
When Your Former Boss Sues You for Starting a Startup - katm
https://medium.com/@michaeldouble/when-your-former-boss-sues-you-for-starting-a-startup-7a1a40e565a0
======
paulsutter
My first instinct is to congratulate Shred for standing up to the big bully.
That was really almost what I posted.

But pick apart Shred's note, and really it's an emotional appeal based on two
ideas:

1\. That the sole test of stealing ideas is source code that has been copied
verbatim.

2\. That the only possible secrets of Smule are features implemented in
released products.

These are pretty weak legs to stand on. They're actually preposterous.

Lawyers will tell you that it's really hard to prove theft in court without a
smoking gun like "stolen source code", and the chances are, if they've stolen
ideas in other ways, they will probably get away with it.

Almost certainly, Shred's lawyers are playing a key strategy role in this PR
campaign.

So my advice is to be wary of emotional appeals from either side of
litigation. We don't know what happened, and we learn less than we think from
these notes.

ps. Yes I read the remarks in Business Insider too. I'm not advocating that
Smule is the innocent party here. Most likely this is some bullshit pissing
contest with 0 innocent parties.

~~~
mikeshreds
Hi Paul thanks for your comments.

In the code comparison, the 3rd party will also be able to look at methods (in
addition to code copied directly). We're more than happy to include
proprietary methods in the review.

On stealing "ideas," do you have some advice here? Smule has never specified
what ideas they think we stole. What do you think is our burden of
responsibility in proving we did not steal ideas our opponents won't even
specify?

~~~
sandworm101
"Ideas" isn't a form of IP that can be stolen. Did you patent anything? Have
you appropriately protected these ideas to qualify for any sort of tradesecret
protections?

(ps. Don't answer. This is the sort of thing to be discussed with an attorney
behind a closed door.)

~~~
ClintEhrlich
That's not quite accurate: "Ideas" cannot be patented or copyrighted, but they
can be protected by contract.

The distinction is who the right to the idea is enforceable against. A patent
represents a government enforced monopoly that bars _anyone_ from using the
specific intellectual property, whereas a contractual right to an idea can
only be enforced against the other party to the agreement.

In California, the seminal case is the Supreme Court's decision in _Desny v.
Wilder_ , which held that a screenwriter could enforce a studio's promise not
to use one of his ideas without his consent. The Court's reasoning was that
while a party is free to come up with its own ideas, the disclosure of someone
else's idea confers a benefit. Federal courts have addressed this issue a lot
in a line of cases holding that _Desny_ claims are not preempted by the
Copyright Act.

I haven't been involved in any cases where the alleged theft of an idea
involved an employment contract, but I see no reason why the same principles
would not apply. Logically, an employer should be able to disclose propriety
ideas to its employees without fear that they will be stolen, regardless of
whether the ideas are sufficiently novel to qualify for an exclusive federal
monopoly.

~~~
sandworm101
I said that ideas were not IP, not one of the recognized forms of intellectual
property rights. Everyone is of course free to invent new concepts via
contract, but that only creates obligations between the parties. Any dispute
will be governed by contract law, not IP. Nobody outside the agreement will be
bound.

The classic case in this area is Warner-Lambert v. Reynolds 178 F. Supp. 655
(1959). (It's about a contract covering the formula for Listerine)

[http://law.justia.com/cases/federal/district-
courts/FSupp/17...](http://law.justia.com/cases/federal/district-
courts/FSupp/178/655/1642490/)

------
grellas
This is an inherently tough situation for the founders but not unwinnable,
provided:

1\. The code is as they say it is, entirely independently developed as opposed
to code that infringes the employer's copyright because it has been stolen.

2\. No moonlighting took place. If it did, the IP is so related in its broad
subject matter that, even under the liberal California law, it could be said
that it involved a reasonably anticipated extension of the employer's existing
products or IP development, in which case it would belong to the employer even
if the employees developed it strictly on their own time and strictly using
their own resources while employed.

3\. The Shred products do not embody proprietary trade secret information
belonging to the former employer. For the employer to have a legitimate claim
on this prong, it would have to show that it had non-public information (e.g.,
special algorithms, techniques, etc.) that gave it a decided competitive
advantage, that were not known to others in the field, and that were the
subject of special efforts by the employer to keep them confidential. If an
employee who is bound by a typical confidentiality agreement learns of such
trade secret information or techniques only while employed, or even develops
or discovers them while being paid by the employer, all such trade secrets
belong exclusively to the employer, even if the employee is capable of walking
away with the secrets "in his head" only. If, however, the techniques,
insights, information, etc. that the employee later used to develop the new
products following termination of employment consisted of things known or
derivable by any person skilled in the field were derived exclusively using
that person's general skills and expertise, and not from taking any employer's
proprietary information, then the employer has no claim on any of this. In
particular, if someone was already an expert in the field _before_ beginning
the employment, and applies what he knows for the benefit of his employer
while employed, that employee continues to own what he came in with and can
use it as he likes in any post-employment situation. He does not lose what is
his just because he passes through a particular employment situation. So,
summing up, if the post-employment products derive exclusively or primarily
from a former employer's "secret sauce," the employer has a claim; if they
derive only from the general skill and expertise of an employee, the employer
has no claim.

4\. Nothing in the new products infringes any patent belonging to the former
employer.

5\. No other acts of unfair competition took place that would have tainted the
new venture (e.g., no raiding of other employees by soliciting them while
employed, no post-employment violation of any express non-solicitation clause,
no customer theft based on misappropriation of trade secret information and
the like).

