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Legal battle erupts between Black Knight, PennyMac over allegations of trade secret theft, unfair business practices

Each company claims the other acted dishonestly

Two of the biggest companies in the housing industry are now engaged in an already contentious legal battle over allegations of trade secret theft, antitrust violations, unfair business practices and more.

In the last 48 hours, Black Knight and PennyMac Financial Services each sued each other in separate federal courts, with each claiming that the other violated contract terms, federal and state laws, and common business practices.

Each company claims the other is guilty of several violations, while simultaneously professing their innocence to the claims laid out by the other side.

According to each of the companies, the lawsuits stem from PennyMac’s usage of Black Knight’s LoanSphere MSP mortgage servicing system, a system used by many of the top mortgage servicing companies in the nation.

Both companies agree that PennyMac, which is one of the largest mortgage servicers in the country, began using Black Knight’s servicing system in 2008.

That much they can agree on. But beyond that, the companies strongly disagree over what happened in recent years.

PennyMac’s allegations

In its lawsuit, PennyMac claims that Black Knight’s MSP system is limited and out of date, and states that it has developed hundreds of “custom, workflow-driven modules” to address the deficiencies in Black Knight’s system over the years.

The company also claims that through its development of the hundreds of custom modules, PennyMac is now ready to cease using the Black Knight system and begin using its own system, again developed to address the supposed shortcomings of Black Knight’s system.

According to PennyMac, upon learning of the company’s plan to stop using Black Knight’s system, Black Knight filed a pre-emptive lawsuit against PennyMac accusing the company of trade secret theft.

But Black Knight has a wholly different view of the chain of events.

Black Knight’s claims

Black Knight claims that PennyMac effectively stole its proprietary system and created one of its own that mimics the MSP system, a violation that it claims will cost the company $340 million.

According to Black Knight, at some point over the last several years, PennyMac launched a “secret project” to copy the functions of the MSP system to allow PennyMac to discontinue using Black Knight.

“In disregard of contractual restrictions and the trust that had been placed in PennyMac, PennyMac instituted a secret project to create a copy of the MSP System for its own benefit in lieu of the MSP System,” Black Knight states in its lawsuit. “In furtherance of this scheme, it not only used the information shared with it in confidence by Black Knight, it also improperly shared access credentials with individuals who were not authorized to use the MSP System under the terms of the Master Agreement.”

According to Black Knight, despite PennyMac’s “two most senior executives” stating earlier this year that they looked forward to continuing to work together, PennyMac was not only secretly developing a facsimile of the MSP system, but also preparing to lie to Black Knight about it.

“In April 2018, at a point when it appears PennyMac knew that its secret project would soon be discovered, its representatives met with Black Knight representatives and revealed a sanitized version of its intentions, indicating that it wished to continue exploring ways that the parties could work together so that PennyMac could continue as a long-term Black Knight customer,” Black Knight states. “PennyMac’s assurances appear to have been designed to keep Black Knight engaged while PennyMac finished work on its imitation system.”

Black Knight states that PennyMac recently notified the company that it plans to discontinue its use of the MSP system now that it has developed its own version of the software using Black Knight’s system as a roadmap.

“PennyMac has used its confidential access to the MSP System, including that software’s functionality, system architecture, support services, and core documentation, to develop, test, and implement software that appears to use the same proprietary structure, format and algorithms as the MSP System,” Black Knight states.

“By breaching its contractual duty of confidentiality and abusing its limited right of access to the proprietary system, PennyMac avoided the vast investments of resources and time and avoided the assumption of risk that would have been required to create a functionally similar product without reference to the MSP System,” the company’s lawsuit continues.

“The actions of PennyMac materially breach its contractual obligations and constitute trade secret misappropriation,” Black Knight adds. “Through its wrongful acts, PennyMac has caused damage to Black Knight in a sum which it believes exceeds $340 million.”

PennyMac accuses Black Knight of anti-competitive practices

PennyMac, meanwhile, claims that Black Knight engages in “unlawful” and “anti-competitive” conduct to prevent companies from developing their own systems or using other competing options.

PennyMac also claims that Black Knight was aware of the company’s development of ancillary systems and notified Black Knight in due course of its intentions to not renew its contract.

“Due to the perceived limitations of Black Knight’s MSP product, PennyMac has invested—with Black Knight’s knowledge and as PennyMac has disclosed to its public stockholders and the markets as a whole—substantial resources to develop custom, workflow-driven modules on a cloud-based, flexible architecture in order to enhance PennyMac’s servicing capabilities,” the company said in a statement.

“This development process has resulted in the phased release of more than 150 modules that now eliminate PennyMac’s need for Black Knight’s LoanSphere MSP and related products,” PennyMac continued. “Among other significant benefits, PennyMac’s custom applications provide greater flexibility and efficiency, significant cost savings, enhanced regulatory compliance and an improved experience for PennyMac customers.”

