Pennymac to pay Black Knight $155M over trade secrets spat

An arbitrator moved to settle a trade secrets dispute between Black Knight and its former customer Pennymac Financial Services by awarding the vendor $155.2 million in late November.

In 2019, Black Knight filed a suit in Florida alleging Pennymac created a mortgage processing system, which mirrors "the architecture, data structure and functioning" of Black Knight's MSP System. At the time, the vendor was seeking over $340 million in damages for breach of contract and misappropriation of trade secrets. Four months later, the case was transferred to arbitration.

On Nov. 28, the arbitrator rejected Black Knight's misappropriation of trade secrets claim, but partially granted the breach of contract claim, finding Pennymac's access to MSP allowed it to increase the speed of developing its own system. 

The arbitrator issued an interim award to Black Knight – subject to change or modification by either party – which "represents six years of avoided license fees, plus prejudgement interest and reasonable attorney fees." However, Pennymac's mortgage-processing system, dubbed Servicing Systems Environment, will "remain the proprietary technology of PLS, free and clear of any restrictions on use." 

A Pennymac spokeswoman said its technology was designed "to bring greater innovation to the mortgage servicing industry" and "to provide our customers enhanced service while reducing the costs."

"We are pleased that the arbitrator affirmed Pennymac's ownership of its SSE mortgage servicing platform and rejected Black Knight's theft of trade secrets claim against Pennymac," she added in a statement Tuesday. "Combined, these rulings confirm our right to innovate for ourselves and our customers."

Intercontinental Exchange, Inc., which recently acquired Black Knight, also issued a statement reiterating that "Pennymac incorporated confidential information from Black Knight's MSP system and breached its contract with Black Knight with respect to such confidential information."

"ICE 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," a press release published by the company Tuesday said.

The one-time payment will likely have a minimal impact on Pennymac.

A Keefe, Bruyette & Woods note pointed out it "expects a modestly negative reaction to the charge, which equates to roughly 4% of book value."

"[PennyMac] noted it has plenty of liquidity to deal with the charge ($1.2 billion of cash as of 3Q) and believes there is potential for additional opportunities for the company over time, now that the technology associated with its Servicing Systems Environment (SSE) platform is clear of any restrictions on use or development," the note added.