6\. The founders have a practical way of dealing with the legal costs and the
impact of the lawsuit cloud on their ability to develop as a company. If the
case is a clean one from their perspective, this usually means the employer
will not be able to get any type of preliminary injunction to stop the venture
during the legal fight. In that case, if the new venture can generate revenue,
this can help fund things or can possibly be sufficient to assuage concerns of
investors so as to convince them it is worth their while to fund the venture
in spite of the lawsuit. The dollars involved in such a defense are large for
a small venture but can be managed in the right situations (likely in the
hundreds of thousands, more if the employer is particularly obnoxious).

7\. If the former employer is taking a reputational hit by pursuing the
lawsuit, this works in favor of the founders as well because there is a real
price to pay besides money for being a bully (if that is what is happening).
After all, who wants to work for a horse's ass of an employer given a choice.

I don't know the facts here but there are several indicators that the Shred
founders are being truthful in what they are saying. If this all followed from
an initial rejection of the former employer's effort to own or control them,
this likely indicates bad faith by the employer. The offer to have the code
compared by a neutral is also important. It is true that stolen code by itself
may not be the key thing but such an examination can bring to light many
important things about whether a viable claim exists here or not. The
employer's apparent refusal to allow this does not speak well of its motives.
Even worse, if, as I understand it from public reports, the employer wants the
code turned over to it in discovery, this is a very bad sign. Even if this is
done under a so-called protective order, this sort of tactic is very often a
tip-off that it is the employer and not the employees that is trying to engage
in dirty tactics to gain a competitive advantage. Information is very
amorphous and having the employer's developers scour the code directly is a
sure way for them to grab key ideas/techniques that they normally would have
no ability to access. Another tip-off is the employer's CEO being taped making
statements that he intends to win whether the employer is in the right or not.
By itself, perhaps an inconclusive statement but combined with the other
factors, this does not look like good faith. Finally, YC is standing behind
Shred. This, again, is only an indicator but YC has demonstrated itself to be
nothing if not honorable in innumerable situations and it does not want the
taint of being associated with a dirty company. Its support is thus a good
indicator of what is going on here in reality.

Only time will tell who is right but, on the surface, this looks to me like a
classic case of abusive litigation aimed at gaining something besides a just
result on the merits.

------
shostack
Genuinely curious for your legal counsel's take on you posting such an article
publicly. I've always thought the prevailing wisdom shared by all lawyers was
"don't talk."

Also, in this day and age of using services like Github for personal projects
but having access to other repos, etc., using things like 1Password for work
and personal things, how has the discovery process worked with everything?

I'm really interested in knowing to what degree someone should be paranoid.
Are you potentially risking your entire business because you once checked your
work webmail from a personal computer or checked a personal email account from
a work phone?

~~~
mikeshreds
One of the best ways to discourage bad behavior is to shine a light on it,
which is why we're publishing our story.

The risk here isn't that your former employer actually has a right to your
company under the scenarios you listed. It's that if they have the resources,
they can bleed you in litigation before your case is ever adjudicated. It's
like a form of patent trolling, they're using the process to achieve an end
they'd never get in adjudication.

~~~
toomuchtodo
If they have the resources to bleed you in litigation, would they not have the
resources to care little about bad PR?

~~~
jegutman
Depends on the company. PR is a proportional thing. If the CEO of a company is
caught on video killing kittens that can kill 50% of a $100,000,000 company or
50% of $1,000,000 company. Public relations / branding is proportional in that
way. Money on the other hand is slightly more constant, so in the two cases
above it might be a 2 million dollar hit to each. A possible gamble to the 100
million dollar company but not to the 1 million dollar company.

~~~
rancur
> is caught on video killing kittens

?

~~~
TallGuyShort
Just an extreme example of bad PR.

------
minimaxir
It should be noted that the startup in question, Shred Video, is (YC S15).

YC comment: [http://blog.ycombinator.com/on-the-shred-video-
lawsuit](http://blog.ycombinator.com/on-the-shred-video-lawsuit)

~~~
debacle
As a corollary, it doesn't seem from past evidence that YC is averse to being
biased when it comes to matters like this, so take their stance with a grain
of salt.

------
kumarm
The only time I heard Jeff Smith was in Stanford Podcast[1]. I listened to
every podcast on Stanford (DFJ Entrepreneurial Thought Leaders lecture series)
and particularly remember Jeff Smith because I thought he came out wrong from
the talk. His statement "Palantir is evil" because they hired a guy who smule
was trying to recruit. Seriously you are giving a talk to inspire future
entrepreneurs and use that to bad mouth someone who is not even your
competitor?

PS: I have no relationship with Palantir. It just really bothered me that
someone would use that opportunity to bad another company.

[1][http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2992](http://ecorner.stanford.edu/authorMaterialInfo.html?mid=2992)
(The point comes at the end as a reply to last question).

~~~
rfrank
Calling Palantir evil strikes me as pretty fair.

~~~
marnett
how are they evil? I feel like I've missed something.

~~~
auntienomen
The name is a dead give-away. In Tolkien's stories, the palantir is a crystal
ball which corrupts the mind of its user. At the least, the name strongly
suggests that they lack a proper respect for the dangers of the technologies
they're using.

~~~
fr0styMatt2
That doesn't really explain anything.

