Why First Round Capital funded a lawsuit
redeye.firstround.com
redeye.firstround.com
1. It is always perilous for a startup to put all its eggs in one BigCorp basket. In most cases, even when success ensues, the startup will get squeezed on things like pricing and they will continually face the risk of termination of the arrangement, leaving them vulnerable if the company's survival is tied to that deal. What is unusual here - and what so seriously increased the risk to this startup even much more than the norm - is the unusually blatant way in which Best Buy connived to steal the trade secrets. It is blatant in what was done because even by the low standards of much of corporate America it is pretty depraved to knowingly scheme to trick a young company into giving over its valuable company jewels while planning along to steal them. It is also blatant in how it was done because only really small-minded executives lack the good sense to refrain from implementing a plan to use contract assurances as a ruse by which to "take a peek under the hood" of the startup's technology, to promise to put up a "brick wall" between the team evaluating the technology and others simultaneously working on a comparable internal development effort only to wind up sending the trade secret information "across the wall" within a week of receiving it, to make a record of acknowledging an extremely high risk of litigation after doing a crude termination of the relationship, and then to use the trade secret information wholesale while simply deleting the name of the startup from it.
2. The founders may or may not have come out OK but they certainly did better given that the VCs stepped up to take the added risk of pursuing the suit than they would have otherwise. Without the VC action, the best they would have had a right to get would have been their pro rata share of whatever might have been left after the likely scant proceeds raised from a distress sale of the company's assets were applied to satisfy the VC's liquidation preferences (in other words, very likely zero). With the VC action, however, after the company sold its assets, its capitalization structure would have remained intact and the $27M from the lawsuit would go to pay remaining liquidation preferences, likely leaving a decent sum to be paid out pro rata to all shareholders, including founders (or, if the liquidation preferences were non-participating and the value of the VC's participation interest exceeded the value of any liquidation preference, then all of the $27M would be distributed pro rata to the shareholders, meaning that the founders would have gotten even more). The only question here is how the litigation funding was handled. If the VC's inserted some unfair mechanism by which the litigation funding was done so as to severely dilute the interests of the founders (akin to a down round), then the founders might have gotten a bad result. From all appearances, however, this did not happen and the founders should therefore be pretty happy with the result. It is a rare case where investors go out and hire Kirkland & Ellis and take the risk of paying them "hundreds of thousands of dollars," all for the purpose of trying to salvage a terrible situation. I would say 99% of VCs I know would have simply walked away from this and that it truly did take guts to take the hard path.
3. I was struck by the comment that, slow and plodding as the U.S. court system is, it generally works well when it plays out as it should. This is very true and is for me borne out by over three decades of experience with the courts. Litigation is frustrating beyond belief and one has to be almost insane to step gratuitously into it: it is costly, slow, unpredictable, and it is guaranteed only of one thing, to rob you of your peace of mind as you endure the process. Yet the adversarial process, when handled skillfully, tends to ferret out the truth and judges and juries do normally want to try to do right. This means that a wanton malefactor such as Best Buy here had better watch out if it meets a determined adversary who is willing to play out the fight and expose its wrongs. I call this "slamming it to them" and it works more often than not if the process plays out in full. It is only sad that the overwhelming number of litigants cannot afford to take the huge risks needed to be incurred to bring it to that state. In this sense, the system is robust and excellent but only for the relatively few who can manage its pitfalls.
4. The Latin-derived word "insidious" best captures the spirit of the wrongs committed here. This derives from a word meaning "to sit" and connotes "lying in wait" to harm the innocent. We can all succumb to temptations to do wrong on this or that occasion but it takes someone really loathsome to do what Best Buy's executives did here. And not just the wrongs but the utter failures to acknowledge them once caught red-handed. This can only mean that Best Buy was animated by a "might makes right" approach to this whole episode. Yes, large corporations do get away with this sort of thing all too often but it remains morally repulsive and it is inordinately refreshing when the day of comeuppance does arrive as it did here. Something to cheer about indeed.
I think arbitration was supposed to be the mechanism that was intended to bring dispute resolution to smaller conflicts, but it's mostly turned into a farce unfortunately.
I'd like to see thoughts on how we might improve this, but I don't have enough experience, or even enough anecdotal hearsay, to know where to start.
