The dynamic nature of our tech sector fosters a flow of new startups entering markets constantly. The speed at which companies can collaborate and innovate can significantly influence which may be the next Apple or Google and which will fail in their first year. These innovations, often the result of tireless investment in R&D, are frequently safeguarded through our system of intellectual property – through protections like patents and trade secrets.
However, abuse exists in nearly every system, and a 2018 Texas trade secrets decision boasts record-setting spoils for potential abusers and how a so-called expert witness can derail a jury. This case, if left unchecked, is a stark warning of just how high the cost of collaboration can be.
As I’ve previously written, since the enactment of the Defense of Trade Secrets Act (DTSA) in May 2016, the United States has experienced a rapid spike in trade secret lawsuit filings – with the number of civil trade secrets cases filed in federal and state courts increasing by 30%.
For example, in 2018 a suit involving autonomous-driving technology trade secrets between Uber and Waymo resulted in a $245 million settlement in San Francisco early last year. In another California-based lawsuit, a jury awarded the U.S. branch of a Dutch semiconductor maker, ASML, $223 million in its suit against a local rival, XTAL, for misappropriating trade secrets.
But the $740 million award handed down in Bexar County, Texas’ Title Source v. HouseCanary takes the cake for 2018’s most costly verdict in a trade secrets case. This record-setting award is especially concerning because just days following the decision it emerged that the victor, HouseCanary, may never have possessed any of the trade secrets at issue in the first place.
Title Source, now known as Amrock, sued Silicon Valley-based HouseCanary for breach of contract when the company failed to develop an automated valuation model (AVM) mobile application. In the meantime, Amrock developed their own AVM based off common industry practices and publicly available information. HouseCanary, in turn, accused Amrock of trade secret misappropriation.
The case is currently under appeal with the Texas Fourth Court of Appeals, which rests on the new evidence that emerged only after the award was already handed down. Whistleblower testimony from four former HouseCanary employees confirms that the app they were hired to develop was not a “functioning product,” was “vapor ware,” and had “none of the [promised] capabilities.”
Notably, the high-dollar remedy was awarded with reliance on suspect “expert” testimony from HouseCanary’s witness, Walter Bratic. As it turns out, Bratic knows his way to the witness stand, having established a career as an expert witness willing who doesn’t let logic or facts inhibit his “expertise,” so long as the check clears. Several of his lofty uncorroborated damages estimates have ultimately resulted in reversal on appeal with his logic-defying damages figures cited prominently among the reasons why the lower court had erred in its initial findings.
In what would have been one of the largest patent awards to date, a U.S. District Judge in East Texas in 2011 overturned a $625 million jury verdict in Mirror Worlds LLC v. Apple Inc. The judge pointed out “the scope of Mirror Worlds’ case and Apple’s potential liability exposure changed during the course of trial” and “Mr. Bratic did not adjust his damages calculations after dismissal of Mirror Worlds’ indirect infringement claims,” – which would have reduced damages by approximately 50% to about $300 million.
In his opinion overturning the verdict, the judge wrote the record “lacks substantial evidence to support the jury’s award of damages” liable for patent infringement, taking particular issue with the damages in Bratic’s dubious valuation suggesting Apple should pay whopping royalties.
However, these damages are only considered if it was proven that the infringed patent was so central to the entire product that it can be considered key driver of customer demand. On whether or not that standard was met, the appellate judge stated, “The record lacks substantial evidence to support the jury’s award of damages. The Court grants Apple’s request for Judgment as a Matter of Law to vacate the jury’s damages award.”
Bratic’s handiwork doesn’t end there. In 2013, his testimony in Xpertuniverse v. Cisco was deemed baseless and thrown out after he employed a bizarre “hypothetical negotiation” in which he contended both parties would have agreed to a $32.5 million lump sum royalty.