I had a read of the article that was linked to from that Quora answer and I
still couldn't glean 'evil' from that -- potential to become evil, yes;
actively intending to do evil, not so much.

------
jroseattle
Back in 2000 (seriously!), I was introduced to a small group of guys in
Redmond, WA. These guys were former Real Networks engineers, and had their
original stock certificates in frames on the walls.

The product they were building was a cross-platform media player. It would
stream music/video/audio/etc. and work on PCs and Macs. They had been in
operation for just a few months, and had a great prototype in place. I
interviewed with them and really liked their story. They followed up days
later and invited me back one more time -- presumably to talk about joining.

A few days later I'm in my car, driving to their location. I actually have a
cellular phone and it starts buzzing. I pick up (yes, nobody cared about
driving & talking in 2000) and it's my friend who introduced me to these guys.
The conversation goes like this:

    
    
          Me: Hello
      Friend: Hey, what are you doing?
          Me: I'm on my way to meet with those guys again.
      Friend: Are you there yet?
          Me: No. Why?
      Friend: Turn your car around, and don't drive near that place.
          Me: Why?
      Friend: Their place is being raided right now. Cops everywhere.
          Me: What?
      Friend: They are taking away everything.
          Me: (turns car around, never speaks with them again)
    

Real Networks had filed an injunction and the company was raided on charges of
stolen intellectual property. I never learned the details, but as my colleague
told me later -- he's pretty sure most of what they were doing had been built
at Real Networks.

~~~
zerr
If they literally stole the assets (source code), that's one thing, but if
they just re-used their technical skills and experience - this seems
completely legit to me. A lot of successful startups/companies/projects
started that way - key people had previous experience in a similar field, in
some big enterprises.

~~~
jroseattle
I can't recall specifics since it was so long ago, but my understanding is
that components of the UI had been produced at Real.

~~~
zerr
Any pointers about that company/persons? Interesting where they ended up and
what are they doing now.

------
ryandamm
IANAL, but: for all the comments stating "there are two sides to every
lawsuit," let me say that oftentimes there aren't. And just because someone
threatens to sue someone else does _not_ mean the party being sued did
anything wrong, it just means plaintiff wanted to sue the defendant.

I'm speaking from personal experience, a former employer threatened to sue me
for unspecified 'trade secret infringement,' and it cost over $20k in legal
fees to convince ourselves we were covering all our bases.

The problem is there's a basic asymmetry in these situations: it costs very
little to initiate a lawsuit, or even just threaten to initiate a lawsuit. We
were so scared we spent money on lawyers (and a second opinion!) before
anything had even hit the court system.

Probably obvious advice we should've taken: do nothing until they'd actually
filed something, then respond only to specific allegations. The burden of
proof is on the plaintiff, and California has some really excellent worker
protections around IP etc. Had we just ignored them it probably would've blown
over.

Shred sounds like they're on top of this, but if anyone needs the name of a
good IP lawyer in CA (he's in LA), message me and I'll put you in touch. I
would love to refer him some business because he gave me hours of free advice,
and was generally very good about keeping costs down. (Relatively speaking.
Signing a check over to a law firm feels like the _worst_ use of capital.)

~~~
ryandamm
Turns out I didn't realize there isn't a messaging feature in HN; my profile
has my email address if you want the lawyer reference.

------
notahacker
Business Insider makes an interesting claim about the boss's public statements
on litigation...

[http://uk.businessinsider.com/smule-ceo-shred-video-
lawsuit-...](http://uk.businessinsider.com/smule-ceo-shred-video-
lawsuit-2015-9?r=US&IR=T)

~~~
Someone1234
Wow, if an employer said that to me, I'd start sending out CVs/resumes that
night. Last thing you want as an employee is to worry that your employer is
going to sue you at some point down the line if you leave...

I'd go work for some other large company initially, so that if I ever did want
to start a startup I am somewhat insulated from that insanity.

~~~
mikeshreds
My co-founder Mark Godfrey did go work full-time for another company before we
started Shred Video. He didn't start working full-time on Shred Video until
May 2015. Smule filed the lawsuit against us without ever seeing any of our
work product, beyond an investor pitch video an investor we'd pitched. All
Smith heard was a description of something we intended to build, decided he
didn't like that we were doing it, and sued us without even speaking to us.

------
iamleppert
I am sad to say I was a Smule customer, having downloaded and played Magic
Piano. I also purchased quite a few songs inside the app. It is/was a great
app.

Not anymore. I've deleted Magic Piano and I'll never again be downloading,
purchasing or contributing to in any way Smule or Jeff Smith's companies or
products.

~~~
hsod
Isn't it possible that there's another side to this?

