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Why First Round Capital funded a lawsuit (firstround.com)
449 points by jkopelman 1815 days ago | hide | past | web | favorite | 140 comments

A few thoughts:

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.

Re: your point #3, I have developed this opinion of the US court system over time. It's really well-designed for big disputes, where the stakes are high enough that the cost of the process itself is small in comparison. In those situations, it's really great at getting down to what really happened between the two parties. But it doesn't necessarily scale down so well.

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.

> But it doesn't necessarily scale down so well.

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.

For really small disputes, small claims court seems to work OK, at least from what I hear (never tried it myself). No lawyers, relatively streamlined process, etc. The problem really seems to be in the middle, where the damage is big enough that small claims is no longer an option, but not so big that you can afford to fund a team of lawyers for months or years. Maybe a middle ground between regular court and small claims would be the place to look.

The article doesn't seem to indicate so, but shouldn't the Best Buy executives who took this decision (and against whom there seems to be incriminating email evidence), be punished in some way as well?

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.

> The article doesn't seem to indicate so, but shouldn't the Best Buy executives who took this decision (and against whom there seems to be incriminating email evidence), be punished in some way as well?

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.)

>if they made $140 million and had to pay out $27 million.

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.

It most certainly is not, in the same way that when you are punished for stealing a car, you do not get to keep the car.

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..

They no longer operate the program.

What do you mean? Who stopped operating what program?

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.

The sensitive contents of the "analytical model" were enumerated in earlier filings in this case and involved the number of customer redemptions of the program and resaleability and inventory issues with repurchases products. Best Buy replaced significant portions of the model by using an insurance-backed system instead of a cash reserve system (parameters for the cash reserve system were one of the enumerated sensitive model bits).

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.

Ah ok that makes sense :)

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.

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).

With regards to 1, while it is very perilous so many companies start this way. At some point, any enterprise b2b company is going to have a small number of clients, of which any one makes up a large percentage of their bottom line.

On your point 4, Perhaps I'm biased, but the entire IT industry is "insidious" by design. The technology infrastructure is what allows nearly endless traps like these to be set for those who try to cooperate with their clients wishes. It's a lose-lose for those trying to win big clients.

Seriously, does Best Buy not have a legal department? How could those people think it was OK to discuss stealing their idea in easily discoverable email, then actually steal it? And then, when the lawsuit comes, not even settle, but go to trial, when there's mounds of evidence that dooms Best Buy? Someone is not doing their job there.

Best Buy is one of those companies that is just all-around mediocre, in every regard.

They do and trust me, you'd be surprised, probably even shocked to know what goes on at their corporate HQ.

I worked there for almost a year and can attest this type of behavior is pretty common.

Is that shocked, or "shocked"? Then again, the purpose of a legal department is (unless I misunderstand it) to _advise_, and if the boss decides to do something Tremendously Stupid, it's hard to blame the lawyers. Unless, of course, they said they thought it would be fine. (Which I can't imagine they would have done.)

No, it was shocked.

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.

Some might say that it is in the lawyers' interest at some level that their bosses go against legal advice and open themselves up to lawsuits because when that lawsuit comes in, guess which department stays employed? Now, I think most lawyers operate in good faith and go to great extremes to convince their client of taking the best option but I can see lawyers give up after a certain stage thinking alright whatever, why am I complaining, this just means I'll have enough work for next 2 years because of my client's stupid decision.

Using that logic, it may be in the law profession's best interest, but certainly not for the Best Buy lawyers who were aware of this.

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.

Woah, no one said anything about lawyers that give poor advice. I was talking about lawyers who give solid advice ... to stubborn clients who choose to go against their lawyer's (solid) advice.

To be fair, a more plausible explanation for the lawyers giving up after a certain point is that nobody wants to argue with their boss that long.

Great point :)

What do you mean? It worked perfectly well for Best Buy; they paid out far less in the judgment than they stole in revenue.

