Abusive IP Litigation Poses Threat to Innovation at Home and Abroad

“Not just Texas, but all legislatures, including Congress, need to look carefully at our nation’s systems for resolving trade secret disputes and legislatively restrain litigants from abusing the systems, for reasons both domestic and international.”

https://depositphotos.com/228219188/stock-photo-light-bulbs-concept.htmlThe World Trade Organization (WTO) was scheduled in December to hold its 12th Ministerial Conference (MC12) in Geneva, bringing together officials from 164 countries to negotiate the future of global trade. Concerns over the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) were expected to feature in discussions, however, in-person deliberations have been tabled until at least March as a result of growing health concerns related to the Omicron COVID-19 variant. In the meantime, it is important leaders consider how TRIPS can be strengthened and refined as needed. TRIPS plays a crucial role in driving global innovation, but ambiguities surrounding the agreement’s dispute settlement mechanism have led some to conclude that it is vulnerable to abuse by countries seeking to advance their national interests.

Leading up to the MC12, many WTO members have treated TRIPS-related concerns and other tangential challenges as abstract legal hypotheticals to be resolved sometime in the future. However, the consequences of deficient intellectual property legal frameworks are on full display in ongoing trade secrets cases in the United States, especially Title Source, Inc. v. HouseCanary, Inc.

The Dangers of Poorly Designed IP Laws

The case began in 2016, when Title Source (now Amrock), a real estate title company, sued HouseCanary, a startup analytics firm, for failing to deliver a functioning real estate appraisal application as contracted. HouseCanary countersued, alleging that Title Source had misappropriated its trade secrets. In 2018, a San Antonio jury ruled against Title Source, awarding HouseCanary a record $706 million in damages over a $5 million per annum contract.

That verdict was immediately called into question when several former HouseCanary executives came forward as whistleblowers, testifying that CEO Jeremy Sicklick had misled Title Source and that “the company never had proprietary anything.” Although these revelations were deemed insufficient to merit a new trial at the time, the initial verdict was overturned on appeal in 2020 on the basis that the court had potentially employed a flawed definition of trade secrets theft to instruct the jury.

Since then, the case has continued to crawl through the courts. HouseCanary has petitioned the Texas Supreme Court to review the appellate court’s decision to overturn the award. The district court recently granted HouseCanary’s motion to keep 14 of their legal exhibits sealed from public access – despite having been previously overturned by both a state appeals court and the Texas Supreme Court. Given the potential impact of this case, media interveners, industry experts, and First Amendment advocates have all expressed opposition to blocking the public’s access to these documents.

Now approaching its sixth year in court, Title Source v. HouseCanary exemplifies just how dangerous intellectual property laws can be if they are not carefully designed to discourage abuse. Despite numerous setbacks and significant doubts as to the veracity of its claims, HouseCanary has managed to entangle Amrock in litigation for the better part of a decade by weaponizing a disproportionate jury award. Even if the case ends in defeat for HouseCanary, its near-success in turning a $5 million contract into a $700 million payday will incentivize other bad actors to attempt similar ploys, creating a domino effect across the economy. In order to avoid extortion, large companies like Amrock will hesitate to enter agreements with smaller companies. In turn, honest startups and businesses will have fewer opportunities to grow and be acquired. Over time, this will result in a less innovative business environment with less competition, fewer jobs, and higher consumer prices.

The Need for Reform

The central problems within Title Source v. HouseCanary – deception, obfuscation, disproportionality, and duration – are unfortunately common to domestic intellectual property litigation and point to a perennial dilemma: how can the law effectively protect innovation without discouraging it? The outcome of the case in question is unlikely to provide a solution, but public attention to its proceedings should serve as impetus for reform. In Texas, that might involve clarifying and narrowing the definition of a trade secret under the Texas Uniform Trade Secrets Act to prevent parties and judges from applying overgenerous interpretations. Elsewhere, it might mean capping damages so that they remain proportional to the valuation of the winning party and their product. The exact provisions will vary between jurisdictions, but there is a clear need for additional guardrails across the board if innovation and entrepreneurship are to be protected.

IP Abuse and TRIPS

As the dispute mechanisms in TRIPS are directed to resolving complaints by nation states that another member’s IP protection laws and procedures are inadequate under the TRIPS agreement, one might conclude that type of litigation process abuse seen in Title Source, a purely domestic trade secret litigation matter, will never be a concern addressable by TRIPS. Certainly, from the standpoint of protecting intellectual property, Texas trade secret law is more than adequate, even if it is subject to abuse, and adequacy of a country’s IP protection regime is the primary focus of TRIPS.

But the broader concern that a country’s IP laws and processes, when abused, constitutes an innovation-stifling trade barrier is one that a WTO member may well want to address under TRIPS as a non-conflict or situational dispute – a dispute where one member state claims that it has been deprived of an expected benefit because of another government’s action, or because of any other situation that exists, even if there is no specific TRIPS obligation violation.

At the very beginning of the TRIPS agreement, the member states put in place a five-year temporary moratorium on non-conflict or situational disputes, thereby precluding any member state from bringing a claim that the U.S. IP enforcement regime, when abused (as represented by cases such as Title Source), constitutes an impermissible trade barrier. This moratorium has been extended many times, and at the 12MC, the WTO members are expected to extend the moratorium again. While the majority of member states don’t want the moratorium to ever be lifted for IP matters, for fear that these types of claims will be abused with the result that IP enforcement mechanisms will be weakened, there are some members states that continue to advocate for lifting the moratorium.

If a trade secret or other IP case were to arise between parties from different member states with the same level of litigation abuse as seen in Title Source, it will make the anti-moratorium case much stronger. Not just Texas, but all legislatures, including Congress, need to look carefully at our nation’s systems for resolving trade secret disputes and legislatively restrain litigants from abusing the systems, for reasons both domestic and international. Whether or not the politicians act and no matter the eventual outcome in Title Source, the case will have a significant effect on the future of intellectual property litigation. It is imperative that we learn from it so that laws designed to cultivate innovation do not end up curtailing innovation domestically and internationally. Lawmakers should consider Title Source v. HouseCanary an early warning—a canary in the mine of IP litigation.


Image Source: Deposit Photos
Author: etiamos
Image ID: 228219188


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Join the Discussion

2 comments so far.

  • [Avatar for Greg DeLassus]
    Greg DeLassus
    January 29, 2022 12:15 pm

    TRIPS plays a crucial role in driving global innovation…

    [Citation Needed]

    I feel stupider for having read this essay. The fact that one (allegedly) abusive trade secrets case has been allowed to proceed in one American jurisdiction means that America is sliding toward a TRIPS confrontation? Be serious, do.

  • [Avatar for Anon]
    January 28, 2022 01:23 pm

    I find the leap stretching credibility to go from a single case of litigation misconduct to the broad-brushed “poor IP laws.”

    The article smacks of (instead) an Efficient Infringer mindset.