~~~
thoman23
First, I believe them when they say they didn't steal anything. But second,
and more importantly, I find it highly unlikely that even if they technically
violated some agreement somewhere that it would play any significant role in
the success or failure of Shred Video. I think it's just anti-competitive,
greedy, ill-will to not allow former employees to succeed or fail based on how
well they execute their new venture. It's a dangerous bullying approach that
stifles innovation.

~~~
fr0styMatt2
Exactly this in the opposite way too - I don't see how Shred Video could hurt
Smule. The way I see it there's no problem with them both coexisting, it's not
like it's a tiny market or anything. Just seems so unnecessary on the part of
Smule and just seems vindictive and pointless. Smule could just, you know,
compete with their products if they felt threatened. Isn't that what a market
is?

I was also a huge Smule fan and would recommend their apps to people looking
for interesting music making tools. Not anymore. Will be doing quite the
opposite actually.

------
sandworm101
I'm in the middle of writing an article about startups and attorneys. Normally
I write articles for attorneys to read, but this time I'm trying to write for
startups. This story falls right into the "hate lawyers" mentality I;m trying
to address.

They seem to have not adopted appropriate procedures for exiting an employee.
Nor did they have appropriate advice on handling IP issues. This is evidenced
by the article's conflation of copyright (the literal code) function (what the
code does) and tradesecrets. Whether the code enables the same features is not
the issue. It is very possible that he stole and used code in an altogether
different product. It is also possible that he stole said code and didn't use
in any other product. That can still be a copyright/tradesecret violation.

Having legal advice at hand can prevent these situations in the first place.
It doesn't cost much to have a lawyer drop by for an afternoon each month. I
do quick IP lectures all the time at small outfits. Making sure new employees
and current managers understand what IP actual means can really calm the
waters.

------
dmourati
"Mark wanted an amicable departure with Smule, and was more than willing to
help his former boss and co-workers after he left."

Rookie mistake Mark. Clean break, and go do your thing.

Good luck but you need to understand where you made your mistake before
launching this whole David vs Goliath story.

~~~
snake117
I had the same feeling when I read how they told Mark to keep the laptop.

I wish you guys all the best and hope this gets sorted out soon.

~~~
dmourati
I get the whole leaving on good terms, really. But this whole "hey, we just
want you to keep the code and answer questions for our other engineers" aspect
really ought to have set off red flags.

Pro-tip, hand write a nice letter to your boss/colleagues on your way out.
Bingo, no burned bridges, and no risk of law suits for holding on to company
IP.

~~~
solotronics
Hand written with a pen? From the perspective of a millennial I am curious
about if it is more polite to email or hand over a written letter.

~~~
mst
I suspect this may significantly depend on the quality of your handwriting.
I'm just old enough to believe that handwritten is more polite in theory, but
in practice I'd probably send an email, or print out a typed letter and then
initial it.

They can't tell if I was being nice if they can't read what I wrote, after all
:)

------
mikeshreds
Hi All

I'm a founder of Shred Video and the author of this article. Happy to answer
any questions about our experience.

~~~
tomasien
Feeling for you man - been there (recently). You'll get a lot of sideways
looks from people who have no reason to doubt you. Ignore it. People always
assume the person doing the suing MUST have a good reason. It's the same
reason people jump ship whenever someone is accused of a crime: until it
happens to you, nobody wants to believe something this destructive can happen
without cause. But it does - every day.

As a side note: everyone saying categorical things like "never walk away from
a former employer with code on your computer" \- remember that they don't know
what they're talking about. Categorical statements in these situations are
never correct. This is about a life lived honestly and in good faith being
turned around on you - don't feel like you did anything wrong, just take
opportunities to learn.

Lastly, to everyone giving Smule the benefit of the doubt remember: this means
nothing (NOTHING) to Smule and everything to the Shred Founders. If Smule
turns out to be right (which seems ridiculously unlikely), then it still means
nothing to them. If they are wrong, which seems to be the case, they're
destroying a company and lives at the same time. Keep the stakes in mind when
you're considering the situation.

~~~
jonstewart
I do computer forensics and have been involved with many IP theft cases. I do
know what I'm talking about. "Never walk away from a former employer with code
on your computer" is indeed a categorical imperative to live by.

\- Never walk away from a former employer with code on your computer. \- Never
walk away with an employer's property. \- Never walk away with a functioning
email account. \- Never walk away with documents. \- Never walk away with
paper. \- Never walk away with anything. \- Just walk away.

~~~
hga
_Never walk away with a functioning email account._

That's not up to the employee, though, but the company's IT. More like - Ask
them to shut down your email account, tell them you'll stop using it, and
never use it again?

Ditto for VPN and any other access to their resources aside from strictly
limited access of their public facing web site.

~~~
tomasien
Exactly. I feel like it's not worth arguing with someone taking this dogmatic
approach, but a company that really wants to be in litigation with you will do
what it can to convince lawyers and judges (who don't really know how the
details of technology work) that you still had access to things and could
steal or change them.

A great example is not removing you from cloud services - this makes them look
bad but also makes you look capable of theft. It's more important that it
remain possible you committed theft than not. Another is if you used a
personal computer for work, as most people I know in startups do these days.
If they won't supervise a deletion of the code off your computer YOU CAN NOT
DELETE IT! If you are sued, you've now deleted things - what if you turn out
to be the only person who had it? That's the real theft, and this has come up
in real life cases I've seen - it became critical that the code WASN'T
deleted.

The statement to never leave with code, email accounts, etc. is just not
practical. It requires cooperation from your employer that will not exist in a
situation where they're planning to try to bury you in litigation. It's a
fools errand to try to pretend like there are reasonable steps the defendants
should have taken - they took many reasonable steps and the plaintiffs can
always find more that should have been taken.

~~~
hga
Agreed, although I wonder how many companies like that will also want you to
still have a lot of power to hurt them; in this case, I gather the original
continued access was in good faith, but that changed to bad faith as soon as
the old boss saw the pitch deck. In the long run of a court case it might be
useful to show they were trying to entrap you by keeping the accounts open but
removing access to various things or rights, but you've already lost big if
you get there.

