Jackpot Justice in Texas
Tort and Contract law don’t let juries award $706 million in a $10 million case
Sometimes small business disputes turn into legal tsunamis. Just that rare of an event happened in Texas when in March, 2018 a San Antonio jury in Bexar County District Court awarded a $706 million verdict for theft of trade secrets in favor of defendant, HouseCanary (HC), who had been sued for $6 million on breach of contract claim by Title Source, Inc.—now Amrock, an affiliate with Quicken Loans. The full case records have not been published, but one does not need to know the details of this case to recognize that only in fairy tales does a party get a hundred-fold return from failing to keep its own contractual obligations. But it is up to the judge to make sure that litigation alchemy does not turn dross into gold.
The case now approaches a critical point as post-trial hearings begin next week on two motions that will determine the next phase in this ongoing litigation. The first of these is a motion by Amrock for a judgment notwithstanding the verdict, which, if granted could undo the entire verdict, or perhaps result in a reduction in damages. On the other side, HC seeks to capitalize on its victory by asking for attorney fees in the litigation. Since this decision would likely have far-reaching and lasting implications, it is worth examining the merits of the case.
I have been asked to review the publically available record by parties that are affiliated with Amrock. By way of background, in April, 2016, TSI filed its routine breach of contract claim against HouseCanary Inc. (HC). Its initial claim: HC had failed to deliver a new automated value model (AVM) that HC promised would allow TSI’s real estate agents in the field to get quick and accurate information about the resale value of residential homes. Instead, TSI received a buggy early version of the AVM that could not be put into service. But, through the magic of litigation, HC counterclaimed against TSI by insisting—you can’t make this stuff up—that TSI had misappropriated trade secrets in data by distilling data through, in HC’s words, “a magic machine” that let it squeeze a veritable treasure trove of information from HC’s “secret ingredients and secret processes,” from which TSI reaped inordinate business profits.
The attention grabber in this case is the outsized damage award. HC was a struggling start-up. At no point in its jury summation did it point to any major sales to any unrelated third party to establish the outsize value of either its AVM or raw data, both of which it had been prepared to license for $5 million per year. But if these assets were worth a fraction of what HC’s expert claimed they were, HC should have been rolling in dough. Instead it was using, without authorization, its contract with TSI to attract a new round of venture capital investment. TSI had no exclusive on either HC data or its flawed AVM. Yet at no point did HC show how it had monetized those assets outside the TSI transaction. Instead it claimed $201 million for the value of its untested trade secrets, on the blithe assumption that these assets propped up all of TSI’s present and future valuation activities. But they never backed that claim up with financial estimates of either the increased volume or profitability of TSI’s business. Competitive forces in a mature market always tamp down on off-the-wall profit claims. The HC expert then postulated further damages under a redundant breach of contract theory by positing a market value of about $64 million for the porous data and flawed AVM. Throw in claims for fraud and punitive damages, and the $706 million jackpot verdict is in reach, especially when a unanimous jury honors HC’s damage request to the penny.
It is a form of hornbook law that courts oversee jury misbehavior by rejecting as a matter of law speculative damages in contract disputes, especially when brought by start-ups dealing with unproven technologies. No party could ever afford to enter into a transaction or sue for its breach if exposed to damages worth huge multiples of any contract value. Duplicative damages are likewise forbidden, lest a party profit excessively when it suffers from any alleged legal wrong. Finally, punitive damages are hugely disfavored, except in cases of egregious misconduct, which is not credible in this contentious dispute.
But was there any theft of trade secrets in the first place? Highly unlikely on the available record. TSI was not some raw player devoid of knowledge or experience and desperate for information. TSI was no stranger to this business. Of necessity, it had developed and used its own AVMs long before HC came on the scene. TSI also had access to other AVMs from public sources, which it could use free of charge. Any information available from these sources cannot count as a trade secret. If TSI had this supposed magic machine, it could have surely applied it to its own data, or data readily available from other sources to improve its own AVM. Nor is it even clear whether TSI’s standard MyAVM contained any HC technology. Post trial, one HC employee signed a declaration saying, “HouseCanary was providing Value Reports to TSI using data output from the Black Knight AVMs,” while apparently concealing that fact to TSI. That claim, if verified, stops this case in its tracks. It is hard to imagine that a $706 million verdict based on such rickety evidence could survive. All eyes are on Texas to see if it does.
Right now I am a law professor with eclectic interests and three homes. My primary position is as the Laurence A. Tisch Professor of Law, at New York University School of
Right now I am a law professor with eclectic interests and three homes. My primary position is as the Laurence A. Tisch Professor of Law, at New York University School of Law. But I am also a Senior Fellow at the Hoover Institution and a Senior Lecturer at the University of Chicago. Titles apart, I have spent over 40 years in teaching a variety of subjects, strongly resisting all forms of specialization. My set of interests runs from the obscure to the contemporary. I teach Roman law on a regular basis, and work constantly with materials from early English and American law. I do basic classes in property, contracts and torts, and lever these to work in areas of complex business transactions, such as land use development, corporations and securities, and have an abiding interest in all stages of constitutional law and political theory. When I was young I was told that “no utility infield has ever made it into the Hall of Fame,” but I am too old to mend my ways. Outside the academics, I play basketball on a regular basis (don’t ask about the jump-reach), do cross word puzzles with more interest than ability, and like classical music and art. I also take a strong interest in family life. There is a sense in which I think that I have led a charmed life, with a wonderful wife, Eileen and three children, one son-in-law and two grandchildren. It is odd to observe the tension between my happy personal life and the visible collective uneasiness about matters both domestic and foreign. I do try not to let the gloom of the world influence daily living and am known to sing (off-key) as a walk down the corridors.Sometimes small business disputes turn into legal tsunamis. Just that rare of an event happened in Texas when in March, 2018 a San Antonio jury in Bexar County District Court awarded a $706 million verdict for theft of trade secrets in favor of defendant, HouseCanary (HC) ]]>