The system works as long as you have unlimited finances and a whole lot of time. This story reminded me of the "Bionic Wrench" fight between Dan Brown and Sears (which is not going as easy).
Else, from Best Buy's perspective, this is still potentially a net win if they made $140 million and had to pay out $27 million. And more importantly, the actual net benefit of following such a strategy (assuming BB has done this to other small companies as well) is likely much higher if the other victim firms weren't able to fight the lawsuit against BB.
Punishing the executives will hopefully be a deterrent to other executives.
They made $140 million in revenue, not profit. With the kind of margins they run, they almost certainly didn't make $27 million in profit. Plus, there are the losses from their legal costs, which probably runs into the millions as well.
That said, it's unclear to me if Best Buy is now allowed to continue with using the model, in which case they can probably recoup any losses.
If Best Buy wants to keep using the model they will have to come to a licensing agreement with TechForward or whoever owns the IP. And they're not in a very advantageous position..
edit: oh you mean BB running the buyback program. Well I assume the analytical model could be used in other ways probably. I don't think wether this specific program has stopped is very relevant to wether BB is still allowed to use that model.
Several of the other "smoking gun" claims that Techforward made were elements of Techforward's own website. Techforward operated a buyback program independently at the same time they were in partnership talks with Best Buy. Anyone could have looked up the terms they used.
I don't think it's likely Best Buy is using this stuff outside the buyback program.
In a word, no. And no, precisely because of the legal entity we call a corporation. IANAL, mind you, so I might have this completely wrong. But as I understand it, the whole point is that Best Buy as a whole is punished, and if the corporation feels that the best way to learn from this mistake is to punish its executives, that's their prerogative. The bad decision was made by representatives of the corporation acting in the capacity of said corporation: therefore the party at fault is the corporation, not the individuals.
(To people more familiar with law, I'd appreciate confirmation that I got this right.)
Best Buy is one of those companies that is just all-around mediocre, in every regard.
I worked there for almost a year and can attest this type of behavior is pretty common.
Exposing yourself to detrimental litigation where the odds of you winning are low will probably result in you (the lawyer giving the poor advice) being let go and a new set of in-house counsel coming in to fix the mess.
Here's a little diddy. Best Buy brought in a bunch of people after Target got sued for $6 million for not having an accessible website for blind people. Since Best Buy's site was very poor shape in this regard, they were hiring developers, managers, practically an entire team just to work on this issue.
First project I'm assigned, I notice a bunch of these errors and start outlining them and attaching how much time it will take to fix. Once the project launched, guess which ones got axed from the list of requirements in the first meeting?
After two more projects like this, I just gave up trying. I was told it cost too much and it wasn't an important issue. To say it was a confusing place to work is an understatement.
+ $140M in revenues
- $22 million in favor of TechForward
- $5 million in punitive damages
- X million in lawyers fees
Even if this damages their brand in only a small way, it's a real cost.
Then buy it on Amazon like everyone else does.
(except over here it's a different large electronics chain and smaller online retailers instead of Amazon)
For an extra slap in the face, a friend of mine even used one of their on-display Macs to place the order in that very store :) (while he did take some precautions against keyloggers, I'd be a bit more hesitant myself, to enter such data into a public computer).
Their problem is that smart customers need to go online anyway, because the specs on the cards in the store are always incomplete (or even incorrect) so you can never quite compare two items. (and then it turns out that their cheapest model runs at nearly the same wattage as their expensive "energy saver" model ...) (that was for monitors btw)
The real cost doesn't come in the suit, though. It comes in lost opportunities and increased deal-making costs because potential partners are much less likely to trust them now.
Best Buy still made "tons of cash" from this. The punitive damages of only $5MM are a shame. This was wilful theft of IP.
Seriously ROWE [0] is the biggest excuse for people not doing real work I have ever witnessed.
Business as usual in America nowadays :/
If it all this suit cost Best Buy were the damages and penalties we already know about, then they are already close to wiped out on the deal (27MM vs. ~35MM, less legal). But that still doesn't capture it, because Best Buy spent money to clone this startup's offering and also to run the company and keep the lights on in the stores, which are expenses not captured in Best Buy's gross margin.