One more trick you can do, although I doubt it will help much in such a bad
faith situation---but maybe do it with your lawyer for documentation---is to
change your passwords to randomly generated ones that you don't retain. E.g.
run pwgen and cut and paste the password into the change and confirmation
fields. If with a lawyer or notary, put them in front of the screen at the
right point and have them generate the new password and enter it in, and
document that you didn't and couldn't see it.

And that will remove all temptation to touch the forbidden fruit. I've done
that with a few forums where I really didn't want to continue joining in the
... discussions.

------
codingdave
I got curious about the facts, so I dug a bit. If anyone is interested, here
is all the public information about the case:

[http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APP...](http://webaccess.sftc.org/Scripts/Magic94/mgrqispi94.dll?APPNAME=WEB&PRGNAME=ValidateCaseNumberSHA1&ARGUMENTS=-ACGC15545359)

------
x0x0
This isn't the first time, even for a yc company. Remember AdGrok? I think the
original post is down, but the short version is the founders met while working
for AdChemy. AdChemy's ceo Murthy Nukala -- who sounds like a real piece of
work; he apparently got $2.4m [1] in the eventual walmart acquisition while
the employees got fuckall -- sued AdGrok and basically killed the company.
They had to raise while being sued and the founders basically got tired of the
stress [2].

[1] [http://www.businessinsider.com/document-from-walmart-
adchemy...](http://www.businessinsider.com/document-from-walmart-adchemy-
acquisition-shows-top-managers-got-rich-2014-5)

[2] [http://priceonomics.com/the-time-my-startup-got-
sued/](http://priceonomics.com/the-time-my-startup-got-sued/)

------
ilaksh
This comes down to what it means to be an employee and fundamental aspects of
class. The reality, although difficult for most to accept, is that the current
wage-based system grew directly out of the previous system which was outright
slavery. The ownership/master class view employees as property. Any and all
output including ideas are also viewed as the property of the owner.

And so far as possible employers attempt to extend the range of their
ownership and control of their employee's and employee's ideas as far into the
future and to as great a degree of scope as they can get away with.

Fundamentally these are unresolved issues our society has about class,
equality, and freedom.

------
bobosha
I am with you Shred team - this is a ridiculous and unfortunately all-too-
common occurrence. Startups are difficult enough without all the lawsuits etc.

Here is a thought, why don't you just freeze on that old code-base and start
afresh? I work with video extensively and know what you are doing can be done
using open-source components and it shouldn't take much time. I can volunteer
my time & coding chops to help out a fellow entrepreneur

------
slantedview
The problem isn't source code theft, it's this, in the words of the Smule CEO
[1]:

"If you fork off a startup and there's IP overlap, it's just a big mess."

And the big legal mess favors the company with more resources, something Smule
knows. Whether the lawsuit is personal doesn't really matter. What matters is
that former employees started a company in an overlapping product space, which
unfortunately made them an easy target for litigation.

1: [http://uk.businessinsider.com/smule-ceo-shred-video-
lawsuit-...](http://uk.businessinsider.com/smule-ceo-shred-video-
lawsuit-2015-9)

------
dang
Also
[https://news.ycombinator.com/item?id=10262034](https://news.ycombinator.com/item?id=10262034).

------
jaynate
Several rookie mistakes in here by the Shred team. First of all if you are
gong to start a company while working for someone else, get an explicit
agreement in writing before starting that venture. Second, there should have
been an agreement/contract in place for doing the additional work which was
requested by Smule. The claims of theft could still be made by Smule but
Shred's story loses credibility for me because these basic business practices
weren't followed. Who is to say that the lines weren't blurred when it comes
to leveraging the assets of the former company? And if a laptop is obviously
the property of Smule then nobody can force you to keep it.

I feel much empathy for the Shred team but the story has a bunch of challenges
buried within.

~~~
inflagranti
I so hate this attitude about people acting in good faith doing 'rookie
mistakes'. I'm just answering to this post, but it's by far not the only one
along those lines.

Why does everything have to be done on explicit contract basis? How can an
altruistic act of one party (helping out after leaving the company for free)
be turned against them!? Where will this end!? Will I have to get in writing
that this was in no way meant as a bribe every if I ever pay a round of beer
for a couple coworkers?

There should be protection in place that if people act in good faith they
cannot easily be sued like this. And definitely this kind of victim blaming is
not helping going in such direction.

~~~
Draiken
I would say it's because history teaches us that goodwill only gets you to a
certain point.

When you're acting on good faith, asking for a formal contract should be seen
as a totally normal request. If the other party is also acting on good faith.

This is basically a win/win situation. If they complain about such a simple
request, they might be hiding something. And if they do agree to simply
formalize the agreement, you're protected.

I've been burned by "good faith" before, and it changes you. By pointing out
"rookie mistakes" maybe someone will read this and start taking these things a
little bit more serious.

Of course on an ideal world, we'd be protected and shouldn't have to worry
about it. But that's utopia for me

~~~
inflagranti
Agreed, but it's still frustrating that we live in a world like this. Though
something important to point out: This ability to just sue people or smaller
companies to bankruptcy is something very American, that's not as easily
possible in many European countries. So it's not like utopia that just
wouldn't work!

------
basseq
Interesting story, and it sounds (from a one-sided perspective) like Shred's
founded acted in good faith. And I agree with the disconnect between frivolous
lawsuits and small companies.

I don't think the last line in particular does Shred any favors. ("Turn this
offer down, and you will reveal yourselves as anti-innovation bullies, using
your wealth to harass a young startup with litigation just because you can.")
They might be, but they might also have good reason not to agree that a code
audit is an unambiguous, standalone, infallible process. This is setting up a,
"When did you stop beating your dog?" kind of question.

------
rdl
I'm glad shit like this is rare enough (in silicon valley, at least) to be
worthy of a post.

