Predatory Litigation Is A Threat To Small Business Recovery

Eighteen months ago, few could have predicted the impact or duration of COVID-19. Almost no corner of society has been unaffected. But the virus has been particularly devastating for underserved and minority communities, which have been disproportionately shaken by wage reductions, job losses, and business closures.

For example, a Harvard/NPR study last fall found almost three-quarters of Latino households (72%) reported serious financial problems during the pandemic.  The same was true for 60% of African-American families and 55% of Native-American families.  For non-Hispanic white families, that number was 36%.

Similarly, the pandemic has disproportionately impacted minority-owned businesses. Research from the summer showed that 49% of Hispanic-owned businesses and 57% of Black-owned businesses were classified as “at risk” or “distressed” before the pandemic. More than 80% of Latino-owned businesses have continued to experience setbacks from the pandemic, according to a Stanford Latino Entrepreneurial Initiative report. Latino unemployment reached nearly 20% last April, and it remains more than double pre-pandemic levels.

One troubling trend is the growing issue of predatory litigation, which discourages entrepreneurialism, a key pillar of job creation and economic development. For example, a recent investigation showed that Oportun, a singular California loan company, was behind 15 percent of small claims for debt collection in the entire state from 2017 to 2018. Ironically, Oportun markets itself as founded to help Latinos achieve the “American Dream.”

Abusive and litigious lenders may be a widely known risk, but litigation abuses come in many forms.  Consider a 2018 lawsuit brought by tech-developer HouseCanary, which resulted in a $706 million award. HouseCanary alleged that Title Source (now Amrock), a title insurance firm and former client of HouseCanary, misappropriated trade secrets.

The jury-awarded verdict—despite HouseCanary’s own expert witness testifying that Amrock did not use any of the purported trade secrets—dwarfs the $5 million annual contract between the companies, which was terminable after one year. That compelled whistleblowers within HouseCanary, after the staggering verdict became public, to come forward with information that HouseCanary provided faulty wireframes and “repeatedly” lied to Amrock about its products and status of development.

HouseCanary sought to silence any information that could undermine its story, according to a sworn statement by one of the whistleblowers from within the company, who testified that he was offered a lucrative consulting agreement in exchange for his silence, despite “no specifically-defined scope of work, nor any minimum or maximum number of hours per month.”

It does not take a Supreme Court Justice to recognize the abuse of the judicial system. Fortunately, the Texas Fourth Court of Appeals overturned the 2018 decision and remanded the dispute for a new trial, which has not begun yet. 

Business owners and innovators should be able to operate with the confidence that they will not be shaken down by predatory litigators without any just cause. When faced with the prospect of costly court battles, especially when those can be sprung with little evidence, entrepreneurs are prone to “keep their day job”—which ultimately kills the jobs and economic activity those businesses would support otherwise.

Texas, where HouseCanary filed its lawsuit, is home to three of the top five cities for Hispanic entrepreneurs. One out of every five Latino small business loan requests in the U.S. originates in Texas. It is not hard to see what a chilling effect this case could have on all businesses, but especially those who face credit and investment challenges. The massive HouseCanary award, and the lack of factual foundation behind it, sent a message to companies of all sizes that their next contract could cost them dearly.

The risk of being targeted with abusive litigation presents another hurdle in the way of minority-owned businesses’ recovery. Lowering the bar for what is deemed worthy of trade secret protection will dissuade business owners from innovation. Small business innovators often provide jobs and opportunities that uplift entire communities.  They need the confidence that they will not get shaken down by predatory litigators.

Wealth disparities have been exacerbated by the COVID-19 pandemic. Hispanic median family wealth last year was barely a third of white families. If we hope to close those gaps, entrepreneurs need a level playing field.

Mario H. Lopez is president of the Hispanic Leadership Fund, a public policy advocacy organization that promotes liberty, opportunity, and prosperity for all Americans.