A Texas appeals court ordered a new trial in HouseCanary Inc. v. Title Source Inc., vacating an award of $706.2 million in compensatory and punitive damages based on a flawed jury charge.
The case has a curious history. Title Source, now known as Amrock, is the nation's largest independent company offering title insurance, property valuations and closing services. Title Source initially sued vendor HouseCanary, a home-valuation startup, for $5 million for an alleged breach of contract, prompting HouseCanary to countersue for breach of contract, fraud, misappropriation of trade secrets, unjust enrichment, quantum meruit and intentional interference with an existing contract.
At trial, the jury rejected Title Source's allegations and entered a take-nothing verdict. As to HouseCanary's counterclaims, the jury found Title Source liable for breach of contract, trade secret misappropriation and fraud. HouseCanary elected to recover on its misappropriation and fraud claims, resulting in an award of $201.6 million compensatory plus $403.2 million exemplary damages for misappropriation and $33.8 million compensatory plus $67.6 million exemplary damages for fraud. The trial court additionally awarded prejudgment interest in the amount of nearly $30 million and attorney fees in the amount of about $4.5 million to HouseCanary.
On appeal, the appellate court affirmed the jury's take-nothing verdict on Title Source's breach of contract claim. It also concluded that the evidence supported the jury's findings as to the existence of trade secrets but vacated the verdict of misappropriation and fraud and ordered a new trial. Here are five key takeaways from this ongoing saga.
1. It is not enough to accurately recite the law in the jury charge.
The jury charge ultimately provided the basis for vacating the jury's award of over $600 million in damages for trade secret misappropriation. As summarized by the appellate court, the jury had been instructed that it could find misappropriation based either on an acquisition by improper means theory or a use theory.
In particular, Question No. 38 instructed the jury that to find misappropriation, the jurors must find that:
1. Title Source acquired the trade secret and knew or had reason to know that the trade secret was acquired by improper means;
2. Title Source disclosed or used the trade secret without HouseCanary's express or implied consent and used improper means to acquire knowledge of the trade secret; or
3. Title Source disclosed or used the trade secret without HouseCanary's express or implied consent and that at the time of disclosure or use, Title Source knew or had reason to know that its knowledge of the trade secret was acquired under circumstances giving rise to a duty to maintain secrecy or limit its use.1
The first two enumerated bases for liability require acquisition of a trade secret by improper means, while the third does not.
On appeal, Title Source objected to including instructions that the jury could find misappropriation based on acquiring a trade secret by improper means, arguing that it had acquired the trade secrets properly under agreements between the parties.2
HouseCanary argued that the evidence supported both improper use and acquisition by improper means. As to the latter, HouseCanary argued that Title Source improperly acquired the trade secrets through misrepresentations.3
The appellate court did not address whether the record contained sufficient evidence to show that Title Source's misrepresentations amounted to acquisition of trade secrets by improper means, as alleged by HouseCanary. Nor did the court address Title Source's argument that including instructions on misappropriation based on improper acquisition amounted to reversible error.
Rather, the court focused on the description of "improper means" in the jury charge, which stated that "'improper means' include theft; bribery; misrepresentation; breach or inducement of a breach of a duty to maintain secrecy, to limit use, or to prohibit discovery of a trade secret; or espionage through electronic or other means."4 The court concluded that the evidence at trial did not support improper means such as bribery, espionage, or breach or inducement of a breach of a duty to maintain secrecy.5
Complicating this issue, the court determined it could not "rule out the possibility that the jury found misappropriation based on a post-acquisition breach of a duty to maintain secrecy, e.g., using "improper means" other than the misrepresentations argued by HouseCanary.[6] The court noted that HouseCanary argued throughout trial that Title Source breached a duty to limit its use of HouseCanary's trade secrets — arguments that very likely supported HouseCanary's breach of contract claim.
The court determined that the description of improper means was harmful error, concluding that the jury charge included "'multiple liability theories, several of which are not supported by legally sufficient evidence."7 The court thus ordered a new trial on trade secret misappropriation.
Practitioners should exercise caution when including over-inclusive jury instructions, as it is not enough to accurately state the law. Here, according to the court, the fatal flaw in the jury charge was including examples of conduct that amounted to improper means, some of which did not comport with the evidence at trial.