~~~
randall
Ugh, right? It's still status quo in other markets for sure.

------
rl3
Filing frivolous litigation against a YC sartup seems like a fantastic way to
become blacklisted virtually everywhere.

Maybe they didn't get the memo.

~~~
jacquesm
Isn't it a bit early to call this frivolous?

~~~
mcv
The "if we're wrong, we'll win" boast by Smith is pretty damning, if you ask
me.

------
declan
I'm not familiar with any of the people involved and haven't read the
pleadings. That said:

* The lawsuit may make it more difficult for Shred Video to raise funding, but the linked writeup and YC's blog post don't exactly show Smule in a positive light. The "if we're wrong, we'll win" quote from Smule is telling. I'd want a very good explanation of this mess before entering into a partnership with Smule.

* Smule is warning that any employees using company property on company time to build their own startups exposes them to legal liability. This is a perfectly reasonable position. (Note I'm not saying that Shred's founders did that, only that Smule's point is correct as far as it goes.)

* California law in particular is more startup- and founder-friendly than most and makes some elements of employment contracts unenforceable as a matter of public policy. It likely doesn't apply here, but it does mean if you build and sell, say, drones in your spare time while working a California pharmaceutical company, that employer wouldn't have an IP claim (even if the employment agreement was broad).

* Shred's founders should have made a clean break and not retained any hardware or access to code after they left. That's what I did when I quit my job at a large publicly traded company last year to found [https://recent.io](https://recent.io) \-- I returned the work laptop on my last day and haven't done any work for them since. But this is hindsight, I know!

~~~
ryandamm
Just a quick correction on point 3, lest someone get too confident they're in
the clear: the law about employees owning their own inventions is the
_default_ in California, but you _can_ sign an employment contract that signs
away those rights. (IANAL, by the way.) Also relevant to HN readers: a lot of
those protections are moot if you're acqui-hired: the CA-specific protections
about noncompete being unenforceable does not apply if you were an equity
holder during an acquisition. Just an FYI.

Also, the default is narrowly defined: if you do it entirely on your own time,
with your own equipment, and without using any _ideas_ etc from your employer,
you're in the clear.

Maybe most importantly, you're only "clear" in theory; in practice you're
'fine' for exactly as long as your (ex-)employer doesn't decide to sue you.

Also, keep this in mind when it comes to lawyers and lawsuits: they produce a
huge, huge amount of uncertainty. We'd like to think of the legal system in
this country as a process that consistently produces just outcomes; in
practice it's noisy and biased against small operations. You can be 100%
morally in the right, and even 100% _legally_ in the right, and still have a
bad outcome. Specifically: I've been told at length that getting 'damages'
when you're sued without cause -- that is, having your legal bills paid by the
frivolous party -- is an _extremely_ high bar to clear.

Furthermore, lawsuits and appeals can drag on for months and years
(particularly absent any binding arbitration clauses). Does it do your startup
any good to get your money back 18 months later? Probably not, and if you die
along the way they win by default.

That last point is what Smule's CEO seems to be counting on when he says 'we
win if we're wrong'. And I guess I'm just saying, he's correct. He's not
right, he's definitely _wrong_ , but he's correct. Just my (morbid) two cents.

~~~
declan
On point #3, I think we're talking about two different things. You mentioned
"noncompete" agreements, which is an important topic but unrelated.

What I was talking about is intellectual property assignment clauses. Excerpt:

 _Under California law, an employee cannot be required to assign any of his or
her rights in an invention he or she develops “entirely on his or her own time
without using the employer’s equipment, supplies, facilities, or trade secret
information” unless: when the invention was conceived or “reduced to practice”
(actually created or a patent application filed) it related to the employer’s
business or actual or “demonstrably anticipated” research or development, or
the invention resulted from any work performed by the employee for the
employer (California Labor Code, § 2870)_
[http://www.intellectualpropertylawfirms.com/resources/intell...](http://www.intellectualpropertylawfirms.com/resources/intellectual-
property/patents/is-your-pre-inve)

Unfortunately you are correct about the Smule CEO being correct (assuming he
was quoted accurately).

~~~
ryandamm
I think the operative phrase there is 'related to the employer's business' \--
the other issue is noncompete / IP assignment clauses will be written to be
broad, then they force you to win on merits: you have to prove it doesn't
relate to their business, and if you lose (because courts introduce a degree
of randomness), it doesn't matter what the protection was.

And of course, that possibility has a chilling effect, which is sort of the
point of the overly-broad IP assignment.

(But yes, you're totally right, I was conflating IP assignment and
noncompete... I've been tangled up in both.)

------
Sleaker
Errr, All I'm seeing in the article is a, 'We didn't use any of their code
guys, see compare the functionality of our products yourself.' Unfortunately,
as true as the article might be, simply showing different functionality
doesn't mean you didn't steal other portions of the codebase that don't deal
directly with the algorithms of what you're doing. For all the reader knows
you stole video decoding/encoding, audio decoding/encoding portions or
something even as innocuous as a GUI frontend. Now agreeing to do a 3rd party
analysis is a wise thing, hopefully the legal system forces this. If the
accusation is that code was stolen, then someone should have to actually
verify against what is alleged that they stole, it'd be pretty ridiculous if
they awarded any damages without doing anything like this and simply went on
the basis that 'they are similar products or may use similar algorithms.'
Being similar or using similar algorithms does not mean they are the same.

------
codingdave
"...the US legal system offers little protection against frivolous lawsuits."

If they believe that, they need better lawyers. I know this is over-
simplified, but -- If the lawsuit is truly frivolous they can file for a
summary judgment. If that is not granted, then the lawsuit was not frivolous.

------
inopinatus
Never take your former employer's code away with you, folks. It's like leaving
a deliberate trail of blood in the water: the sharks will follow it.

