You’ve probably heard about Theranos – the company that deceived investors, customers and even its own employees about its supposed ground-breaking blood testing technology that turned out to be nonexistent. Silicon Valley has long been characterized as a place where “ship now, fix later” has proven to be a winning strategy, but Theranos committed outright fraud with a “fake it till you make it” strategy, as the HBO documentary “The Inventor: Out for Blood in Silicon Valley” reveals.
But Theranos isn’t alone – in fact, we have a Theranos-type situation going on right here in Texas, with ominous implications not just for the companies involved, but for the entire innovation economy. At least Theranos got caught, and the bad actors are about to stand trial. But in the case I’m about to describe, the bad actors are winning.
In 2018, a San Antonio jury awarded an outrageous $706 million jackpot judgment award to HouseCanary, a company claiming to have cutting-edge technology for automating real estate valuations. The loser in this case was Title Source, a company that had licensed HouseCanary’s technology for $5 million annually but which had become frustrated at HouseCanary’s inability to deliver. So far, just an ordinary breach of contract dispute, the likes of which are settled in courtrooms on a regular basis.
But as a Hail Mary defensive measure HouseCanary countersued Title Source for theft of trade secrets, and the San Antonio jury fell for it, awarding an absurdly high award that sent shockwaves throughout the tech and intellectual property (IP) industries.
After the stunning verdict, a whistleblower from HouseCanary came forward, outraged by the injustice of the jackpot award. The whistleblower revealed that HouseCanary never had any proprietary technology that worked, and was simply bluffing, and the whistleblower’s testimony is now part of the basis of Title Source’s appeal. Essentially, HouseCanary agreed to license a technology that it simply hadn’t yet developed, hoping but ultimately failing to deliver. Sound like Theranos?
The parallels don’t end there. The whistleblower said that HouseCanary was simply using other valuation software from a company called Black Knight to cover for their own failure, much as Theranos was using equipment from Siemens and other companies while trying to get their own to work.
And eventually a whistleblower came forward against HouseCanary, just as George Schultz’s grandson blew the whistle on Theranos. Unfortunately for Title Source, the whistleblower came forward after the $706 million jury award, but the case is now on appeal.
Why does this matter? Apart from to the shareholders, I mean? The HouseCanary case is being carefully watched by the tech and IP industry because of its potential to harm the IP licensing system by dramatically raising the risks of such agreements.
The licensing of intellectual property, whether patents or trade secrets, is a key enabler of the innovation economy. Most products are not based on a single invention, but are rather an amalgam of innovations. There are literally hundreds of patented innovations in an iPhone, for example, and not all of them belong to Apple. In the tech world, companies that intensely compete with each other at the same time cross-license each other’s technologies. It’s a virtuous system in which companies compete and cooperate at the same time, made possible by property rights, and which results in maximum consumer benefit and tremendous economic growth.
But it’s put at risk by absurd outcomes like the HouseCanary verdict.
To that point: Why would a business license a technology for a relatively modest amount of money if the downside risks could be as much as 150 times their initial investment? Outrageous, baseless jackpot awards issued by nonspecialist juries based on spurious arguments threaten to raise the marginal risk of IP licensing, which will create additional and unnecessary economic friction.
Texas has unfortunately gained a reputation for excessive awards on IP cases, but here’s hoping that the truth prevails in Title Source’s appeal, which is now underway. Ultimately, we need new federal IP legislation which, while strengthening IP protection, also creates new specialist courts to adjudicate these technical IP disputes, which were apparently beyond the capability of the San Antonio jury.