In the 2015 case IVS v. Microsoft, in which IVS accused Microsoft’s Xbox and Kinect of infringing on a facial recognition patent, the court ruled that Bratic erred in opining that royalty damages should be a running royalty of 3x the court-ordered royalty rate based on a prior case involving handheld controllers.
Likewise in his damages valuation testimony for HouseCanary, Bratic used an outrageous price of $11 per use for the AVM, which emails between Amrock employees from February 2015 make clear would never have been the agreed upon rate.
This case is the epitome of trade secrets litigation abuse – potentially an ominous high-dollar indication of an even costlier problem with broader impact on American innovation and competitiveness in a global technology sector. If the decision stands, the established precedent will further open the floodgates for abuse of IP protections – offering an attractive option for companies looking for a way around fair market competition and innovation.
What began as a $5 million contract has morphed into three-quarters of a billion dollars and a legal spectacle – in large part due to faulty reasoning and voodoo math of an expert witness with a history of over valuating for his clients and being overturned by the courts. Legal scholars and the entire tech sector are closely watching to see how this case plays out for the future of American innovation.
Legislation would boost public-private partnership, cut regulations
The United States is falling behind China when it comes to emerging technologies such as artificial intelligence and quantum computing, according to Rep. Cathy McMorris Rodgers (R., Wash.), who told the Washington Free Beaconshe is working on a package of legislative measures that would boost public-private partnerships to ensure the United States does not lose its competitive edge in these markets.
As China invests $1.4 trillion over the next five years to dominate the field of cutting-edge technologies, the United States must create its own plan to foster innovation in this area, McMorris Rodgers said. Her plan, which is garnering support among House Republicans, would increase federal research into new technologies and remove much of the bureaucratic red tape currently restraining the private sector. While the United States cannot compete by throwing money at the problem, it can eliminate many of the restrictions that have prevented the federal government from partnering with private tech startups already making inroads into these technologies.
“We will never outspend them, we will never out-subsidize these industries like the Chinese government plans to do,” McMorris Rodgers, a member of the House Energy and Commerce Committee, told the Free Beacon.
Instead, Republicans aim to level the playing field with an unprecedented legislative package comprised of 15 bills that would force the federal government to identify the areas where it is lagging behind China and work with the private sector to spur growth. This includes beefing up American investments into A.I., facial recognition technology, blockchains, quantum computing, and unmanned delivery services—all areas where China is outpacing the United States due to massive investments.
The legislative package is one of the largest and most comprehensive currently circulating on Capitol Hill. It is part of a larger push by Republican members in the House and Senate to combat China’s massive investment in cutting edge tech at a time when the world is becoming increasingly dependent on the communist regime.
The private sector has become more attractive to the federal government as bloated budgets and bureaucratic regulations slow its foray into a range of fields. These types of partnerships proved successful during the weekend when the United States launched its first man-based mission into space in nearly a decade. NASA partnered with tech billionaire Elon Musk’s SpaceX to make that mission a reality.
Some Democrats, however, have already balked at the GOP plan, citing concerns about privacy and the potential for civil rights abuses by government authorities. They maintain that these technologies could be used for unethical purposes—much in the way China has used them to solidify its police state and spy on dissidents. If the GOP does not find a way to compromise with its colleagues in the Democrat-controlled House, the bills could be dead on arrival.
Nine of the bills included in the GOP package identify new fields of research where the federal government can help spur private-sector innovation. They include A.I., 3D printing, facial recognition technology, and other new technologies still in development. All of the bills would require the Federal Trade Commission and Commerce Department to identify roadblocks preventing innovation in these fields and then create a plan to reduce bureaucratic challenges, such as restrictions on interstate commerce.
Another set of bills seeks to create protections for sensitive U.S. data to ensure the Chinese government does not intercept them, which comes on the heels of reports about China’s efforts to steal sensitive U.S. research and infiltrate the American academic system.
Other legislative efforts would require the federal government to assess its partnerships with tech startups and other smaller private businesses focusing on fields of interest.
