United States: Everything's Bigger In Texas: The Housecanary Trade Secret Saga

HouseCanary, a real estate data-analytics start-up, obtained the largest IP jury verdict of 2018, totaling $706.2 million in compensatory and punitive damages.¹ Curiously, HouseCanary’s adversary, Amrock, initiated suit in Texas state court to avoid paying a $5 million licensing fee to HouseCanary. The jury flat-out rejected Amrock’s allegations, finding instead that Amrock’s conduct was so egregious that the jury awarded the maximum amount of punitive damages available, $470.8 million. After the jury awarded it a total of $706.2 million, HouseCanary raised similar claims against an even bigger fish, Quicken Loans, the largest home lender in America.² These cases provide a road map of what not to do with information obtained under license agreements and highlight the need to evaluate your own conduct before setting foot in court.

Background

Amrock, which describes itself as “the nation’s largest independent company offering title insurance, valuations, and closing services,”³ began collaborating with HouseCanary to gain access to HouseCanary’s data analytics technology, including real estate appraisal software with an automated valuation model for predicting home values. This technology provides an automated approach to home appraisals, in contrast to traditional methods based on more time-consuming in-home inspections. 

Amrock and HouseCanary entered into two key agreements. The first, an NDA executed in 2013, restricted the use of confidential information and prohibited, among other things, disassembling or decompiling software, reverse engineering the design and function of any shared confidential information, and developing any software product or business system derived from the confidential information.⁴ The second, a Master Software License Agreement executed in 2015 and later amended, granted Amrock access to HouseCanary’s appraisal software for a $5 million annual fee. Like the NDA, the license agreement forbade reverse engineering and any unauthorized use of HouseCanary’s appraisal data.⁵ Pursuant to these agreements, HouseCanary provided software and information to Amrock.

The collaboration between HouseCanary and Amrock deteriorated. Amrock refused to pay HouseCanary under the terms of the license agreement, alleging that it never received any operable software. Meanwhile, Amrock decided to develop its own appraisal tool, all the while requesting and receiving detailed confidential and restricted data, software, and information from HouseCanary.⁶ Throughout, Amrock assured HouseCanary that it would not use their information to develop an in-house model.⁷ As the Texas state court jury concluded, those assurances proved false. 

Texas State Court Litigation

Amrock sued HouseCanary in Texas state court on April 12, 2016, alleging fraud in connection with the license agreement and breach of confidentiality obligations based on HouseCanary’s disclosure of its confidential licensing relationship with Amrock. HouseCanary counterclaimed for breach of contract and later added claims for misappropriation of trade secrets based on information it learned through discovery. 

During the state court case, HouseCanary learned the extent of Amrock’s allegedly inappropriate conduct, including that Amrock had developed its own automated real estate appraisal model. The evidence at trial indicated that Amrock had planned several potential projects based on HouseCanary’s data and subsequently downloaded over 150,000 HouseCanary home Value Reports from January to May 2016. According to HouseCanary’s theory of the case, this and other evidence showed that Amrock violated the agreements by, among other things, reverse engineering HouseCanary’s products.

The trial lasted seven weeks, with the first half focusing on Amrock’s claims against HouseCanary and the second half on HouseCanary’s trade secret and contract claims against Amrock. After considering the evidence, a 12-person jury unanimously found that Amrock had misappropriated trade secrets, violated the companies’ agreements, and engaged in fraud by assuring HouseCanary that it was not developing its own competing valuation models. The jury awarded HouseCanary $201.6 million for trade secret misappropriation, twice that amount ($403.2 million) as exemplary damages for misappropriation, $33.8 million for fraud, and twice that amount ($67.6 million) as  exemplary damages for the fraud. Additionally, the jury rejected Amrock’s claims against HouseCanary, finding, inter alia, that HouseCanary did not commit fraud or fail to comply with its contractual obligations to Amrock. Amrock has filed a “vigorous” motion for judgment notwithstanding the verdict.⁸

Federal Court Allegations

Two days after the jury rendered its verdict, HouseCanary filed suit against Amrock’s affiliates, Quicken Loans, and related entities, in the Northern District of California based on information it acquired through hard-fought discovery in state court. Quicken Loans receives valuation services from Amrock, and it uses such information to determine whether to grant home loans, refinance loans, and the like. Quicken Loans is Amrock’s biggest client.

