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America’s business legal climate has reached a tipping point

The term predatory litigation often evokes the image of a sleezy ambulance chaser out to make an easy buck. But the real bandits have their sights set on much larger targets. This practice of weaponizing the legal system in an attempt to extort big payouts from businesses has become an industry of sorts, costing companies, and ultimately their customers, millions of dollars to fight or settle.

According to the U.S. Chamber of Commerce Institute for Legal Reform, America has the world’s most expensive legal system and 79% of American voters see the number of “frivolous” lawsuits as a problem. One study found the cost of the tort system in the United States amounted to $264 billion in 2010, or $3,428 for a family of four. At a time when we are working to recover from the economic shocks of the COVID-19 pandemic, America can ill afford such a significant drain on its economy.

One case that is still playing out in the courts stands out as an example of how massive the cost of litigation abuse can swell in certain circumstances, and how it can have a significant impact on our nation’s businesses.

In March 2018, a jury awarded San Francisco-based tech developer HouseCanary a $706 million award against property valuation and title insurance firm Amrock (then known as Title Source) for allegedly misappropriating trade secrets related to the development of a piece of home appraisal software known as an automated valuation model (AVM). Notable was the disproportionality of this award based on the $5 million per year contract the parties had entered into, and how the award came about only after HouseCanary failed to deliver a functional product to Amrock several months after the contractual due date. Even worse, it also turns out there was no technology to steal.

After Amrock sued due to HouseCanary’s failure to deliver, very much in the bounds of standard business practices, the case then swerved into the realm of perplexity. HouseCanary countersued, lobbing claims that Amrock had misappropriated its intellectual property in the creation of their own automated valuation model called MyAVM. The lawsuit was remarkable in that HouseCanary had no proof it delivered any property or tech to unjustly leverage. One of HouseCanary’s own expert witnesses even testified there was no evidence of “any fingerprints, any clues, any reference to any HouseCanary technology” in Amrock’s product.

Nevertheless, Housecanary’s lawyers painted an emotional tale of David versus Goliath—HouseCanary, of course, the victimized ‘little guy,’ according to their version of the story. They masterfully brushed aside the inconvenient truth of HouseCanary’s failure to deliver by spinning a narrative that Amrock used a “magic coke machine” to reverse engineer Housecanary’s AVM.

The outlandish $706 million verdict compelled whistleblowers to come forward to testify under oath that HouseCanary failed to produce the technology it promised. It also came to light that the Amrock executive who oversaw the AVM project was secretly in cahoots with HouseCanary and planned on joining the company along with obtaining an equity stake.

Fortunately, in a win for the rule of law and fair markets, a Texas appeals court last summer reversed the initial decision and remanded the case for a retrial. The appellate court review determined the jury likely considered invalid legal theories introduced by HouseCanary, among other critical errors, in reaching its initial flawed decision.

Not to let such a hefty payday be snatched from the jaws of victory, HouseCanary is now seeking to take the case to the Texas Supreme Court. Otherwise, they’ll have to hope lightning strikes twice in the same place if a new trial is held, where whistleblower testimony and other new revelations will be front-and-center this time around.

If the award to HouseCanary is allowed to stand, it would have significant legal and financial consequences. In an environment where entering into a partnership with an outside firm risks exposure to a legal threat that could cost 140 times more than the contract itself – as it did for Amrock – companies will be dissuaded from collaboration. This will in turn harm consumers who will lose out on the benefits such as new innovative products and services, and new jobs, among other economic and societal gains.

The legal climate for American business has reached a tipping point. Let us hope that in future trials, the courts favor evidence and facts and err on the side of advancing economic growth and opportunity when making their final decisions.

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Michael Busler

Michael Busler, Ph.D. is a public policy analyst and a Professor of Finance at Stockton University where he teaches undergraduate and graduate courses in Finance and Economics. He has written Op-ed columns in major newspapers for more than 35 years.

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