A Massive Threat to Innovation Dodged—for Now

“Enormous jackpot verdicts like the one in HouseCanary undermine the licensing system. Who would risk entering into a $5 million licensing deal if the downside can be more than $700 million in damages?”

innovation op-ed - https://depositphotos.com/31248541/stock-photo-opinion-business-concept.htmlWhen people think of innovation at this moment, odds are they are thinking about innovation in the biotech and pharmaceutical sector, as the industry scrambles to invent a dependable vaccine for COVID-19, more reliable tests and other treatments. The immediate need for such innovation is real, but the U.S. economy has a constant, ongoing need for innovation across all industry sectors because we are no longer the cheapest place to make things or to grow things. We are the place that invents and innovates things.

As such, our economy depends on a robust innovation ecosystem. That means we must maintain a system of abundant risk-capital, affordable and accessible quality educational options, a culture of risk-taking, and a strong intellectual property system so that if an invention succeeds, those who took the risks have a chance to reap the rewards.


Disaster Averted

Both the culture of risk-taking and the intellectual property system dodged a massive threat this year, thanks to the Court of Appeals of Texas, Fourth District, which overturned the absurd nearly $740 million judgment in Title Source v. HouseCanary and stipulated a new trial.

Title Source v. HouseCanary seemed destined to go down as one of the most anti-innovation rulings since the advent of financial technology. Fortunately, on June 3, the Texas Court of Appeals overturned the record-setting $740 million judgment and ordered a new trial. As the case returns to the trial court, the most significant difference is the likely inclusion of testimony from HouseCanary whistleblowers, who only came forward following the conclusion of the first trial. However, if the whistleblowers’ sworn testimony provided for the court record is any indication, it is tough to fathom the new jury reaching the same conclusions as the initial panel.

At the onset of the dispute, real estate service provider Title Source (now Amrock) sued fintech company HouseCanary for failing to produce a mobile app that HouseCanary was contractually required to produce. As a Hail Mary defensive strategy, HouseCanary countersued, making the claim that Amrock had misappropriated their confidential data and technology, and the counter-claim paid off in a windfall: a Texas jury awarded  HouseCanary almost three-quarters of a billion dollars in compensatory and punitive damages.

The result was astounding, both for having emerged out of a countersuit and for the staggering scale of the remedy, with awarded damages more than 140 times greater than the original $5 million annual contract between the companies.

Immediately following the conclusion of the first trial, a former HouseCanary executive-turned whistleblower revealed that the jury’s finding was based on inaccurate information. That disclosure led to the sworn testimony of four former HouseCanary executives, who testified “there was never a working version of the app,” and that HouseCanary CEO Jeremy Sicklick instructed employees “to make misrepresentations to Title Source about the status of the HouseCanary products.” But the judge overseeing the case did not vacate the jury’s verdict following these revelations.

Reinstating the Award Would Undermine Innovation

Had the trial court’s ruling been upheld, its implications would have extended far beyond the parties named. Intellectual property protection facilitates licensing deals and mitigates risk in an already risky innovation system. Enormous jackpot verdicts like the one in HouseCanary undermine the licensing system. Who would risk entering into a $5 million licensing deal if the downside can be more than $700 million in damages?

Overturning the trial court ruling benefits startups as well as large corporations. It allows established companies like Amrock to continue to collaborate with smaller firms, knowing that, although there will always be some bad actors who engage in surreptitious behavior to extort remuneration from business partners, they no longer need to fear that a misinformed jury, void of checks and balances, could cost them hundreds of millions of dollars.

Especially as the U.S. economy tries to pull out of the COVID-19 slump, we need to ensure that innovation and risk-taking are not hindered by uninformed, punitive jackpot jury verdicts far in excess of their value. The economic fallout of the COVID-19 pandemic has simultaneously increased the importance of innovation and reduced corporate risk tolerance. Since companies must assume risk when pursuing innovation, they need reassurance that their exposure is worthwhile. This is especially true for the tech sector, which is driven by research and development.

Litigation abuse far predates COVID-19, but its consequences have been magnified as companies scramble to protect themselves against unprecedented threats. Given its prominence, the Amrock v. HouseCanary case will inform corporate assessments of risk related to collaboration and partnerships for years to come, and industry experts and the legal community will be closely following the case as it moves forward towards a new trial.

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Join the Discussion

2 comments so far.

  • [Avatar for Jam]
    October 13, 2020 03:01 pm

    The article leaves out critical facts for determining whether the “disaster” is the large jury award, or whether the disaster is the court overturning the award.

    Moreover, questioning a judgment based on the amount of damages is not a strong argument. Regardless of whether HouseCanary’s app worked or used puffery to describe the status, did Title Source breach an agreement with HouseCanary and (or) misappropriate confidential data and technology?

    If so, then overturning the judgment means any business in Title Source’s shoes doesn’t have to worry about little things like contracts and can run over any other business in HouseCanary’s shoes. It encourages businesses to misappropriate confidential data and technology because they don’t have to worry about the consequences of their actions. Even more perversely, if a company causes $5M in damages, they may then be encouraged to cause significantly more damage ($700M) so that a jury award can get thrown out based on the disparity between the damages and the initial disputed amount.

    Why should a small business try an innovate when any larger business can come along, misappropriate the technology, and have a court rubber stamp that outcome?

  • [Avatar for ipguy]
    October 13, 2020 02:18 pm

    “the jury’s finding was based on inaccurate information”

    And if the jury’s finding had been based on accurate information? Isn’t the jury entitled to weigh the evidence actually presented to it? It seems to me that the only issue actually raised is whether or not there should be a cap on punitive damages in Texas in business cases like this. Texas has no problem capping punitive damages in other areas. In Texas, medical malpractice suits, the maximum non-economic damages a person can recover in a medical malpractice suit are $750,000. Punitive damages are capped at the larger of: $200,000 or two times the amount of economic damages plus an equal amount of non-economic damages up to a maximum of $750,000. For example, in Texas, if you were involved in an accident that was caused by the defendant’s gross negligence and it resulted in bodily injury, the plaintiff can sue for punitive damages so if the plaintiff is awarded economic damages amounting to $150,000 and non-economic damages amounting to $200,000, punitive damages will be capped at $500,000. Government entities are largely immune from personal injury liability in Texas. However, in the instances where they are subject to personal injury liability, damages are capped at $250,000 for a single person and $500,000 for a single event. So, the problem that needs to be asked is why Texas is so willing to cap punitive damages for individuals but has not capped punitive damages for corporate plaintiffs? I think we already know the answer. Texas is “business friendly.” The right for individuals to seek just compensation is limited while the ability of businesses to reap huge rewards is open sky.
    The SCOTUS has held that making a defendant pay an absurdly high amount of punitive damages is a Due Process violation. While there is no hard and fast rule regarding what is excessive, it’s my understanding that anything above four or five times the compensatory damages is viewed as suspect.

    This was a Texas court, and the jury acted in accordance with the information it received. The article should be presented to Texas legislators to get them to change punitive damages for business entities. The threat to innovation seems to be the lack of action from the Texas legislature.