America has a monopoly problem.

And it’s not big tech

Quite a bit of ink has been spilled lately over America’s “monopoly problem” and how to fix it. Nobel Prize winners are writing about it. Executives are being called into congressional hearings and questioned about it. Presidential candidates are building platforms on it. And while calls to “break up big tech” can now be heard from both ends of the political spectrum, history proves that many of the perceived issues with “bigness” can sort themselves out.

There is, however, a very real monopoly problem that has been percolating for some time now in the United States. In fact, if left unchecked, it could grow to a point where it becomes a much more serious threat to innovation than any “big tech” company poses. It’s already grown to an astronomical size without most of us even noticing. Courts around the country are enforcing pseudo-monopolies that are threatening the future of American innovation.

To understand it and where we are, we have to go back to a rather mundane contractual dispute from 2015. Here’s how the Cato Institute’s Ike Brannon described the case:

Title Source Inc., an independent title insurance and valuation company, sued the data analytics firm HouseCanary for breach of a $5 million per annum contract. Title Source (which has since changed its name to Amrock) asserted that HouseCanary did not deliver an advanced, automated home valuation model as promised, impeding Amrock’s field agents from reliably obtaining the latest and most accurate estimates on home values.

HouseCanary then countersued, claiming Amrock stole HouseCanary’s trade secrets to design and implement its own valuation model.

On its face, this case is enough to make even a contracts professor yawn.

There’s only one problem: While HouseCanary’s counterclaim could be best understood to be “merely a tactical move with little basis in reality,” the jury bought it. Moreover, HouseCanary was awarded a $706 million verdict for the alleged theft of its trade secret. That’s nearly three-quarters of a billion dollars for the defendant in a breach of contract complaint. It’s the largest punitive damages award ever in Bexar County, Texas, and one of the largest in American history. And they weren’t even the plaintiff in this case. As legal scholar Richard Epstein described it, “Sometimes small business disputes turn into legal tsunamis.”

Fighting over trade secrets is nothing new with tech companies. In 2004, Mark Zuckerberg was sued by the Winkelvoss twins and settled for $65 million. In 2015, Uber was sued by the founder of a company called Celluride with no settlement. In 2017, Waymo (Google’s self-driving car company) sued Uber and secured a $245 million settlement. Earlier this year, Tesla sued two different competitors over alleged trade secret theft. Silicon Valley’s culture of freely flowing ideas and highly mobile employees makes the industry particularly susceptible to these suits.

What’s more, trade secrets litigation is quite different than traditional cases involving patents and copyrights. The Verge outlined the problem nicely in a recent write up of Jawbone’s lawsuit against Fitbit:

[T]he issue isn’t whether a new company actually used the protected information…All that matters is if the subject broke their agreement to keep the information secret, which could be as simple as copying work files to a personal computer. If the secret is something more abstract, like Jawbone’s strategy for building a better health tracker, it can be hard to say what keeping the secret would even mean. That makes it difficult to prevent a case from being launched, and hard to predict the outcome once the case is underway.

Unlike patents, trade secrets never expire. Trade secrets aren’t registered. And, as recent history suggests, trade secrets litigation favors the one claiming their secrets were stolen. According to data from Lex Machina, of the 234 such cases that were resolved through trial between 2009 and 2018, the party claiming the trade secret won nearly three quarters of them.

HouseCanary’s claim against Amrock shows just how little bearing the facts can have on a claimed trade secret. HouseCanary was hired to build a product from Amrock, they didn’t, and were sued for it. In the meantime, Amrock built the product they needed. HouseCanary wins three-quarters of a billion.

For a long time, cases like this were limited to state courts. However, as Brannon points out, with the passage of the Defense of Trade Secrets Act (DTSA) in 2016, more are arising and being brought to federal courts:

The law’s intent was to bring more coherence and consistency to laws governing trade secrets and make it easier to bring such suits in federal court. Unfortunately, it has become clear that the legislation did little to clear up these disputes. The scope of the damage awards in the last few years and the recent spike in cases involving trade company secrets means that more companies should brace themselves for lawsuits.

In fact, the first year after the passage of the DTSA saw a 30 percent increase in such claims.

Moreover, as law professors David S. Levine and Sharon K. Sandeen pointed out, “We should all be alarmed by the possibility of creating conditions ripe for introducing trolling behavior into trade secrecy.” They explain:

Trade secret trolls have been unable to emerge thus far because of the strengths of uniform state law and the checks against abuse found in established trade secret principles and corollary state law involving noncompete covenants and invention ownership. But the free-ranging, plaintiff-oriented [Defend Trade Secrets Act and the Trade Secret Protection Act] will destroy that delicate balance and defeat the very purpose of trade secret law as a force of maintenance of commercial ethics. Simultaneously, the Acts will replace that balance by creating near-perfect conditions for the rise of trade secret trolls, moving cyberespionage from the first to the second most important issue in trade secrecy law and practice for trade secret holders.

In calling for the DTSA to be reconsidered, they conclude that trade secret reform will “advance an environment where entrepreneurship, employee mobility, and legitimate access to information can flourish.”

As we continue to have conversations about the future of innovation, it’s important to remember the impact that expansive trade secret protections will have. The DTSA’s definition includes:

All forms and types of financial, business, scientific, technical, economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible.

In short, this allows for an unexpirable monopoly on nearly any idea. No matter how small and mundane.

The prospect of companies that do not deal in billion-dollar sums getting billion-dollar judgments is an incentive too strong to ignore. The last thing we need is a category of company that exists to pursue profits in court rather than by providing valuable products and services to willing buyers.

This isn’t to deny that some trade secret claims are worthy of protection. But the risk of a new breed of patent trolls untethered by patent law claiming even the most mundane idea was stolen by America’s innovators and entrepreneurs is a risk worth worrying about. If not, our future will be rife with these mini-monopolies, much more potent than big tech could ever dream of.

The Benchmark

A publication by The Center for Growth and Opportunity at…

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