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.