Scott Ball / Rivard Report
San Antonio is home to more than 1,500 innovation and tech companies. Not only that, but San Antonio has one of the largest concentrations, across multiple agencies, of IT and cybersecurity professionals in the nation. The San Antonio Economic Development Foundation reports that San Antonio boasts more than 34,000 IT professionals and that the industry generates nearly $10 billion of economic impact for our city.
I am proud to serve as the chairman of the City’s Innovation and Technology Committee. Our committee’s mandate is to help develop San Antonio’s long-term strategy as it relates to smart-city infrastructure, technology workforce, and recruitment of technology and innovation opportunities – opportunities that create jobs, raise our city’s profile among technology leaders, and make us more resilient and competitive. My job is also to guard against any threats to our innovation economy and our ability to thrive.
While our future is bright, there is a disturbing Texas trend menacing our efforts to make San Antonio a hub of technology jobs and innovation. This trend is playing out just north of us. Residents of Plano and Frisco recently learned that Apple will close its doors there and open a new location in Dallas.
Apple appears to be fleeing these communities because they reside within the Eastern District of Texas, a federal judicial district that has become popular with patent and trade secret trolls. Many of these trolls buy patents for the sole purpose of suing other companies to extract settlements over supposed intellectual property infringements. Patent trolls base their lawsuits on tenuous interpretations of intellectual property rights and sketchy claims of trade secret infringement.
Apple’s decision to relocate right outside the Eastern District’s boundary reflects how patent troll litigation and stratospheric verdicts can damage our innovation and technology economic development efforts and, in turn, our communities.
In 2018, Apple was sued in Texas by a “patent-assertion entity” called VirnetX. The company alleged that Apple infringed on VirnetX patents for secure communications, including its VPN on-demand technology and consumer FaceTime and iMessage software and services. The jury awarded VirnetX $502.6 million, even though VirnetX never developed any of the technology. It bought the patents for the sole purpose of profiting from litigation.
There’s no sign that VirnetX has actually used the patented technology for any business purposes. In its Securities and Exchange Commission filings, VirnetX noted that they “currently derive minimal revenue from licensing activities.” Nonetheless, VirnetX has been awarded more than $1 billion in damages from its patent troll cases over the past decade, including two huge verdicts against Microsoft totaling $223 million.
Troll litigation in Texas has always been big business. Plaintiffs used to flock to the federal courts in the Eastern District of Texas to file intellectual property infringement (IP) lawsuits because its judges are perceived to be friendly to IP litigation plaintiffs. The Eastern District features a small courthouse with only two judges who were motivated to move cases through the system quickly, earning the “rocket docket” nickname because of how fast plaintiffs could score big verdicts.
In 2016, Marshall (population 24,000), the Texas city that hosts the Eastern District’s courthouse, was home to 25 percent of all intellectual property and patent lawsuits in the U.S. In May 2017, the Supreme Court ruled unanimously in a case called TC Heartland v. Kraft Foods that plaintiffs can no longer forum-shop to find a friendly court like the rocket docket. Instead the court ruled that plaintiffs must file in districts where the company being sued is incorporated or where it has an established place of business.
If San Antonio is to protect its tech economy, then we are wise to look west. Specifically, we should look at California’s track record. California serves as a warning of what could come if our legal system does not offer fair rulings in trade-secret and patent disputes. A 2018 study found that 1,800 companies left California in a single year, with the legal climate being the primary reason.
Verdicts handed down by California courts in 2018 included one for $145 million against Apple, another for $66 million against Elec-Tech, and $60 million against Emerson Electric. It would be naïve to think that troll litigation verdicts like these don’t get noticed by CEOs and investors.
The economic burden of today’s troll litigation is unprecedented. The costs disproportionately burden innovation firms as the data reveals that the more research and development a firm does, the more likely it is to be sued by trolls. A 2015 study conducted by MIT found that infringement suits brought by trolls were directly associated with decreased investment from investors.
Patent trolls and trade secret trolls are well aware of how profitable it can be to target successful tech companies with weak allegations of intellectual property infringement. For this very reason, it is alarming that San Antonio is now home to one of the biggest troll verdicts in the history of Texas.
Amrock, a national provider of title insurance, property valuations, and settlement services, found itself saddled with a $706.2 million verdict last year after HouseCanary, a San Francisco-based home valuation company, made allegations of trade secrets misappropriation. The verdict, which was the largest in Bexar County history and second largest in the nation in 2018, dwarfs the judgments that sent Apple scurrying to find a safer haven.
Throughout the case, experts and other witnesses agreed that Amrock’s tech didn’t contain HouseCanary’s trade secrets and that HouseCanary didn’t have any proprietary technology or trade secrets to steal. HouseCanary’s own employees testified that the company’s trade secrets were not trade secrets at all and called their own company a “house of cards.”
Despite these troubling revelations, HouseCanary still walked away with a verdict valued at more than 10 times the size of its total venture funding. Emboldened by this disturbing verdict in state court, HouseCanary, not unlike the IP litigation trolls elsewhere in our state, has now filed suit against three of Amrock’s sister companies in federal court.
Companies looking to invest in Texas will notice this and consider it when choosing where they invest. If word spreads that San Antonio is a fruitful hunting ground for intellectual property trolls, CEOs and investors will look to safer cities in which to do business.
The justices who preside over Texas’ 4th Court of Appeals will soon hear Amrock’s appeal. I hope that, by examining the merits of the case, the appeals court will rule in line with the law and send a reassuring message that San Antonio is a safe harbor for innovation and technology companies.
Just as Plano, Frisco, and California have seen businesses flee due to unpredictable technology litigation verdicts, San Antonio could find itself in a similar situation if our courts do not reverse the trend of exorbitant and unsubstantiated intellectual property troll verdicts.
San Antonio was named the fastest-growing city in the nation between 2016 and 2017, in large part because businesses believed they could thrive here. We also grew our economy in 2018 and all indicators point to an even better 2019. But San Antonio isn’t immune from national economic forces and trends. Our economic development success depends on the strength of our target industries. We all must continue to protect a local economy that is not only strong but is also resilient. If we don’t, the economic consequences for our community could be disastrous.