- - Tuesday, September 3, 2019

ANALYSIS/OPINION:

Vacationing in Bangkok recently, I was asked by the woman I brought my laundry to what I thought of President Trump’s chances for a second term. I told her I thought they were good, but also necessary — particularly because no one else is brave enough to stand up to China. She bemoaned how China has bought up Cambodia and fears it will do the same to her native Thailand. 

This is par for the proverbial course with China. Its ruthless practices abroad have (rightly) received fresh scrutiny as the Trump administration cites it as one reason for its escalating tariffs — particularly with regards to Beijing’s years-long abuse of intellectual property rights.

The administration is right to confront China’s tormenting of American industry. A recent survey found that one in five North American-based corporations has been the victim of Chinese theft of intellectual property. 

Despite the administration’s efforts to clamp down on Chinese malfeasance, there is still a long way to go. In fact, just as China continues to steal American intellectual property, the Chinese telecommunications firm Huawei began demanding that Verizon pay licensing fees for use of over 200 patents. 

Nauseating hypocrisy aside, Verizon isn’t even one of Huawei’s customers. Perhaps because of the financial strain the U.S. moratorium has placed on Huawei over national security concerns with its technology, Huawei seems to have opted for brazen shakedowns to recoup its losses.  



It’s no secret China and its companies have exploited our IP system for financial gain. What also is no secret is the information that some American companies are passing off as trade secrets in an attempt to reap massive, undeserved profits.

HouseCanary, a Silicon Valley-based real estate technology startup, struck an enormous $740 million judgment after alleging that its customer misappropriated trade secrets. The judgment, which makes HouseCanary’s entire venture funding of $64 million look like pennies, was the largest IP jury verdict in 2018. 

HouseCanary seemed to be flying high until numerous former executives at the company whistle-blew that the startup was a fraud that lacked any legitimate intellectual property.

Company insiders have lined up to say HouseCanary “never had any proprietary anything” and sold “wire frames and apps that didn’t function” to unsuspecting clients. The whistleblowers noted that HouseCanary’s products did not work “sufficiently at a level to be viable in the marketplace.” With little to no revenue from sales, HouseCanary discovered the intellectual property system to be a lucrative alternative for quickly increasing its cash flow. 

Adding to the peculiarity of HouseCanary’s trade secret litigation is the fact that the startup exposed its supposed secrets to the public domain, making them by definition not a trade secret. HouseCanary discussed, displayed and admitted into evidence the very information that it claims to be its “most sensitive information.” The startup sought court-ordered secrecy to undo its own public disclosure, but in July a court ordered the information to be unsealed. 

An appeals court is reviewing HouseCanary’s outlier jackpot. But if struggling companies observe that bogus intellectual property could be the golden ticket to otherwise unobtainable revenue, then expect far more Chinese-style abuse to infiltrate American intellectual property law, the system that has enabled the last 200 years of life-saving, life-improving technological innovation. 

Years of experience have conditioned American officials and entrepreneurs to expect China to assail U.S. companies. But HouseCanary shows that American companies too can extract money from industrious producers when competing in the market fails to deliver.

Theoretically, the court system should be capable of recognizing spurious trade secret claims. When the owners of a dance studio tried exploiting trade secret protections by suing dancers who allegedly misappropriated their “ideas and concepts for dance productions, marketing strategies and tactics, as well as … customer lists [containing] contact information,” the North Carolina Supreme Court rightly rejected the premise that these qualified as trade secrets. At the very least, the court demanded specificity to the trade secret claims and not sweeping generalities about well-known concepts. 

Unfortunately, the court system is not able to stop every swindler’s unserious trade secret claim. And when it doesn’t, the damage can be measured in the hundreds of millions of dollars.

It’s vital for policymakers to explore not only how to prevent intellectual property abuse by foreign actors, but by domestic rent-seekers as well. Our IP system needs to stay the envy of the world, not a place where trolls air out their dirty laundry. 

• Jared Whitley has worked in the U.S Senate, the White House and the defense industry.

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