Yeah, sadly this lawsuit is just "cost of doing business" for Best Buy. They earned $140m in the first year, they only had a % chance of paying out for a lawsuit, and the lawsuit was worth less than 20% of the $140m earned. They just profited over $113m (plus the benefit of money now vs. money later) from destroying a startup

Business as usual in America nowadays :/

No, to both of you. No no no. Best Buy didn't "earn" 140MM; according to this story, they achieved 140MM of revenue. Revenue for Best Buy is the price tag on consumer electronics. Bust Buy doesn't pull those consumer electronics out of its butt; it pays vendors to acquire those goods, marks them up, and sells them to customers. Best Buy is a public company and is required to account for this difference, which is its gross margin. Best Buy's gross margin hovers around 25%.

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.

That's a good point - revenue is not profit - but I'm not sure it is it a conclusive point. First, why would you assume the final estimate of revenue which came out of the sausage system of the legal system, with Best Buy's lawyers presumably heavily incentivized to knock down the estimate at every point in every way possible, is remotely accurate? An economics book on cartels and their prosecution I read (_Global Price Fixing_) noted dryly that the estimates of illicit revenues and hence profits in the cases were nowhere near what an outside would calculate especially in the case of the vitamin cartels.

(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.)

The gross margin comes from Best Buy's SEC filings. They have every incentive in the world to report the highest possible margin.

Not really, best buy and any other company of its size are more concerned with tax filings (which should be an "Ah Ha" moment for those of you at home), which generally gives companies an incentive to jack up costs and consequently decrease revenue. If you want a better idea of what their margins actually are you best bet would be to talk to a good (read: independent) investment analyst.

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.

This comment suggests that Best Buy, a publicly traded company, is incentivized to minimize its gross margins. That is an extraordinary claim.

Meanwhile, Best Buy no longer operates the buyback program. The program wasn't a golden goose.

You misunderstand. Minimizing margins and maximizing revenues are not mutually exclusive. Also, saying an entity is publicly traded irrelevant, as you are suggesting we know every detail about a company simply by reviewing their financial documents and investor relations mail; this is not the case.

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.

Best Buy is priced in the market in part based on their margins.

I can only assume that you have failed every economics course you have ever taken, because if you left without understanding the concept of supply and demand orthe concept of value, then there is really nothing I can say to you other than avoid procreating. Though I certainly wish market pricing was determined via plot hole. It would certainly lead to more entertaining conversations. Next you can explain to me why the world is flat or why water is made up of hydrogen and nitrogen, or some other fundementally flawed concept. Have you written any books? I think I could do an entire 2-hour talk on just how fucking stupid you are. You my friend are a gold mine.

Ohh maybe you have a blog. But, in all seriousness, avoid procreating, there are enough retarded people that society has to care for.

That is the nastiest comment I have ever seen on HN. Why?

Your point would be right if companies SEC filing matched their tax filings. Companies are ALLOWED to keep a set of Tax record books and accounting record books and pay taxes based on the profits from their tax books. The Tax books have been screwed with beyond all belief, the SEC ones not so much. My wife is a CPA and I've got a masters of finance and have spent time doing the tax book game.

I'm willing to bet the $5MM in punitive damages put Best Buy squarely in the red if they weren't there just after the $22MM.

Where do you get the numbers for BB's gross margin? Isn't 25% a bit small? (also does it mean they mark up the vendor price by 25% or that 25% of the consumers price tag is profit?)

I googled "Best Buy gross margin" and this was the second result: http://ycharts.com/companies/BBY/gross_profit_margin

Your calculation ignores the likely dozens of other companies Best Buy and other BigCorps have screwed over with no consequences whatsover. They rolled snake eyes in this case but this will still be business as usual until damage awards become 100x actual damages, since 99 times out of 100 the BigCorp's lawyers will have their way.

My calculation ignores a whole world of injustices and unfairnesses, because it is about this particular case.

As has been discussed multiple times on here and the original link, revenue != profit. Given the margins a company like Best Buy has to run to maintain competitive, it's almost assured that they made less than $27MM in profit off the program. Let's not forget that $5MM of that is non-compensatory damages, which are designed solely to punish the perpetrator (hence the term punitive).

Don't know why they didn't settle, but

    + $140M in revenues
    - $22 million in favor of TechForward
    -  $5 million in punitive damages
    -   X million in lawyers fees
Best Buy still did alright if you ask me.