McMorris Rodgers said the coronavirus pandemic has exacerbated concerns about China’s influence on the global stage, exposing the United States’ weaknesses and vulnerabilities.
Republican lawmakers also want the United States to directly combat China’s weaponization of new technologies that allow it to promote misinformation. One of the bills in the legislative package directs the Federal Trade Commission to determine how A.I. can be used to combat propaganda, such as deepfakes—videos altered to make it appear as if people are saying and doing things they are not.
If we’ve learned anything from the COVID-19 virus, it is that dependence on the Communist country is dangerous. For example, the Chinese authorities stopped a ship in transit filled with paid-for medical supplies at a strategic moment, hoping to hold us hostage. The Communist regime mixes all Chinese businesses with its military objectives using economics, trade and a growing dominance in the high-tech world to make their power and military might in the world greater.
That party has even bragged of its future capacity to attack and defeat the United States during an international pandemic. We must understand therefore that China isn’t merely a trading partner, it is also a dangerous international enemy. In response, we must always maintain a strong military. That is obvious. But what may not be quite so obvious, but every bit as important:
We must maintain our high-tech advantages and not make ourselves dependent upon a hostile power.
The Trump administration has been aware of these risks and has taken steps to stop China’s high-tech adventurism.
The administration recently enacted restrictions on Chinese tech company Huawei, which is infamous for placing backdoors in their chips so that the communist regime has control over any device with Huawei chipsets. This alone should make it clear the U.S. can never allow itself to become dependent upon China for its technology. Imagine American fighter jets, radars and missile defense that would work only if the communist regime in China decided not to switch them off.
This is why it seemed to be good news when the world’s third-largest chip maker, Taiwan Semiconductor Manufacturing Company (TSMC), and the Trump administration recently announced TSMC’s plans to build a large chip manufacturing facility in Arizona, bringing in over 1,600 good-paying high-tech jobs. It also puts a major chip manufacturing facility on U.S. soil.
If we look more deeply into the details though, there is lot that needs to be improved if this deal is to truly advance America’s economic and security interests.
First, the deal would build a factory that when complete will be building yesterday’s chip sets. The factory is currently planned to make 5 nanometer chips. But the next generation 3 nanometer chips are just a few years off. Given that the factory won’t be fully complete until 2030, it should be built to manufacture the highest tech chips — not ones that will be a generation behind by then. The 5 nanometer chips may still be used widely in consumer electronics in the future, but they won’t be the most powerful, efficient and capable chip sets needed for the most demanding applications.
Bottom line: We won’t be getting a facility capable of manufacturing the highest tech chip sets that will be needed in the future. However, TSMC is updating some of its facilities in Asia to build these next generation 3 nanometer chipsets. So we should insist that if we’re going to build a chip factory in the U.S., it must be a top of the line, high-tech factory — not yesterday’s tech.
The planned factory would also have a relatively low monthly output capacity. Other TSMC factories can produce more than five times the monthly capacity of the proposed U.S. factory. If the planned factory is too small to truly act as a counterweight to China’s plans or to make us truly independent of China’s high-tech tentacles, it doesn’t actually do that much to make America stronger or safer. We should insist therefore that the factory capacity be expanded to make it a true counter-balance to China’s aims.
Here is a solution to all of these concerns — the U.S. requires TSMC as a condition of the deal to form a joint venture with an American firm. It could increase the available funding to build a factory capable of manufacturing the latest and greatest and most powerful chipsets. Moreover, it would allow the factory to be built bigger so that its monthly capacity qualifies it as a true, cutting edge “Gigafab” facility. And finally, a joint venture with an American firm would insulate the venture from China’s active efforts to co-opt strategic businesses and thereby make America and others dependent or at risk to China’s designs.
