VCs Successfully Fund Lawsuit Against Best Buy After It Completely Screws Over Startup
from the stopping-bullies dept
I recently heard a story of yet another startup which had been hit by a bogus patent troll lawsuit. As always, it would be cheaper to just settle the lawsuit than to fight it in court, even though they knew that they would win. In this case, the CEO said he was going to fight it anyway because it was "the right thing to do" and to ward off future trolls. That, of course, is the worst part of troll lawsuits: the reason they work so well is that it's cheaper to "lose" and pay the troll than to "win" in court. Obviously, the SHIELD Act looks to change some of that calculus by making trolls have to pay up for bogus lawsuits. However, in general, plenty of startups can tell stories (beyond just patent trolls) in which they "settled" some sort of legal dispute, rather than did what's "right" and to win in court. Frequently, this is driven by the pressures from investors and venture capitalists, who don't want to fund lawsuits but high growth companies.Of course, many realize that settling or foregoing a legal response in such cases can often make the situation worse, because it attracts more such activity from companies who know they can get away with it. I'm thinking of that after reading this fascinating story by famed venture capitalist, Josh Kopelman, in which he discusses why he and another investor in the startup TechForward financed a lawsuit against Best Buy. You should read the whole thing, but the short version is that Best Buy approached TechForward about using its system to create a "buyback" program. They signed some non-disclosure agreements, leading TechForward to share a bunch of confidential info about their model with Best Buy. Best Buy proceeded to take that info, and then tell TechForward "no thanks." Of course, it came out that the plan all along had been to get access to TechForward's model to build Best Buy's own. Due to the amount of resources (over a year) that went into trying to get the deal, having Best Buy pull it out from under them left TechForward in a bad position, and its assets were sold off. But the VCs kept funding the lawsuit:
Best Buy's last minute actions posed a fatal blow. Techforward sued Best Buy – but it would take a very long time before the case made it through trial. And since Techforward had invested so much money working on the Best Buy deal, the cash position of the company was not looking good. The board ultimately had to make a horrible choice – they sold Techforward's assets to a third party. BUT – they did not sell the lawsuit. Instead, First Round Capital (along with our co-investor, NEA) decided to keep funding the lawsuit. And over the last 18 months, we and NEA gave the lawyers hundreds of thousands of dollars to keep the suit going. This wasn't an easy decision. We are in the business of funding companies – not lawsuits. But my partner, Howard Morgan, was a board member of Techforward – and he sat in those board meetings. And Howard was convinced that Best Buy shouldn't get away with their behavior. We needed to send a message to Best Buy – and every other large company – that they can't blatantly violate agreements and steal ideas from startups. And if big companies believe they can violate agreements with immunity because a startup can't afford to sue them, it is bad news for every startup in the ecosystem.The end result is that a jury sided with TechForward, awarding it a $22 million award, along with an additional $5 million in punitive damages as response to the action being willful and malicious. The details show that Best Buy employees were pretty blatant about their plan to lead TechForward along, get access to its model, and then copy it. In one email exchange between employees, they even said directly "...remove the Techforward reference in the file names..."
A couple of thoughts on this. It is incredibly rare and surprising to see VCs like Josh and Howard agree to do this kind of thing. I can't recall a single instance of VCs agreeing to fund a lawsuit like this. However, as with the CEO fighting the patent troll, there's an important signalling aspect to this decision. Letting companies know that they can't just rely on VCs not wanting to fund such a lawsuit might lead some big companies to think twice before trying to take advantage of smaller companies. Hopefully more venture capitalists will agree to do similar things.
The second interesting tidbit: this kind of lawsuit got figured out without using a patent. We always hear about how patents are "necessary" to stop big companies from just copying small companies -- but what this showed was that (1) it's not always so easy to copy without more detailed knowledge and access and (2) even if such access is granted, it can be done so conditionally (such as with an NDA, as in this case) allowing for the sharing of information, without having to use a tool like a patent or a copyright. Hopefully more investors will do similar things, recognizing not just the wider social benefit, but in scaring off other companies from either filing bogus lawsuits of their own, or just taking questionable actions towards the companies.
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Filed Under: breach of contract, bullies, howard morgan, innovation, josh kopelman, lawsuits, venture capital
Companies: best buy, techforward
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File under /system-worked.
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I believe the smoking gun came out in discovery, which was likely after they'd already agreed to fund the lawsuit.
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and won $27 million.
I would guess that they anticipated an award at least in the millions in which case this could have simply been a good business decision instead of the "right thing to do".
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How can you claim to live in a democratic country where everyone is equal before the law when justice can only be afforded by the rich?