Incidentally, the 22MM figure also didn't get pulled out of some judge's butt. If you read the jury's finding, it's the amount of unjust enrichment Best Buy achieved by misusing Techforward's property.
In the very worst case scenario, virtually every penny of profit from this program was redirected from Best Buy to the winners of the lawsuit. But it's even more likely that Best Buy took a bath even beyond the imputed profits we're talking about.
(A more picayune point is that a small profit or a loss to Best Buy in one case doesn't mean that its practices are not a net expected profit; indeed, if they weren't losing an occasional case, they probably aren't taking enough risks to make the most possible profit.)
Also, best buy pays ~27 million (adjusting for the time value of money over two years at 2.5% gives us 25 million, btw) for a golden goose they can reuse year over year and had they build it themselves they wouldn't have had it immediately. I don't have all the details, but the project (including legal costs) will likely pay for itself before 5 years is up. They also mitigated any risk with building it themselves and doing it wrong which would cost additional time and money.
As a side note, I am curious if the court decision has any impact on the possible of Best Buy whoring out their duplicate system.
Meanwhile, Best Buy no longer operates the buyback program. The program wasn't a golden goose.
Furthermore, I will happily make the "extraordinary" claim that, in general, large companies are incentivized to minimize margins to reap the tax benefits. Then again I am Joe Blow with a whole 46 karma, therefore, I must not be as smart or knowledgeable as a lurker like you with 1000's of karma, right? (oh and this one is a rhetorical question)
As usual on this particular site, if someone doesn't like the truth, they simply think its wrong because they don't like it. I half expected to get super down voted by all the closed minded individuals that have <~500 karma, but I guess you had the skeleton shift ehh tptacek.
As far as the golden goose goes, even if they scrap the program they are still better off. Does it sound better pouring far more money into building what you think is a golden goose only to make a lemon? That and they still have the system if they want to modify it and roll it out again a couple years from now. Also, they got the system right away and immediately got feedback from it. They saved a lot of time, time that they will use now on more lucrative projects.
Ohh maybe you have a blog. But, in all seriousness, avoid procreating, there are enough retarded people that society has to care for.
The entrepreneurs held stock in TechForward, which sold its assets to a third party but kept the lawsuit. Total investment was only $5.7 million (per Crunchbase), but the lawsuit payout is $27 million. The investors put in more money (hundreds of thousands) at unknown terms, but my guess is that this means a modest number of millions for each of the two founders.
If the entrepreneurs risked their own cash and the possibility of losing the case, they should be entitled to the money. But they didn't, so they're not.
"I had (naively) assumed that senior-level employees of a $50B company would know right from wrong"
was to think "that's not naive, that's flat out stupid. Of course they know the difference, they just don't care."?
That might depend on what you mean by cheating. Microsoft did pretty well back in the day with their anti-competitive practices. Likewise, Intel managed to kill AMD.
In the long run, had they continued those practices, Linux and Apple (or some other competitor in the marketplace) likely would have risen farther/faster. Forcing everyone to use IE was not a viable strategy back when that was a death sentence for computer security.
AFAIK AMD is alive and well.
People were always free to use a different OS, and many have.
You haven't offered a counterargument to this obvious fact.
You haven't explained why you think MS was cheating by selling software configured in a particular way (nor why countless analogous examples in other industries don't constitute cheating).
I find your bald assertion that my views are not philosophically defensible to be below the belt. I can (and often do) rigorously defend my views, and can point to further information. I take claims contrary to my views seriously. People who aren't interested in what I have to say can easily avoid me.
strange Randian views
By the way, hasn't it been said that good, novel solutions will often appear strange, and not to discount ideas for that reason? Isn't that a reason to investigte? Especially since philosophers have not engaged with or been able to offer counter-arguments to Rand, and since there is a growing persence of Objectivist philosophers in university philosophy departments?
Secondly, there is not actually a growing presence of Objectivist philosophers, excluding those who are explicitly bought, like Roderick T. Long. If you want a demolition of her philosophical views from people who are politically sympathetic to libertarianism, see Robert Nozick's "On the Randian Argument", or Murray N. Rothbard's "The Sociology of the Ayn Rand Cult". Rothbard's satirical play, "Mozart was a Red!" [1], is also somewhat funny, though it is not very well-produced.