~~~
Someone1234
Exactly. And there are no exceptions to this. If they want to keep you on as a
contractor or consultant then by definition you aren't a former employee.

------
pj_mukh
One of the most interesting company's to come out of S15. No wonder, people
are coming after you. You must be doing something right. Stay at it :).

------
joeblau
I'm always so paranoid of this at any of my employers so I go through great
lengths ensure everything is separated. It's a lot more work in terms of
managing your stuff, but can simplify situations like these. I always keep my
work and my personal projects completely separated. Separate machines,
separate repos, separate accounts and I don't do personal stuff at work. My
goal is to have a clear separation so if either of us decide that our contract
isn't working; it's as frictionless at possible. While I applaud the fight for
what's right, there is no doubt that a legal disagreement will take time away
from building the product that your users want.

~~~
mikeshreds
Completely agree. We ourselves were very conscientious to never do anything
Shred Video-related on any Smule machines, and did not build anything Shred
Video-related until after we'd terminated our full-time employment at Smule.

~~~
joeblau
Yeah, I wish you guys the best; litigation is never fun.

------
zekevermillion
This sounds a lot like a non-compete claim masquerading as a trade secrets
misappropriation claim, and if so should be dismissed as a matter of law
unless Smule can allege what specific trade secrets were stolen.

------
kriro
The "bullying" aspect of this is interesting to me. Would taking VC money from
a big player help me in such a situation. Let's say for arguments sake I am
backed by a16z. Is it usually part of the deal that they provide their legal
muscle in these spots or am I on my own?

What would happen if a YC company (pre-funding) gets threatened in this
manner? Edit: Nevermind didn't realize it is a YC company (summer of 2015
batch).

Here's the relevant blog post: [http://blog.ycombinator.com/on-the-shred-
video-lawsuit](http://blog.ycombinator.com/on-the-shred-video-lawsuit)

------
omouse
This is kinda why I like free/open source; you don't get too many weird issues
like this and it can be very obvious and public if you've copied source code
or "took inspiration" from others' code.

------
leelin
Maybe Smule doesn't want their code and IP floating around anywhere outside
the company? Even if they trust the company doing the audit, can they trust
all the employees of that company, and any future acquirers?

I'm not taking sides (because I don't know anything), but after reading this
and Geoff Ralston's post, that's at least one good reason Smule wouldn't agree
to the 3rd party audit that no one else has brought up.

Of course, I say this with a background in the quant hedge fund world and I
doubt any decent fund would agree to voluntarily submit their most proprietary
code to be reviewed by anyone.

------
anseljh
If you wish to brave the San Francisco Superior Court's abysmal court records
website, you can plug in case number "CGC 15 545359" to see the docket and
view the documents in the case.

------
dendory
There are tons of cases out there of clear abuse of the legal system, where
the facts are as close to black and white as you can get. This doesn't seem
like it is. From an outside view, reading about employees who had access to
trade secrets, even source code, leaving together to make their own product in
a similar field while retaining access to said secrets (the ongoing support
role) seems like a very murky case, and something that the court system is
probably best to sort out.

------
tlogan
You know what is sad and wrong thing here: YC companies have reputation and
perception in my mind (by reading storied about BnB, Uber, heroku, rapgenious,
etc.) that my initial reaction is that Shred founders are just typical hipster
white kids who stole other's people hard work.

I'm 100% wrong with my initial reaction but if I'm YC I would look into this
trend and perception in public.

Again I'm wrong and there should be no judgment here.

------
neurotech1
It sounds like a strategy might be for YC to have a litigation attorney on
staff to help deter frivolous suits against YC startups.

------
aianus
If you're an employee at Smule you should quit immediately with no notice.
Make Smule hurt where Jeff Smith will feel it.

~~~
dogecoinbase
I know it's problematic for a number of reasons, but I'd sort of love to see
YC throw their weight behind this -- e.g. "if you've worked at Smule beyond 23
Sept 2015, you are ineligible for consideration in any future YC rounds".

It always baffles me how much power goes unused in Silicon Valley, but I
suppose most of that restraint is due to personal relationships between the
VCs/founders.

~~~
hga
Two reasons that's a bad idea:

A lot more time is needed, e.g. "If there is no decline in the SV job market,
if you're still employed by Jan 1 2016/April 1 2016...."

If they did that, it would suck a lot of oxygen out of Shred's attempt to win
this battle in the court of public opinion.

All that said, I would expect YC to be putting out the word this is a _very_
bad idea.

------
Beltiras
I demanded a clause in my last employment contract stipulating that I retained
the ability to use methods developed for later employment but the system as a
whole is the property of my employer. Protects both parties. I can't steal his
product. He can't prevent me from doing math.

------
asle
Wow. This is a well written piece and really sets the facts straight. Go
Shred! As for the comment that there are zero innocent parties: huh? Doesn't
seem like that reader read the facts.

