Southeast Texas Record

Saturday, March 28, 2020

Misapplication of Trade Secrets Law Could Doom Innovation

Their View

By J.W. Verret | Jul 2, 2019

General court 07

Protecting intellectual property is a critical component of our nation’s founding and is essential to strengthening our economy, however flawed jury awards disconnected from underlying legal doctrine could have disastrous effects on collaboration and innovation. The United States Constitution allows Congress to write laws granting “authors and inventors the exclusive right to their respective writings and discoveries”.  In the spirit of this constitutional objective, the Uniform Law Commission promulgated the Uniform Trade Secrets Act forty years ago to establish clarity about what a trade secret is and how misappropriation of trade secrets should be punished.  To date 47 states, the District of Columbia, Puerto Rico, and the U.S. Virgin Islands have adopted the uniform code.  

These protections have allowed the U.S. to become a cradle of invention, fostering innovations that have improved the health and lives of people all over the world.  However, if a trade secret claim is distorted – or misunderstood – by a court, it could have devastating consequences that ripple throughout our economy.

According to the Uniform Trade Secrets Act, in order for a trade secret to exist it must have independent economic value, not be generally known, and not be readily ascertainable.  Separately, a trade secret no longer exists when it becomes common knowledge within the industry in which it’s used; and any damages from misusing trade secrets need to be carefully matched to the underlying harm. 

Unfortunately, much of this is still up to interpretation – or misinterpretation – as courts attempt to decipher what is and what is not a “trade secret”.

Take for example a recent jury ruling in Texas, which noted libertarian law professor Richard Epstein has described as “jackpot justice”, in a case of alleged misappropriation of a purported trade secret.

The facts from the case indicate that, Title Source, a real estate valuation firm, contracted with HouseCanary, a data analytics start-up, to build a mobile application (app) that would help Title Source’s housing appraisers in the field more accurately determine the value of a home.  HouseCanary was never able to develop and deploy the app, so Title Source sued for breach of contract. In response, HouseCanary countersued Title Source by claiming misappropriation of trade secrets and won a stunning $706 million judgment. 

What’s troubling about this verdict is that the purported trade secrets that HouseCanary claimed don’t appear to be secret at all.  In fact, according to court documents and other publicly available material, they seem to be very much commonplace in the world of real estate valuations.  Characteristics such as square footage, number of bedrooms, and location in relation to schools are all part of an exhibit that HouseCanary had attempted to hold under seal as a trade secret.  But these same attributes are used by virtually every other appraiser and, in fact, are freely available on websites like Zillow and Trulia.

But even if there was a misappropriation of trade secrets, testimony indicated that the entire home valuation market is about $70 million per year.  So this jury’s verdict – 10 times the annual market – certainly strains credulity.

Based on the available evidence it seems likely that this verdict will be overturned or reduced upon appeal.  If it’s not, however, the precedent it sets could stifle intellectual advancements and creative coordination moving forward. 

It stands to reason that the potential damages through the court system could become so vastly disproportionate to the underlying value of work that innovation and collaboration among and between companies no longer makes economic sense.  Individuals and companies will have to seriously weigh the potential risk and consequences of a jury – again – misapplying the law and in the end decide if the partnership has an upside significant enough to outweigh the risk of costly litigation or even bankruptcy. 

If companies with financial means ultimately decide that collaboration isn’t worth the legal risk, start-ups and other creative innovations that could improve lives will most likely be starved out of existence.

J.W. Verret is Associate Professor of Law, George Mason University Antonin Scalia Law School where he teaches Banking, Securities, and Corporate Law

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