Revenues aren't profits. Over the last 4 years their pre-tax profit on revenues was 3.6%. Even assuming this was much more lucrative than average, I suspect they lost money.

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.

This program, the buyback program they got sued over, was almost all "pure profit". Kinda like the extended warranty they try to sell you. It's 300% profit margin business. The court documents talk about it Best Buy expecting it to be a cash machine and driving instant profits to the Best Buy bottom line, and that TechForward would have made about $20MM per year just from the licensing deal.

Best Buy still made "tons of cash" from this. The punitive damages of only $5MM are a shame. This was wilful theft of IP.

I agree. Also, the 140 that BB would have made wouldn't have all gone to Techforward anyway, whether it was profit or not. What we'd really have to compare is the 22 million + fees to how much they would have paid Techforward as part of the partnership. Since there are a lot of other costs to a buyback program (e.g. actually buying things back from customers), 22 doesn't sound unreasonable. This was a huge, shortsighted waste on BB's part.

Best Buy's gross margins hover around 25%, and that's before all the rest of their overhead kicks in. Best Buy probably took a bath here.

Is their gross margin just revenue - whole_sale_cost? If that's the case, they also have cost in labor, real estate, marketing, and others. After all those, the lawsuit would have put them in red.

Good. Screw them. Now the evil a-hole caption will hang over their logo in my mind forever. Probably others on HN.

Even if this damages their brand in only a small way, it's a real cost.

If you really want to screw Best Buy the way the rest of the market is screwing them (that is: to death), then, next time you want to buy a big-ticket electronic product, go to Best Buy to try it out.

Then buy it on Amazon like everyone else does.

I agree this is the best way to buy electronics :)

(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)

They would've made that revenue anyway if they had kept the deal with TechForward.

this was simple calculus. big companies do it all the time. their legal department, their leverage... their money -- against the lack of all three (by comparison) possessed by a small company. it's not that they didn't know what was going on or the risk - it's just that they assumed that it wouldn't matter. this is why it's so great that FRC fought the whole way. about time!

Mediocre? Not possible, they had two geniuses revolutionize the workplace!

Seriously ROWE [0] is the biggest excuse for people not doing real work I have ever witnessed.

[0] http://en.wikipedia.org/wiki/ROWE

I've implemented versions of ROWE in two different companies and the results have been excellent. Not sure what your experience has been, but mine is most definitely different.

Great. So First Round Capital is pushing idea that they stood with David against Goliath and won teaching a lesson to Big Co. Did the entrepreneurs see any of the money?

The way they describe the deal structure, my guess is yes.

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.

Depends upon liquidation preference, tranches, stock classes, etc.. We'll never know unless we are specifically told.

Sure. I'm assuming typical to somewhat-worse-than-typical terms. They could have gotten screwed, but there's no particular reason to think they did.

I was thinking the same thing. Without knowing whether the founders agreed with the Board decisions to a) share the models with Best Buy and b) pursue an ultimately ruinous legal claim, it's hard to know if First Round were part of the solution or part of the problem...

The way it's phrased makes it sound like the Board was the reluctant party, rather than the founders.

Why should they?

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.


Am I exceptionally cynical because reaction to this quote:

"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."?

In my experience with senior executives at $10B+ companies making these decisions, it's not a case of knowing the difference, or not caring, it's more a case of, at that level, the concept of "Right" and "Wrong" are immature concepts that aren't relevant. Executives that have reached that level, frequently take an almost purely game-theoretic position in any decisions they make, where they do a risk-assesment, consult their attorneys, determine what their exposure is, and then simply make a decision that is going to yield the greatest NPV (Net Present Value) inclusive of those risks.

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.

What experience do you have, out of curiosity? It's interesting to think that top executives consider breaking the law in their options when making decisions.

The experience I had typically fell the categories of Revenue Recognition . Things like round-trip revenue exchanges with other companies, Shipping gear with the understanding that return would occur at the end of the quarter, and capitalizing OpEx.

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.

How would one become one of these lucrative auditors? (hypothetically speaking, of course..)

