Zillow Sues Rival Compass Alleging IP Theft And Breach Of Contract Over Its Artificial Intelligence, Machine Learning, And Cloud Computing Real Estate Technologies

Shook, Hardy & Bacon L.L.P.

Shook, Hardy & Bacon L.L.P.

Switching from defense to offense, Zillow Group, Inc., best known for its residential real estate marketplace technology, recently filed a lawsuit in the U.S. District Court for the Western District of Washington alleging a number of both federal and state legal violations against competitor Urban Compass, Inc., Compass Washington, LLC, and former employee turned current Compass employee Robert Ming-Yu Chen. At the federal level, under the Defend Trade Secrets Act, Zillow alleges trade secret misappropriation of its machine learning, search relevance, and user personalization technologies. At the state level, Zillow alleges trade secret misappropriation, breach of contract, breach of implied covenant of good faith and fair dealing, tortious interference with contractual relations, breach of fiduciary duty, and unjust enrichment arising under the laws of the State of Washington.

In its Complaint filed on April 19, 2019, Zillow alleges Compass engaged in “unlawful business practices” and “calculated theft” by unlawfully hiring Zillow employees using a “poach and extract model” in order to obtain Zillow’s trade secrets. (see Complaint, pp. 1-2, 14). In particular, Zillow alleges Compass incited Mr. Chen—Zillow’s former Senior Director of Machine Learning and the current Director of Engineering at Compass—to breach his employment agreement containing confidentiality, non-compete, and non-disclosure clauses, in order to obtain Zillow’s proprietary machine learning algorithms and models which Mr. Chen helped develop. To support their allegations, Zillow provides in their complaint side-by-side screen shots that highlight the similarities between Zillow’s and Compass’s online and mobile tool offerings. In addition, Zillow points to evidence that Mr. Chen “took screen shots of propriety trade secret information and deleted this information in the weeks before his departure from Zillow, including proprietary wireframes and a proposed regional launch timeline related to certain Zillow services.” (see Complaint, p. 15). In addition to damages, Zillow is also seeking both preliminary and permanent injunctive relief to protect its trade secrets. (see Complaint, p. 28).

Founded thirteen years ago by two former Microsoft executives, Zillow has quickly become an industry leader in providing widespread access to pertinent real estate and mortgage information. With its portfolio of websites and mobile applications including Trulia®, StreetEasy®, HotPads®, Naked Apartments®, RealEstate.com, Out East, and Zillow Homes Loans, Zillow provides information on over 110 million homes in the United States, receives over 180 million unique visitors per month, and controls a commanding ~30% market share in the real estate technology space. Headquartered in Seattle, Washington—endearingly called “Cloud City”—Zillow’s success can be linked, at least in part, to its heavy investment in machine learning, artificial intelligence, and cloud-computing technologies directed at improving user preference prediction and website search relevance capabilities. Such investments have led to various online tools, including Claim Your Home and Personalization, Similar Home Recommendation System, Zestimate®, and Premier Agent® Analytics.

Zillow appears to have dominated the online and mobile technology-driven residential real estate industry for some time. However, Compass, a relative newcomer into online real estate, has taken the real-estate technology world by storm. Founded only seven years ago and headquartered in New York City, Compass is the country’s fastest-growing luxury real estate technology brokerage company. Valued around $4.4 billion, including receiving the largest real estate investment in U.S. history—a $450 million investment by SoftBank Vision Fund—Compass has set its sight on additional expansive growth with its “2020 By 2020” plan, with hopes of gaining 20% of the real estate market share in the top 20 U.S. cities by 2020. To reach its 2020 goals, Compass continues to invest and develop machine learning and search relevance technologies to integrate into their products for both consumers and agents.

While this litigation is in its early stages and Compass has yet to file a response, neither Zillow nor Compass are new to the litigation sphere. In the past seven years alone, Zillow has been on the defensive in 38 intellectual property, contract, employment, and antitrust lawsuits, including a lawsuit similar to its current lawsuit against Compass in which Zillow settled with Move, Inc. (operator of Realtor.com) for $130 million after Move asserted Zillow hired two of its executives that had allegedly stolen Move trade secrets. Like Zillow, Compass has experienced a large volume of litigation in recent years, including allegations of IP theft and poaching top talent.

This litigation is an interesting example of the use and attempted enforcement of trade secrets to protect valuable intellectual property involving machine learning models and artificial intelligence technology. It’s notable that Zillow did not include a claim for patent infringement against Compass. That may be understandable since Zillow’s primary goal is to swiftly enjoin Compass from using Zillow’s proprietary technology, and a trade secret misappropriation action is likely the most expedient path to achieve that result. And if Zillow can prove its case, i.e., establish that its technology actually constitutes trade secret IP, and that there was indeed misappropriation, that would most certainly exemplify the power of trade secrets. That said, all too often trade secret litigants are unable to establish that they in fact hold “trade secret” IP, in that the owners have not taken all necessary steps to preserve their trade secrets, and/or they cannot adequately articulate exactly what technology comprises a trade secret. That is why securing patents on innovative machine learning and artificial intelligence technologies is a critical strategy in protecting what are often some of the most valuable corporate assets. To the extent a trade secret misappropriation case cannot ultimately be made, IP owners may still win the battle with a patent infringement action.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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Shook, Hardy & Bacon L.L.P.


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