While in many cases this error could have been harmless, arguments that appear to support HouseCanary's claim for breach of contract may have caused confusion as to what evidence the jury relied on in its verdict, providing a basis for the appellate court to order undo a $600 million verdict.
2. Preserve objections to reversible error ... maybe.
On appeal, Title Source did not argue that the jury charge description of "improper means" amounted to harmful error requiring a new trial.8 Rather, Title Source challenged the inclusion of two grounds for liability that required acquisition by improper means.9 Title Source devoted a mere two paragraphs of its 70 plus page brief to this issue, without mentioning that certain exemplary improper means did not comport with the evidence at trial, e.g., bribery, espionage, breach of a duty to maintain secrecy.
While many courts may have concluded that Title Source waived any objection to the jury charge description of improper means, the appellate court here nevertheless relied on that description when ordering a new trial.
3. Avoid uncertainty with respect to preemption.
The appellate court also relied on the jury charge to vacate an award of just over $100 million for fraud. Under the Texas Uniform Trade Secret Act, or TUTSA, and in almost all other states that have adopted the Uniform Trade Secrets Act, trade secret claims preempt tort claims based on misappropriation.10
Here, HouseCanary alleged that (1) Title Source fraudulently induced HouseCanary to enter into an agreement to obtain access to HouseCanary's trade secrets and (2) Title Source never intended to pay HouseCanary and induced HouseCanary to agree to less favorable licensing terms in an amended agreement based on alleged misrepresentations. The appellate court determined that the former allegations were founded on misappropriation and thus preempted, while the latter ones were not.11
The jury charge provided a single broad-form question on fraud, with no separation between preempted and nonpreempted allegations.12 The appellate court concluded that it could not determine whether the jury's verdict was based on preempted versus nonpreempted allegations and ordered a new trial on fraud.13
This issue could potentially have been avoided by including separate jury questions on (1) fraudulent inducement to acquire confidential information alleged to be trade secrets and (2) fraudulent inducement to obtain the amended agreement. While question 1 may be preempted, in some jurisdictions it may be viable if the jury concludes the fraudulently acquired information did not amount to a trade secret but was otherwise protectable information.
4. Protect trade secrets at trial.
The disclosure of trade secrets at trial can potentially destroy their value. HouseCanary did not follow the procedural rules for sealing trial exhibits containing its trade secrets at trial, resulting in a costly legal battle that has now wound its way up to the Texas Supreme Court.
After trial concluded, HouseCanary moved the court for an order sealing numerous trial exhibits, arguing that the sealing of its trial exhibits is consistent with Section 134A.006(a) of the TUTSA, which states that a court "shall preserve the secrecy of an alleged trade secret by reasonable means" and which creates a presumption in favor of granting related protective orders. The trial court ultimately sealed eight core exhibits after initially denying HouseCanary's motion to seal many more.
The appellate court reversed, holding that the trial court abused its discretion by disregarding the requirements of Texas Rule of Civil Procedure 76a.14 For context, Rule 76a favors openness and sets out cumbersome requirements for sealing documents.15 The presumption of openness in the rules of civil procedure appears to conflict with the TUTSA, and where such a conflict arises, Texas law requires the TUTSA to control.16
But while Texas law appears to generally favor protecting trade secrets, in Title Source, the parties agreed to a stipulated protective order requiring compliance with Rule 76a for the protection of records.17 The appellate court held that there was no conflict between the TUTSA and Rule 76a and that the parties should have followed the procedures in Rule 76a to protect trade secrets.18
HouseCanary petitioned for review, and the Texas Supreme Court granted review on June 19. While the fate of HouseCanary's exhibits remains unclear, this expensive and protracted legal battle could have been avoided by following the procedural rules for protecting trade secrets at trial.
5. Conduct a thorough pre-suit investigation.
It is unclear what type of pre-suit investigation Title Source engaged in before filing suit, but the facts revealed at trial paint a less than savory picture of the company.
