An arbitrator conclusion issued last week caps a four-year legal battle over allegations of trade secret theft involving two of the biggest companies in the housing industry, Black Knight Servicing Technologies and PennyMac Financial Services.
In a 2019 lawsuit, Black Knight accused Pennymac of copying its mortgage servicing platform, MSP, to create its Servicing Systems Environment (SSE) platform.
On Nov. 28, an arbitrator awarded Black Knight $155.2 million in damages related to a breach of contract claim (plus interest and attorney’s fees), representing six years of avoided license fees.
Meanwhile, according to the arbitrator’s conclusion, Pennymac will keep all its intellectual property and software, including SSE, “free and clear of any restrictions on use.” Pennymac said SSE has allowed it to reduce its servicing costs per loan by over 30% since its implementation.
The arbitrator issued an interim award, which means the companies can still move to correct, modify or vacate it before a state court confirms it.
Black Knight filed a complaint against PennyMac in November 2019 for breaching contracts and misappropriating trade secrets. According to the plaintiff, Pennymac stole its mortgage-processing system and created one of its own.
The lawsuit, filed in the Fourth Judicial Circuit Court in and for Duval County, Florida, sought $340 million in damages and injunctive relief under the Florida Uniform Trade Secrets Act and declaratory judgment of ownership of all intellectual property and software developed by or on behalf of Pennymac.
In March 2020, the companies entered arbitration.
More than three years later, the arbitrator awarded, in part, Black Knight‘s breach of contract claim and denied the claims of trade secrets misappropriation and injunctive and declaratory relief.
“The arbitrator concluded (wrongfully in our view) that Pennymac’s access to MSP allowed it to increase the speed of developing SSE and awarded Black Knight lost profits in the form of licensing fees it would have otherwise received from Pennymac over a longer development period,” Pennymac said in an 8-K filing with the Securities and Exchange Commission (SEC).
ICE, the new owner of Black Knight, said in a statement that it “will continue to seek the robust protections afforded to trade secrets and confidential information under federal and state law, including in products developed using its confidential information.”
According to Pennymac, the accrual related to the interim award will be recorded in the fourth-quarter earnings, with an impact of $2.85 per share. The company states it had $1.2 billion cash on its balance sheet as of Sept. 30 to fulfill the interim payment.
Analysts who cover Pennymac at Jefferies wrote in a report that they “would expect a modestly negative reaction to the charge, which equates to roughly 4% of book value.”