Spend your career in a Big Four accounting firm mostly. Get a MAcc and CPA.

Get an accounting degree, remove your soul. Work long hours doing lots of pointless stuff without killing yourself, leaving, or being told to leave and you'll likley become a partner and become fiarly wealthy. (my wife is a CPA)

Without addressing the broader question of corporate decision-making, it seems to me that Best Buy broke a contract, not the law--which is why it was civil trial, not criminal.

The executives we are all talking about here largely aren't normally part of the decision process in such a case. In fact it's more-so their responsibility to create policies and create organizations who then enforce them. So I think the comment that these executives are actively breaking the law, is slightly myopic. Where these executives do fail is not providing a vision and culture that fosters fair play, but rather bottom line results.

That's an excellent description of the state of mind I was thinking of that I ambiguously called "not caring".

> 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.

Yes, you are exceptionally cynical. Cheating is not a reasonable strategy over the long run. It's no small coincidence that it's Best Buy, a notoriously mediocre company, that had cheaters at the helm. This would be less likely at a better company.

> Cheating is not a reasonable strategy over the long run.

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.

"anti-competitive practices" is an anti-concept (look that term up in an epistemology book if you don't know it). Microsoft didn't initiate force or fraud against anyone; therefore, they weren't cheating.

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.

Microsoft was cheating; your strange Randian views are neither the law, nor philosophically defensible. In the real world, abusing monopoly power is cheating, both legally and ethically.

MS didn't have a monopoly (i.e., exclusive right to sell something granted by the government); they were operating in a free market.

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?

First, a government-granted monopoly is only one kind of monopoly. Surely you have read enough economics since the 17th century to be aware of that? Even Adam Smith discussed it as a possibility.

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.

[1] http://www.youtube.com/watch?v=9mGpMpaHGM4

Roderick Long is not an Objectivist.

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.

Time to hit the economics text books if you think a monopoly === exclusive right to sell something granted by the government.

Free markets have monopolies.

Time to hit the economics text books

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.

And those books are...?

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.

[1] is the book I had in mind.

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...

AMD the company is alive and well, but this is despite their CPU division, not because of it. For a sizeable part of the 2000's AMD was the price/performance leader in CPUs. Intel leveraged their position with OEM's to keep AMD out of many PCs during this period. The extent of the damage is debatable, but currently AMD's CPUs are quickly becoming relegated to the low-end, low-margin market. Without strong profits to fund R&D, AMD will likely stay there.

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

Sorry for my delayed response. I haven't read those links yet (I am planning to, but don't want to forget to comment) but... if AMD lost out because Intel had deals with the OEMs, AMD should have made those kind of deals, even if they had to pay a pretty penny, or AMD should have created it's own end-to-end PC business, or AMD should have purchased an OEM, or whatever. It's just business strategy. At the end of the day, if AMD could not make it happen, they should have let their IP be acquired by someone else and let someone else have a go at it. Or they should have diversified their business (which I guess they did do, successfully) and then waited for a better opportunity to go after the CPU market later.

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.

The long run doesn't matter for them. I give BB 2 years before they follow Circuit City into liquidation.

3 if they're lucky.


> Cheating is not a reasonable strategy over the long run

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 question of Best Buy settling has come up. Most settlements involve a clause that prohibits either party from disclosing the terms of the settlement. Since the primary objective of First Round taking on the law suit was to 'teach big businesses a lesson.' A settlement would have been counterproductive for them, even if it would have resulted in a substantially higher payout or significantly decreased legal costs. First Round wanted blood to be shed publicly.

Let's face it, "teach big business a lesson" is a convenient press tactic. First Round is a bunch of capitalists like the rest of us.

I think the lesson for big business was "don't fuck with our companies" and the lesson for startups was "we won't let big business fuck you over".

> I also learned that our justice system, while slow and imperfect, does work.

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.

The justice system is not supposed to be driven by the market. In theory, they could have done this entirely without paying any lawyers: I doubt the paperwork by itself would have cost too much for a normal company.

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.

Assuming standard liquidation preferences and a relatively small(?) amount of capital raise given first-round involvement, it's most likely that the founders probably saw a few million bucks each.