At the outset of their relationship, Title Source and HouseCanary entered into an agreement prohibiting a party from developing a product that used any of the other party's confidential information.19 Despite this agreement, internal Title Source documents show that it was using HouseCanary's confidential information to develop its own home valuation product, all the while assuring HouseCanary that it was not developing a competing product and prodding HouseCanary for more and more details on its analytics.20
Evidence at trial also undermined Title Source's breach of contract claim. For example, Title Source argued that HouseCanary's products never worked as intended, yet the evidence at trial showed that HouseCanary's model had greater valuation accuracy for a greater percentage of properties than the service Title Source had been using.21
Worse still, after the parties entered into an amended agreement requiring HouseCanary's product to maintain a certain hit rate,22 Title Source employees submitted thousands of fake addresses, including 99999 Anywhere Street, Nick Is Awesome and Wiping a Vendor Wipes the Fee.23 These fake addresses lowered HouseCanary's hit rate, making it appear that it failed to meet the standard set out in the amended agreement. As noted above, the jury rejected Title Source's breach of contract claim.
A diligent presuit investigation could have uncovered these bad facts, before Title Source initiated suit against HouseCanary and triggered an onslaught of counterclaims. Such an investigation could have included an overall project review, contract analysis and interviews with key employees. The time and effort to conduct such an investigation would be minimal compared to the verdict rendered against Title Source by the trial court.
What to Watch For at a New Trial
If the case proceeds to a new trial, Title Source may be estopped from arguing that HouseCanary did not possess trade secrets, as it had an opportunity to litigate that issue and lost before the trial court and at the appellate level. This would place Title Source at a further disadvantage on remand.
It will also be interesting to see whether the trial court allows additional evidence into the case, including testimony by a purported whistleblower who allegedly has information undermining HouseCanary's claims. Title Source has waged an aggressive media campaign based on the whistleblower's allegations, which emerged after trial. While Title Source argued these allegations warranted a new trial, the appellate court did not address them at all in its decision.
Footnotes
1 Title Source, Inc. v. HouseCanary, Inc., Cause No. 2016-CI-06300, Charge of the Court at 41(Dct. Ct. Bexar County Mar. 14, 2018).
2 Title Source, Inc. v. HouseCanary, Inc. 
, -- S.W.3d--, 2020 WL 2858866, *9 (4th Ct.
of App. Tex. Jun. 3, 2020).
3 Id. at *10.
4 Id. at *9. Interestingly, the appellate court noted that the instruction tracked the TUTSA's definition of "improper means" and was therefore a correct statement of the law.
5 Id. at *10.
6 Id.
7 Id. at *11.
8 See Title Source, Inc. v. HouseCanary, Inc., No. 04-19-00044-CV, Brief for Appellant at 62 (Jul. 10, 2019) ("Because all the purported trade secrets were freely acquired from HouseCanary, HouseCanary had no legally sufficient evidence to prove misappropriation by 'improper means.' Nevertheless, over Title Source's objection, the trial court instructed the jury that it could find misappropriation if there was 'improper means' of acquisition, along with an additional theory of misappropriation.").
9 Id.
10 TEX. CIV. PRAC. & REM. CODE ANN. § 134A.007(b)(2).
11 Title Source, 2020 WL 2858866, *11-12.
12 Question No. 11 asked the jury: "Did Title Source commit fraud against HouseCanary in connection with Amendment One?" See Title Source, Cause No. 2016-CI-06300, Charge of the Court at 14.
13 Title Source, 2020 WL 2858866, *12.
14 Title Source, Inc. v. HouseCanary, Inc., No. 4-18-00509-CV, 2019 WL 2996974, *10 (Ct. App. Tex. Jul. 10, 2019).
15 Tex. R. Civ. P. 76a.
16 Tex. Civ. Prac. & Rem. §134A.007(c).
17 Title Source, 2019 WL 2996974, at *8, 9.
18 Id. at *9.
19 Title Source, 2020 WL 2858866, *1.
20 Id. at *3.
21 Id. at *2.
22 A "hit rate" was "defined as the percentage of those residential properties submitted to [HouseCanary] by [Title Source] for which [HouseCanary] can deliver a valuation using its customary practices." Id. at *4.
23 Id.
Originally published 31 July, 2020
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