According to HouseCanary, Quicken Loans used Amrock as a conduit to access HouseCanary’s information. In its complaint, HouseCanary quoted trial testimony from Amrock’s CEO that Amrock’s autovaluation model—the model that the state court jury concluded was based on technology stolen from HouseCanary—was being used by Quicken Loans and related entities “every day to run and test against other appraisal data.”⁹ HouseCanary asserted that Quicken Loans and related entities should not be allowed to use the auto-valuation model that Amrock developed based on technology stolen from HouseCanary. The defendants challenged venue, and HouseCanary voluntarily dismissed the case and filed a nearly identical complaint in the Western District of Texas. 

The parties continue to battle in Texas district court. HouseCanary moved for a TRO, preliminary injunction, and expedited discovery.¹⁰ Quicken Loans challenged personal jurisdiction, venue, and HouseCanary’s requested relief.¹¹ In an entertaining order entered by the federal court in San Antonio, Judge Fred Biery admonished the parties to avoid “Rambo tactics or other forms of elementary school behavior,” cautioning that any “acerbic shrillness” may result in “revocation of pro hac vice privileges, sitting in timeout in the rotunda of the courthouse and opposing counsel kissing each other on the lips in front of the Alamo with cameras present.”¹² The judge further urged the parties to keep things in perspective as he nudged them toward potentially settling the matter. After noting that in comparison to the history of the earth, “this litigation is a nanosecond blink of an eye,” Judge Biery implored the parties to “move toward a reasonable conclusion with or without a trial whether in this Court or some other.”¹³ Sage advice.

Discussion

The Amrock and Quicken Loans cases illustrate the extreme care that must be taken when receiving confidential information from licensors. Well-designed intake procedures might have prevented the ensuing calamity. These cases also exemplify a situation where reverse engineering, normally a perfectly appropriate activity, cannot be performed due to contractual restrictions. Last, they teach that companies should conduct thorough due diligence before filing a lawsuit and continue to monitor activities, while assessing settlement, as cases proceed. 

A. Trade Secret Information

Amrock could have, and should have, taken greater care with how it treated the confidential information it received from HouseCanary. For context, this case involved the version of the Uniform Trade Secret Act (UTSA) applicable under Texas state law, which broadly defines a trade secret as any information that derives independent economic value by virtue of its secrecy (more specifically, by virtue of not being generally known or readily ascertainable by proper means by one who could obtain value from its disclosure), and that is the subject of reasonable efforts to maintain such secrecy. Tex. Civ. Prac. & Rem. Code § 134A.002(6).¹⁴ The “Appraisal, analytics, metrics, reports or Data” at issue in Amrock squarely fall under this definition. Both the NDA and license agreement contain contractual requirements for keeping this information confidential. Given this backdrop, Amrock received trade secret information that should have been very carefully handled. What Amrock did with that information was hotly contested during the trial. For example, while Amrock contended that it did not “use” HouseCanary’s information when making its own appraisal model, the same team that led Amrock’s efforts to build its autovaluation model (its data science team) also worked directly with HouseCanary and had access to confidential and restricted technology.¹⁵ Amrock could have protected itself from potential misappropriation (or the appearance of such misappropriation) by preventing their data science team from accessing HouseCanary’s confidential information and explicitly instructing those with access to HouseCanary’s information not to work on competing products. 

B. Reverse Engineering

Many companies engage in reverse-engineering activities involving competitors’ products or services, and these activities are usually permissible.¹⁶ Indeed, the Texas UTSA specifically provides that reverse engineering is considered a “proper means” of acquiring information “unless prohibited.” Tex. Civ. Prac. & Rem. Code § 134A.002(4). But that was the point in Amrock—reverse engineering was expressly forbidden in the NDA and license agreement. By engaging in this prohibited activity, Amrock exposed itself, and potentially related entities in the Quicken Loans family of companies, to liability for both breach of contract and trade secret misappropriation.

Absent contractual prohibitions on reverse engineering, such activities may contribute to independent development of information that would otherwise be protected as a trade secret. In Texas Advanced Optoelectronic Solutions, Inc. v. Renesas Electronics America, Inc., the appellate court held that while the defendant, Intersil, had misappropriated TAOS’s design for a 1:1 interleaved photodiode array with information obtained during unsuccessful merger discussions, that design later became accessible to Intersil through proper means, specifically, reverse engineering.¹⁷ The court concluded that “[s]ecrecy protection terminated at the end of the period of time it would have taken Intersil, after Intersil’s permissible discovery of the photodiode structure, to recreate that structure in its own products.”¹⁸ As a result, the court determined that the vast majority of damages attributable to that misappropriation (over 90%) had been improperly awarded.

