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.