The Trump administration is smart to build positive relationships that strengthen America and reduce our dependence upon China. But the details matter, and the deal with TSMC needs some serious improvement if it is to truly end our dependence on high tech semiconductors that are within China’s orbit. The last 30 years have been disastrous for American manufacturing. China has been the primary beneficiary of those wrong-headed policies, taxes and regulations that drove business overseas. Hopefully, the COVID-19 virus has woken us up to the malignancy of the communist regime and the risks of relying up on it for things that are fundamental to our security.
Washington, DC — The race to the 5G generation of telecommunications technology is on. By 2035 it will be responsible for more than $13 trillion in global economic output.
The nation getting the best technology to market the quickest will enjoy an incredible competitive advantage. For America to produce the first fully functional 5G network involves many things that must happen. The development of the hardware that will make things happen and the writing of software to control it all is only part. Anything operating wirelessly, as many of these new applications will, needs enough clean spectrum to carry the load.
Without it, the U.S. will end behind the Chinese and others who are already clearing the midrange C-Band to deploy 5G. In the U.S, that space is occupied, allocated to satellite companies who are using it, putting the issue before the U.S. Federal Communications Commission, which has regulatory authority over the spectrum.
The chairman of the FCC, Ajit Pai, has been a real leader in the campaign to keep the government from doing anything stupid that would slow the evolution of the Internet or hamper the technological progress needed to support it. Late last week, he announced his proposal for dealing with the C-Band issue so the folks prepared to use it for the next level of what cyberspace can do can get it, and the folks who have it can be compensated adequately.
To remove the potential roadblock to progress, the companies who’ve already made investments in the C-Band space need to be compensated fairly and have their relocation costs addressed. We’re talking of course about a communal public asset regulated by the government, but that doesn’t mean the feds can just take it back because it wants it for something else. “It’s only fair,” Pai said while revealing his plan, “that every single reasonable cost should be covered. So, under my draft rules, the winning bidders in the C-band auction would be required to reimburse satellite operators for their reasonable relocation costs.”
Some in Congress are also trying to make sure compensation happens, but on the cheap. Louisiana GOP Sen. John Kennedy’s SMART Act that would delay an FCC auction and, unintentionally to be sure, give the Chinese time to take a great leap forward on 5G faster than America can. His bill allocates just $5 billion in reimbursements to the companies involved as incentive to relocate to another part of the spectrum and grants them no more than a $1 billion share in the revenues the auction is sure to generate.
As an incentive to cooperate rather than sue, that’s not much. Even Kennedy admits the auction could generate $60 billion in revenues — and that’s probably a low estimate. A $5 or $6 billion buy-out of a 40-year, $50 billion investment in building out C-Band based businesses that currently provide content to 120 million U.S. households just won’t cut it.
Some folks say the push for a more realistic incentive is merely crony capitalism. That’s not so, and the people saying it is are trying to manipulate the opinions of President Donald Trump and his supporters. The SMART Act undermines U.S. technology innovation and investment because it signals to the marketplace that private companies cannot be sure their capital spending in government-regulated space is safe from federal confiscation sometime in the future if needs change or political winds shift.
The commission’s scheduled to take up Chairman Pai’s proposal on February 28. So far, under his leadership, it’s been doing a lot of good things. The Pai-led FCC has been protecting a huge percentage of the economic growth that’s occurred in the U.S. economy over the last several years. And we’ll all benefit if his colleagues stand with him regarding what’s to happen with the C-Band spectrum. Trillions in future economic growth are at stake. He’s found a way to thread the needle and keep everyone, the people to whom it is licensed and the people who want it, happy. If his proposal fails, or of the Kennedy plan is adopted by Congress, the whole thing almost surely ends up in litigation for years as someone else, probably the Chinese, take control of the world’s telecommunications sector.
We don’t have forever. We must move fast. We need the private sector to lead the way to U.S. dominance in 5G. The federal government can’t do it fast enough to beat the Chinese. President Trump and Chairman Pai need to offer a fair deal with real incentives from which the taxpayers will ultimately benefit because of the jobs and wealth a 5G global network led by America will produce for us.
Think of it as keeping America’s telecom sector great!