C. Litigation Due Diligence

Amrock also provides a cautionary lesson about being careful what you wish for when litigation is involved. Although it is difficult to know what Amrock’s counsel knew at the beginning of the case about how HouseCanary’s information had been handled, they certainly would have known that nationwide Amrock represented a much wealthier target than start-up HouseCanary. Indeed, as noted by HouseCanary’s counsel following trial, “I don’t think the irony should be lost on anyone: They sued us first. There probably would never have been a lawsuit but that they sued us first.”¹⁹ Furthermore, as the case progressed, it seems highly likely that at least some opportunities for settlement presented themselves, perhaps in conjunction with a creative business arrangement. Waiting until positions harden after trial, and perhaps for years during the appellate process, raises the stakes and diverts management’s attention from more productive business activities.

Conclusion

Amrock and its progeny will be remembered as monster intellectual property fights that might have been avoided. They demonstrate the unique and threatening nature of trade secret law. While juries might miss some complexities of modern technology, they feel competent to decide the issue of theft. And what is proven at trial can certainly be relied upon for subsequent litigation. For these reasons, companies should protect themselves when receiving confidential information from outsiders by carefully safeguarding and properly using that information.

Footnotes

1 Charge of the Court, Title Source, Inc. v. HouseCanary, Inc., Cause No. 2016-CI-06300 (73rd Jud. Dist.).

2 Title Source, Inc., the named party to the state court lawsuit, changed its name to Amrock, Inc. The defendants in the federal case are Quicken Loans and others in its family of companies, namely One Reverse Mortgage, LLC and In-House Realty, LLC. Amrock, also a member of the Quicken Loans family of companies, is not a party to the federal case.

3 See https://www.amrock.com/about/#about-us (last visited Oct. 5, 2018).

4 Plaintiff’s Tr. Ex. 1.

5 Plaintiff’s Tr. Ex. 3.

6 “Payout in Gilbert Title Company Case Likely to Be Far Less Than Jury’s $706 million,” Crain’s Detroit Business (Mar. 16, 2018).

7 “Susman Team Wins $706.2M Trade Secret Verdict for Real Estate Valuation Client,” Texas Lawyer, (Mar. 16, 2018).

8 See Defendants’ Opp. to Plaintiff’s Verified Application and Memorandum of Law Requesting a Temporary Restraining Order, a Preliminary Injunction, and a Request for Expedited Discovery (D.I. 40), 3, HouseCanary, Inc. v. Quicken Loans Inc., Civ. A. No. 5:18-cv-00519 (W.D. Tex.).

9 Complaint (D.I. 1), ¶ 17, HouseCanary, Inc. v. Quicken Loans Inc., Civ. A. No. 3:18-cv-01672 (N.D. Cal.).

10 Plaintiff’s Verified Application and Memorandum of Law Requesting (1) a Temporary Restraining Order, (2) a Preliminary Injunction, and (3) a Request for Expedited Discovery (D.I. 37), HouseCanary, Civ. A. No. 5:18-cv-00519.

11 Defendants’ Motion to Dismiss or Transfer to the Eastern District of Michigan (D.I. 32), HouseCanary, Civ. A. No. 5:18-cv-00519; Defendants’ Opposition to Plaintiff’s Verified Application and Memorandum of Law

Requesting a Temporary Restraining Order, a Preliminary Injunction, and a Request for Expedited Discovery (D.I. 40), HouseCanary, Civ. A. No. 5:18-cv-00519.

12 Order Setting an Initial Status Conference, Hearing Regarding Jurisdiction, Venue, Request for Injunctive Relief and Other Related Matters (D.I. 47) at 2, 3 (internal footnotes omitted), HouseCanary, Civ. A. No. 5:18-cv-00519.

13 Id. at 5; see also id. at 1 (quoting Elvis Presley, Judge Biery added that “Truth is like the sun. You can shut it out for a while, but it ain’t going away.”).

14 The UTSA has been adopted by 49 of the 50 states, with the only New York still relying on its common law definitions (on October 1, 2018, Massachusetts became the 49th state to adopt a version of the Uniform Trade Secrets Act). The definition of a “trade secret” under the federal Defend Trade Secret Act is substantially the same as the UTSA definition. In the Quicken Loans case, HouseCanary& raised trade secret claims under both the Texas UTSA and the federal DTSA.

15 Complaint (D.I. 1), ¶¶ 62–63, HouseCanary, Civ. A. No. 5:18-cv-00519.

16 See Kewanee Oil Co. v. Bicron Corp., 416 U.S. 470, 476 (1974) (“A trade secret law, however, does not offer protection against discovery by fair and honest means, such as by independent invention, accidental disclosure, or by so-called reverse engineering, that is by starting with the known product and working backward to divine the process which aided in its development or manufacture.”).

17 888 F.3d 1322, 1336–37 (Fed. Cir. 2018).

18 Id.

19 See n.7, supra.

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