The Framers of the U.S. Constitution knew  that safeguarding  intellectual property boosted economic growth. In a document  characterized by its limits on governmental power, Congress is  explicitly empowered to protect inventors and authors from those who  would make money from stolen ideas. 

Once Congress fulfills its duty to  protect IP and the wealth that flows from it, the burden is on the legal system to prevent the misuse of IP laws, especially when it has the  perverse effect of stifling innovation,  as we have seen with patent trolling. As courts across the country take  up the growing trade secrets case load, they should be careful to avoid  opening the floodgates to frivolous suits and reckless remedies that  will ultimately inhibit and impede technological  advances and slow economic growth. 

George  Landrith is the President and CEO of Frontiers of Freedom — a public  policy think tank devoted to promoting  a strong national defense, free markets, individual liberty, and  constitutionally limited government. Landrith is also an attorney and  member of the bar of the United States Supreme Court. 

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