I don't know how you calculate Objectivist presence in academia, but I strongly suspect the numbers are growing, although I think that growth will probably plateau soon (but maybe I'm wrong). But, that doesn't really matter.
Do you not think that all academic philosophers are bought? (OK, I know what you mean, though.)
views from people who are politically sympathetic to libertarianism
People who are sympathetic to libertarianism are (generally) anti-Objectivist, since they are basically a splinter group off of Objectivism, so that doesn't really mean anything.
Anything by Rothbard can pretty much be dismissed out of hand, especially with a factually incorrect title like that. I think I've seen it before, but I'll double check.
I think I've also see Nozick's "On the Randian Argument," and found that he hadn't actually grasped AR's methodology at all and had not made a legitimate critique, but I will double check that, too.
Free markets have monopolies.
There are definitely economics textbooks that agree with me on this. I know of at least one off the top of my head.
Ultimately, we have to look at reality to determine the truth.
I've got a copy of Macroeconomics by Mankiw sitting over here that says you're wrong. So does the consensus on wikipedia http://en.wikipedia.org/wiki/Monopoly and to get right down to it Adam Smith, when writing of monopolies in Wealth of Nations, has a different definition than you as well.
I think it's pointless to argue about it in that way, though. If you can think of a supposed example (or more than one) of a monopoly that doesn't derive from government power, I'll either explain to you why that's not the case, or concede the point. I scanned at the list of examples on Wikipedia briefly, and didn't find any "free market monopolies."
[1] http://www.amazon.com/Capitalism-Treatise-Economics-George-R...
Ars Technica has a good writeup that sums up the whole affair here: http://arstechnica.com/business/2010/01/intel-response-to-ft...
Note how much market share AMD has lost in the enthusiast market already: http://www.cpubenchmark.net/market_share.html
Ultimately, it's barbaric for the government to use guns to stop Intel from making its own business decisions in the market, which is what people are directly advocating whenever they accuse Intel of being "anti-competitive" or a monopoly.
3 if they're lucky.
The financial industry disagrees. Politics disagree. History disagrees. Evolution disagrees since the populations of sociopaths seem stable. Game theory disagrees quite strongly.
> This would be less likely at a better company
What do you mean by better? More profitable? That's blatantly false given the financial industry. More honest? That's just tautological.
The problem at Best Buy is their GC did a poor job of training the company on the importance of not leaving behind discoverable material. That's the real lesson that I'm sure Best Buy's CEO took away from this who event.
Don't be too surprised if Best Buy shifts to 90 day retention on email.
The thing was - these executives (CEOs, CFOs, and EVPs of sales) never used words like "Wrong" and "Right" - they just made sure their activity wasn't discoverable and would pass muster of the Auditors (Auditors, who, were hired by those very same executives and were also doing consulting work for the company in other lucrative deals.) Anything that they could get away with, they simply presumed to be the best course of action. And, you really buy into that mindset when you're with them - and don't really realize what you are involved with until you hear about your CFO being indicted for something she got caught doing.
> at that level, the concept of "Right" and "Wrong" are immature concepts that aren't relevant
I'm assuming you are explaining the thinking of these amoral opportunists here and not stating that as true.
How does this follow, when this story clearly demonstrates that the average company is not able to get their justice, unless they get VC funding for the lawsuit?
In my eyes, this demonstrates the exact opposite: In the US, most companies cannot afford to get justice when faced with a large corporation doing whatever it wants.
It's great that these guys got funding and did finally win in the end, but to me it underlines all the companies that probably do get screwed by large corporations because they cannot afford spending hundreds of thousands of dollars on lawyers.
What use is a confidentiality agreement if the only power it gives you is to spend hundreds of thousands of dollars to make the other party stop ignoring it?
In which case, some people might get the idea to come up with a whole lot more fun and creative ways to spend hundreds of thousands of dollars to make Best Buy stop ignoring a contract. Now substitute "fun" with "quicker and more definitive", and you get something the justice system is supposed to prevent, and one of the reasons why it should not only function for those with sufficient wealth.