------
tomasien
Sounds so familiar. Feeling for you and anyone else going through this!

------
joshuahutt
> He’s not suing us because we’ve harmed Smule in any material way.

If they can't establish damages, and there was no breach of contract, it
doesn't seem like they would have a case.

~~~
hga
In that case, the remedy would presumably be an injunction, to prevent damages
in the future.

------
tedchs
This is the exact narrative from HBO's Silicon Valley.

------
ashleyp
If he shuts you down can you make your code open source and allow others to
compete in your place? ;)

~~~
hga
If "he shuts you down" because you've run out of money to defend yourself,
that would turn an injunction into actual damages.

If it's because he's gained an injunction from the court, you'd be in
contempt.

------
lasryaric
Can someone explain why a company being sued needs a lot of money to survive?

~~~
sandworm101
(1) Lawyers are expensive.

(2) Going to court without a lawyer is even more expensive.

(3) With an outstanding legal issue the company will find it hard to access
credit.

(4) Many assets may be locked-down pending the outcome of the lawsuit, making
it difficult to sell things, enter into new contracts or use said assets as
collateral on loans.

------
jheriko
this guy needs to be careful.

1.) people reading this won't pay attention or understand the fine detail 2.)
non-compete clauses etc. are there because learning on the job gives an
advantage to starting up after leaving.

should have researched legal precedent and played it safe imo. waited two
years and set up somewhere geographically remote from the original employer...

i hope this plays out well. as much as there was some naivete in this
enterprise i don't think there was any ill intent, and this really is a bit of
bullying... the only sad thing is that the bullying might be legally
justifiable given the circumstances described.

~~~
hga
Non-competes for the targeted employees are _completely_ unenforceable in
California, where both companies are based, from long standing statutory and
case law.

Many believe that law has more than a little to do with the success of Silicon
Valley/the Bay area's tech concentration, which has long and far surpassed all
others in the US.

~~~
jheriko
that is a useful piece of information. i'll remember this in future... i'm
sure it might come in handy.

------
cletus
Here are my thoughts.

Let's assume the poster's former employer is trying to sue them into
submission. That's a plausible claim as that kind of thing does happen.

Well, if true, that strategy is clearly working.

Why do I say this? Because no competent lawyer would let their client post
something like this. It can only hurt you. Make any statement of fact that
helps the plaintiff and they'll use it against you. Make a statement that
doesn't help them? Well they were going to dispute that anyway so who cares?

So I can only conclude the Shred Video doesn't have competent legal
representation and thus is probably going to be or are being bled dry by
litigation unless they can find a source of funding, which, as noted, is more
difficult with a lawsuit hanging over your head.

One thing I've consistently done is when I've left a job I've never taken any
hardware with me nor a single line of source code. It can only hurt you.
Obviously I don't know if that were a factor here but the poster has
stipulated one of the founders did have a Smule laptop with company source
code on it. Woops.

Consider this a lesson learned: either don't offer to help your former
employer when you're working on something else or get them to release any
current or future claims to your company or IP before you do. Also, you
probably want to get paid upfront. A separate contract should govern such work
and it should state clearly that the former employee has access to the source
code at the employer's request and the employer relinquishes any claims
resulting from that source code. Employer might not go for that. Fine. Walk
away.

As Paul Sutter stated, this is an emotional appeal. I too suspect there was
fault on both sides here without knowing the facts.

One question I have is: when did the founders start working on what became
their startup? That matters. If there's a crossover with their employment then
that's potentially a problem.

In California the law is pretty generous with side projects so this might
actually be OK but here's the thing...

If the plaintiff through discovery finds source code commits to the project
that occurred before they finished working for Smule then even with
Californian law they have a problem because the plaintiff has now established:

1\. The founders started working on this before terminating employment; and

2\. They claimed otherwise.

It's (2) that gets you into trouble because it hurts your credibility when
making any other claims.

This is why any competent lawyer will not allow you to make such public
statements. Let me repeat: it can only hurt you.

The founders are making the mistake of trying to win this in the court of
public opinion. That doesn't matter for this particular plaintiff I suspect.
So they've just given him a bunch of ammunition as every statement will be
carefully parsed and fact-checked and any inconsistency will be used against
them. Even if a statement is ambiguous and was intended one way but can be
interpreted another (that can be disproven), it's a problem.

I had a threat of a lawsuit once that basically amounted to someone using the
threat of it to get out of paying a fairly substantial amount of money. Not
life-changing but certainly annoying. The lawyer I spoke to at the time (side
note: free legal consultations where you shop around a potential case can
really help) gave me this advice:

"Don't respond (to emails, phone calls, etc)."

If they file suit, they file suit and you can deal with it then. Until then
don't give them any ammunition.

Other facts that may matter here are any patents Smule has or are pending and
if the founders are listed as inventors. Something like "algorithmically
annotating a video to music" is the sought of nonsense patent the USPTO might
grant and may later be invalidated as being overly broad and generic but again
that puts you in the position of having to either show non-violation or to
invalidate the patent. Neither is quick or cheap.

------
krs_n
What I have trouble understanding, given the ubiquitous nature of the
internet, is that people continue to start up companies in the US or other
countries where there is an unbalanced and corrupt legal system. Why not at
least start a company in a country where you are guaranteed some form of
defence through the courts even if you don't actually want to reside there?

------
rconti
Thanks for the reminder to disable HN notifications in Safari.