According to PennyMac, Black Knight has engaged in “continuing unlawful conduct” in order to prevent companies like PennyMac from developing competing servicing systems.

“Black Knight’s lawsuit demonstrates the lengths to which Black Knight will go in order to prevent a customer from developing business solutions independent of Black Knight products,” PennyMac states.

The company “alleges that for decades, Black Knight’s MSP product has dominated the market, not through innovation, but by creating high barriers to entry.”

According to PennyMac, Black Knight “effectively entraps its mortgage lending customers by encouraging them to invest substantial resources to supplement Black Knight’s antiquated MSP product, making it difficult for customers to leave without abandoning their investment in customized modules, which Black Knight later claims as its own.”

PennyMac continues: “Black Knight then exploits customers’ reluctance to leave by repeatedly forcing subsequent price increases onto its customers without any improvements or innovations to its product—egregious behavior in an industry where companies usually reduce costs as they evolve.”

According to PennyMac, the company “made every effort to avoid litigation” and “repeatedly” warned Black Knight about it “anti-competitive conduct.”

But despite providing timely notice of its intention to end its contract with Black Knight, PennyMac states that Black Knight filed a pre-emptive lawsuit in Florida to try to get out ahead of the matter in advance of its Tuesday earnings release.

“Faced with these accusations and its own failure to properly disclose to the market the imminent loss of a significant customer and substantial revenue, a Black Knight affiliate, Black Knight Servicing Technologies, instead filed suit yesterday in a Florida circuit court in advance of Black Knight’s third quarter earnings call,” PennyMac states. “Black Knight’s suit makes the extraordinary demand, among others, that PennyMac transfers ownership of its own systems to Black Knight.”

PennyMac claims that Black Knight’s lawsuit is “without merit” and plans to “defend itself vigorously” against Black Knight’s allegations.

“Black Knight’s 50-year-old mainframe-based MSP technology—ancient by almost any standards—is so limited that PennyMac and other customers are forced to build or buy a clunky patchwork of applications and modules to enhance Black Knight’s otherwise rudimentary functionality,” said David Spector, PennyMac’s president and CEO.

“By contrast, our independently developed servicing modules fully leverage cloud-based infrastructure and real-time processing and enable us to reduce costs, increase scalability and decrease response times to changes in regulations and the market environment,” Spector continued.

“In general, modern technology has allowed businesses to reduce costs and operate with greater agility,” Spector added. “Now, faced with our likely antitrust suit and substantial lost revenue from losing PennyMac as a client, Black Knight with a straight face claims that the custom system of modules PennyMac developed somehow belongs to Black Knight.”

Black Knight accuses PennyMac of duplicity

While PennyMac claims the software is its own, Black Knight alleges that the company was developing it alongside Black Knight’s system, even running its system parallel to the Black Knight system to test its effectiveness.

“These modules were specifically designed to mirror the architecture, data structure, and functioning of the MSP System and, as Black Knight believes, were run in parallel with the MSP System so that it could be used, not for the limited purposes permitted by contract, but instead as a benchmark against which to test and fine-tune the results produced by the facsimile modules, with the goal of eventually replacing the corresponding modules of the MSP System,” Black Knight states.

“By thus ‘mirroring’ the system architecture and functioning of the MSP System, in violation of its contract, PennyMac was able to significantly accelerate and shortcut the development cycle and potentially save hundreds of millions of dollars, as well as avoid significant risks and take advantage of Black Knight’s years of development and innovation,” Black Knight continues.

According to Black Knight, PennyMac developed these systems in secret, concealing the company’s intentions from “Black Knight, regulators, government-sponsored enterprises, and other third-party providers.”

Black Knight claims that PennyMac provided MSP system access to “dozens of software engineers and developers, web application developers, and technical leads, at least five of whom are or were employed by a third-party software developer,” despite there being “no legitimate reason for them to be on the system at all.”

All that led to PennyMac developing its own servicing system, which, according to Black Knight, went live on Oct. 31, 2019.

“This, of course, allowed PennyMac to bypass the MSP System completely, causing Black Knight in excess of $340 million in damages, as a result of Penny Mac’s improper use of Black Knight’s trade secret and confidential information,” Black Knight claims. “Further, PennyMac’s use of Black Knight’s confidential and proprietary information in PennyMac’s imitation system will further expose Black Knight’s confidential and proprietary information.”

As PennyMac did, Black Knight “disputes the allegations contained within PennyMac’s lawsuit” and “intends to vigorously defend the matter.”

Meanwhile, PennyMac states that it “does not anticipate any disruption to its residential mortgage customers, business partners or employees as a result of this litigation.”

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