In practice, the problem with the justice system is that it's too large to navigate without lawyers, and lawyers must be paid. That's an indictment of the market's inability to force lawyer fees down to a reasonable level, not the justice system.
There is more than one takeaway in this story.
By my estimate (http://news.ycombinator.com/item?id=4879046), they should have seen a reasonable payout. As was explained in the blog post, TechForward sold all the company's assets except the lawsuit. So the original shareholdings should all be in place, minus whatever additional equity they had to sell to the investors to get the small amount of additional money needed for the lawsuit.
When there is a real risk of this kind of thing happening, you would expect VSs and lawyers to advice startups against going into the deal. Otherwise, they're not doing (part of) their job.
The VC who wrote the article made a point that an unusual level of reassurance was needed before the technology sharing took place.
Edit: clarity.
That can cause deadlock when bit companies need to talk to each other...
Edit: I was on my mobile and I couldn't confirm this. In fact, as the peer comment said, when it refers to the litigants the process is discovery. A subpoena is required to compel a third party to testify or provide documents. Discovery is normally just a give and take, unless one party objects and the court intercedes.
Here you go: http://en.wikipedia.org/wiki/Discovery_(law)
It's by and large a cooperative process between your lawyers and the opposing party's lawyers, but its not really voluntary. If you refuse to answer a discovery request, opposing counsel can go to the judge and get a subpoena compelling you to hand the documents over. Hanging over the whole process is the threat of sanctions: for your attorneys as well as for the company. For your attorney, it is a violation of the civil rules of procedure to unreasonably refuse production requests, and it is a violation of the ethical rules to not hand over documents that are relevant and not privileged just because they might hurt your case. The former can result in sanctions, and the latter in disbarment (i.e. the professional death penalty), so while your lawyer loves you and is on your side, he will cough up the documents the other side requests. If the client refused to cooperate, the court can hold him in contempt as well.
It sounds like the penalties are severe if you are detected making omissions during discovery - but how would that actually be detected?
At the most basic level, the system is built on trusting lawyers to act dutifully as officers of the court. Corporate law firms care very much about their brand for trustworthiness, because at the end of the day their business depends on that brand. Nobody wants to be like Arthur Andersen, which went from a $9 billion company to nothing because people stopped trusting their brand (for the actions of a relatively small group of partners).
Are you really saying there's no independent auditing? That the entire system relies on Best Buy's lawyers incriminating their co-workers and the employer who puts bread on their table? That seems exceptionally trusting in lawyers' professional ethics.
Does the discovery at least have to be done by an different law firm to the corporation's day-to-day legal work?
Remember also that plaintiff's counsel also thoroughly interviews witnesses under oath. Cross-checking witness accounts can highlight inconsistency in the documentary record. It also adds a second group of people who don't want to hide information under threat of punishment.
Boy, you're sure a glass-is-half-full type, 'rayiner --- my experience in litigation was that:
1) many, many litigation attorneys like to play chicken, doing their utmost to obstruct your discovery (or to demand unreasonable discovery for themselves), stopping just short of making you so mad that you go to the judge; and
2) the vast majority of litigators hate going to the judge, knowing that most judges utterly loathe discovery disputes and basically absent themselves from the discovery process unless they absolutely have to get involved. (There are exceptions; some judges announce that counsel can get them on a conference call just about any time they're not actually on the bench --- not surprisingly, those are the cases where counsel can actually be pretty reasonable ....)
As you grow, somewhere you cross that line where you have to start being on the defensive. It's different for everyone but you know, one day, it'll happen.
In this case, and probably in most, it caught them off guard. You can only hope to be prepared when you get bit for the first time but witnessing cases like this really hurts when you're trying to build a start-up and extending that level of trust to just about everyone...
http://venturebeat.com/2012/02/27/a-classic-startup-horror-s...
I've gone through something similar to this, but since we were nowhere near to a deal being done we weren't getting into trade secrets. The whole thing turned out to be just my psychopath competitor trying to get info or some dirt on me because he knows I know how incompetent he is, the technical problems with his product, etc.
[0]: http://www.internetnews.com/ent-news/print.php/3073811/
Thank god for it too--if people stopped trying to screw each other over all the time, I might have to find another line of work!
How could they have written their contract so that their profit motive aligns like a positive sum instead of a zero sum?