Technology Lawsuits Send Texas Businesses Scrambling

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San Antonio's tech economy could be at risk as patent trolls seek to use the court system to file contentious and expensive lawsuits against companies such as Apple.

Scott Ball / Rivard Report

San Antonio's tech economy could be at risk as patent trolls seek to use the court system to file expensive lawsuits against companies such as Apple.

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.

5 thoughts on “Technology Lawsuits Send Texas Businesses Scrambling

  1. Wow! Very insightful. Thank you for the information. I don’t think many people know of this unfortunate tactic.

  2. This “commentary” fails to accept many problems created by the party that lost. Amrock lost after choosing San Antonio as the venue it wanted to sue another company. Amrock lost after a jury of our neighbors, and your constituents, spent weeks listening to all the evidence where both parties were represented by some of the best lawyers money could buy. Amrock lost after instituting the lawsuit in the first place–they were the aggressor and the original plaintiff. San Antonio courts do not have a track record of being unfair. That is probably why Amrock chose to institute their lawsuit in San Antonio.

    The gloom and doom warning is unfounded. The United Supreme Court has already ended what was happening in the Eastern District of Texas–conveniently ignored in this piece. Parties are limited on where they can file lawsuits and San Antonio/Bexar County has never been a hot bed of this type of litigation.

    This article is nothing more than advocacy. This is an attempt at riling the basest worries in people that thing there is a tort or court crisis. This tries hard to paint the loser, Amrock, as a victim when in the end they are a victim of their own choices. This is an unfair and veiled attack on our courts and our jurors.

  3. This commentary is unfair. First, Amrock CHOSE San Antonio to sue another company. Amrock was the original Plaintiff (suing party). Second, your constituents and 12 of our peers listened to evidence for weeks before rendering a verdict against your client. If there was a crisis, why would your client file suit in San Antonio? Third, all partied hired highly qualified expensive attorneys to represent them. Finally, the gloom and doom is misleading as the United Supreme Court has already remedied the problem your article spends most of the time discussing.

    There is no court crisis in San Antonio/Bexar County. If there was, Amrock would have never chosen to file suit here. Amrock, upon the advice of well-heeled and well-informed counsel, knew San Antonio was a fair venue. This commentary is an attempt to influence and scare Judges and future jurors about things that are not happening and are not a risk following the US Supreme Court ruling. It is upsetting that an elected would choose to mislead readers and constituents in an attempt to advocate for a company that is only the victim of their own decisions and the losing side of a fair trial.

  4. I prefer to trust a Bexar County Jury of twelve of our fellow community members rather than paid defense counsel for a Detroit-based corporation to tell me what is just.

  5. Mr. Palaez, I am an inventor from Plano, TX. I am not a patent troll. I know Bob Short and Victor Larson the inventors of the VirnetX technology. Their technology was core to secure encrypted communications over the web. They are not patent trolls either.

    San Antonio’s own David Monroe is a prolific inventor that has been labeled a patent troll. He integrated his wireless video technology into the first cell phone camera, first military and industrial wireless surveillance systems, and since has become ubiquitous. You should visit with Mr. Monroe at the San Antonio Museum of Science and Technology which he founded.

    These real inventors are getting wiped out by the tech goliaths that manufactured this patent troll propaganda. You don’t need to feel sorry for Apple, their trillion dollar multi-national corporation is not threatened by Bob and Victor.

    If you want San Antonio to become a hub for innovation, you should talk to these inventors about what it takes to create a new technology and compete with the big guys. You will find these are the kind of innovators San Antonio should be encouraging.

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