In June 2020, the San Antonio Court of Appeals issued its opinion in Title Source, Inc. v. HouseCanary, Inc., No. 04-19-00044-CV, 2020 WL 2858866 (Tex. App.–San Antonio June 3, 2020, no pet. h.), reversing and remanding for new trial a $740 million judgment in favor of HouseCanary on its Texas Uniform Trade Secrets Act (TUTSA) and fraud claims against Title Source.
The facts of Title Source are complex but familiar to those who litigate trade secret cases. In 2013, the Title Source (TSI), a property valuation company, and HouseCanary, a real estate analytics company, signed a non-disclosure agreement (NDA) to explore possibly working together. The NDA prohibited decompiling, reverse engineering, or attempting to develop software derived from the other parties’ confidential information.
In 2014, TSI asked HouseCanary to build an iPad application that TSI’s appraisers could use to perform appraisals more efficiently. The parties signed a Master Software License Agreement that contained similar restrictions to the NDA. After signing, HouseCanary began developing the following, which HouseCanary considers its trade secrets:
- Automated Valuation Models (AVMs): computer programs that analyze data to estimate a home’s value;
- Similarity Score Model: algorithms to compare similiarites between properties;
- Prototype Complexity Score: estimate of how difficult an appraisal will be to complete;
- Value Report: overall report and tool to value a property and have comparables around that property.
In 2015, HouseCanary gave TSI an early version of its app and its “data dictionary,” another claimed trade secret of compiled data. TSI assured HouseCanary that it had no intention of developing its own valuation models, but TSI was apparently doing just that. The evidence showed multiple examples of TSI’s use of the data dictionary to build its own valuation software:
- An internal TSI email asking another employee to “check the HC data dictionary to make a list”;
- An internal TSI email discussing how TSI planned to build its “own products” and needed to “think big and wide on how to maximize the value of the HC data to our business”;
- An internal TSI email discussing how an employee was “more interested in knowing what data” HouseCanary had than its app; and
- An internal TSI email joking that TSI should call the HouseCanary project “the Birdcage since we are capturing the data they provide.”
In November 2015, TSI and HouseCanary signed an Amended Master Software License Agreement that provided for a greater exchange of information between the parties but prohibited TSI from creating a database or derivative product from HouseCanary’s information.
In March 2016, a TSI developer sent an email with an spreadsheet called “Appraisal Complexity Model.” HouseCanary was the source of the ten different types of information for this spreadsheet.
In 2016, the parties’ relationship deteriorated, especially after TSI asked HouseCanary to sign a second amendment that would have given TSI all of HouseCanary’s underlying data and removed all restrictions on reverse engineering. After HouseCanary refused, TSI began submitting fake addresses to HouseCanary’s valuation application, which resulted in errors in the application. TSI then sued HouseCanary for breach of contract and fraud. HouseCanary counterclaimed for breach of contract, fraud, unjust enrichment, quantum meruit, and, later, TUTSA violations. HouseCanary won at trial and elected to recover on its TUTSA and fraud claims.
The Court addressed several issues on appeal. I’ll discuss most of those issues in subsequent blog posts. Today, I will address the jury charge question that resulted in reversal. The court’s charge asked the jury if TSI misappropriated trade secrets and instructed the jury that misappropriation could be based on a “use” theory or a “acquisition by improper means” theory. In other words, the jury had to find that TSI:
- acquired the trade secrets and knew or had reason to know that the trade secrets were acquired by improper means; or
- disclosed or used the trade secrets without HouseCanary’s express or implied consent, and that TSI used improper means to acquire knowledge of the trade secrets; or
- disclosed or used the trade secrets without HouseCanary’s express or implied consent, and that TSI, at the time of the disclosure or use, knew or had reason to know its knowledge of the trade secrets were acquired under circumstances giving rise to a duty to maintain secrecy or limit their use.
The problem in this case was the submission of all three theories of liability. Here, the records seems to support theory 3–TSI was using HouseCanary’s trade secrets in violation of a duty to limit their use. But there was no evidence that TSI was liable under theories one and two because TSI acquired the trade secrets by proper means because HouseCanary willingly turned over its trade secrets after signing the various agreements that were supposed to restrict TSI’s use of those trade secrets. (For a discussion of the different types of liability under TUTSA, see pages 2-3 of my 2019 Trade Secrets Update.)
This created a Casteel problem: “When a single broad-form question commingles valid and invalid theories, a new trial is required if the appellate court cannot determine whether the jury’s verdict is based on an invalid theory.” Because HouseCanary submitted a three-party jury question, and two of those parts were not supported by legally sufficient evidence (because TSI had properly acquired the trade secrets), the Court determined that it could not rule out the possibility that the jury based its misappropriation findings on the “acquisition by improper means” theories. Therefore, the court remanded the case for a new trial.
There’s two lessons here. First, a litigator needs to think hard about what kind of misappropriation occurred: was it a use-based misappropriation or an acquisition-by-improper-means-based misappropriation? That will help determine how to craft the jury charge. Second, if there is any doubt about the evidence supporting each theory, the litigator needs to submit the theories as separate questions so the jury can make a determination on each theory.