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The core problem is that legal representation costs too much, enough that it's possible (and fairly common) for a defendant in a legal dispute to be clearly in the right but feel that they have to settle because they just can't afford to fight it. Until we fix that, going after patent trolls is just a game of whack-a-mole.
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Techforward's purported trade secrets could not have been stolen (i.e., theft) since notwithstanding Best Buy's reprehensible conduct Techforward still had a copy of the information in its possession.
In start-up scenarios VC's exert significant control, and in many instances complete control, over contracts of all types with third parties. This case makes it appear as if the VC's were asleep at the wheel. Agreements concerning the initial one way exchange of sensitive business information are the most problematic of all for the party holding the information, and are usually drafted with great care. It would be interesting to read a copy of the initial agreement because if done right it would clearly recite that it was establishing a fiduciary relationship.
Because initial exchanges under confidentiality arrangements are to whet the other party's appetite, anything beyond top-level disclosure is, when done correctly, performed under contracts of the type such as teaming agreements, cooperative development agreements, tech transfer agreements, and others of similar ilk. The complaint alludes to "contracts". Thus, it would be interesting to read each of these as well.
Fortunately for Techforward, at least one of the various instruments appears to have given rise to an action based in tort, as opposed to just "vanilla" breaches of contract. The former hold out the possibility of punitive damages, whereas the latter do not.
The take away point from this matter is the critical importance of ensuring that a fiduciary relationship is established in writing, the limitations on how disclosed information may be used must be drafted with particular care, and further, more detailed disclosures should be supported by more than merely a confidentiality agreement. One is playing with fire to do otherwise.
Trade secrets are but a species of so-called IP. Accordingly, suggesting that one can protect one's legal rights under these circumstances without resort to patents and copyrights in somewhat off the mark. Addditionally, trade secrets have long been associated with "property" (e.g., Ruckelshaus v. Monsanto), so situations such as this are not altogether free of property dimensions in the eyes of the judiciary at both the state and federal level.
Finally, it is always quite satisfying to find "smoking guns", which is this case seems to have been much less than a "smoking gun" and more in line with an "incredibly large bonfire". If there is one thing that invariably happens, non-lawyer business men can be counted on to prepare written documents that make it only too clear they have engaged in "hanging offenses". Stupidity is not limited to lower echelons is large organizations. In fact, the worst offenders are almost always senior executives, and especially those associated with marketing. In this case I would not be surprised if many of these executives are now wearing blue vests and reciting to all they meet on the job with the well known phrases "Welcome to Wal-Mart" or "There is a Blue Light Special on Aisle 15".
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Did I claim it was "stolen"?
In start-up scenarios VC's exert significant control, and in many instances complete control, over contracts of all types with third parties.
I don't know what startups you have experience with, but in my experience with LOTS of startups, this is almost NEVER the case. At least in Silicon Valley type startups. VCs may control the board, but it very, very rarely involves control of operations to the level of contracts with other companies.
This case makes it appear as if the VC's were asleep at the wheel.
I wonder what makes you say that here, since the agreement appears to have done its job. Did you miss the part where Techforward won the case?
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bby
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Happens a lot more than you think...
The thing that usually puts a stop to lawsuits is bankruptcy, but a surprisingly large number of startups manage to avoid bankruptcy and either go dormant or dissolve.
The big difference in this case is that they seem to be publicizing the result, which is not common.
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My experience with startups has primarily involved the transfer of technology, follow-on technical support, and personnel transfer of telecommunications technology from large defense contractors, with the goal being to take existing defense systems and prepare them for entry into the commercial marketplace. These have involved, inter alia, massive parallel processing, MMW satellite and terrestial systems, mesh networks, military precursors to what are now cellular telephone devices and related infrastructure, airborne electro-optical systems for commercial applications, remote scanning systems capable of passive scanning of persons and objects, etc. These are, of course, high end systems requiring substantial investment for conversion from the defense to commercial market, and VC participation invariably involved legions of nationally and internationally known law firms intent on insinuating themselves into every facet of the deals. Obviously, these types of deals are much more involved than the more common startups typically discussed here. Even so, in the arrangement that is the subject of the article, it was the startup that had everything to lose if Disney was not locked up to the maximum extent possible. Since the VCs were putting up the risk capital, experience informs me that they would have been well advised to monitor contractual arrangement every step of the way. The article suggests this was not the case, so I believe my observation is a fair one.
Yes, Techforward won the case, as it should have under the stated facts. Of course, this was a pyrrhic victory since it came after the fact. The damage was already done. Whether or not it can fully recover at this point in time remains to be seen. Hopefully so, but much time has been lost.
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harrassment at Best Buy
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