So if I'm reading this correctly, the VC makes $27m and the original founders and team who worked an entire year on the project make $0. Is this correct?

There is more than one takeaway in this story.

How do you get that?

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.

You are almost certainly not reading this correctly.

I doubt you're reading that correctly.

Yeah, I was mildly sympathetic until it got to the part where they said in passing "oh, unfortunately, we just sort of liquidated the company."

You're forgetting the legal cost AND the risk of not getting paid the VC took.

Does anyone have any idea (anecdotal or broad) how often this happens in startups dealing with large companies? Was the Best Buy case the exception or the rule? Pretty egregious.

This isn't firsthand, but I would suspect it to be the exception, not the rule.

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.

The exception - but only in severity.

I wonder what role an NDA played. Any ideas? I know in startup-land NDAs are non-existent, but in my past life as a product manager for a medium sized company, the biz dev guys would always have an NDA signed before letting the company get too close with a new partner. Maybe new-world startups should have NDAs when working with old-world big cos (where NDAs are common and prevalent, and maybe even respected)? No idea here, just hoping to hear some enlightened thoughts.

Edit: clarity.

The article mentions they did have an NDA, which is undoubtably what ultimately allowed them to prevail. Requiring an NDA for every silly detail of your startup is self-limiting. Giving out critical, "special-sauce" details without proper legal backing is corporate suicide.

Also, offering an NDA before working with a person can be a difficult issue and can slow things down; presenting one before working with a large corporation is simply standard practice (if you have a reasonable NDA) and will not affect the relationship at all.

Many big companies won't sign 'your' NDA but they will have their own one that is probably reasonable (although check it, and get it checked by a lawyer if you are disclosing anything really stealable).

That can cause deadlock when bit companies need to talk to each other...

Could someone explain the process of how those emails were handed over? Is Best Buy obligated to do so, or was it a private investigation of some sort?

When you get sued, the court supervises a process called discovery to gather facts relevant to the suit. During the process, hard drives are imaged, documents are copied, etc. The opposing party's lawyers will make requests, such as: "We want to see all of the CEO's e-mails from March to June relevant to this matter." Your lawyers will sift through the e-mails to give opposing counsel what they want. Opposing counsel will then sift through the e-mails to find dirt on you.

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.

> ...the court supervises a process called discovery ...

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 ....)

I mean "supervises" in the same manner as a pre-school teacher "supervises" a class of hyperactive little boys.

My understanding is that if the judge thinks one party is not cooperating in discovery, or is purposefully hiding evidence, he can issue a default judgement solely on that basis (regardless of all the other aspects of the case). Since the penalty for playing games in the discovery process can be so severe, it's very rare for parties to try to conceal evidence (hiding saved emails or chat logs or whatever).

Great post.

It sounds like the penalties are severe if you are detected making omissions during discovery - but how would that actually be detected?

The enforcement mechanism is mostly paranoia. The ethical codes for attorneys requires you to rat out your colleagues at the threat of getting in trouble yourself if you fail to do so. Documents are managed in review databases with time stamps and user tracking. Opposing counsel will go through your productions and might spot inconsistencies. Opposing counsel will also spend hours grilling witnesses, looking for inconsistencies and references to documents that haven't been produced. Opposing counsel also generally has a good idea of what kind of documents should exist, given that corporate transactions are generally pretty stylized.

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).

Team Best Buy seems pretty unethical, and when Best Buy's lawyers manually check which CEO e-mails were relevant to the case I'm sure honest mistakes sometimes get made. It would be awfully easy for dishonest 'mistakes' to be made with one or two of the most incriminating e-mails.

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?

This sort of thing is almost always handled by an outside law firm, similar to how audits are handled by an outside accounting firm.

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.

Many of the "e-discovery" software suites out there now include digital forensics capabilities that will scan for signs of tampering.

There are lots of companies focused on "electronic discovery". It's a very lucrative market.


Likely it was a subpoena compelling them to provide the emails. I believe in Apple v Samsung there was a matter of Samsung failing to retain some emails which were relevant. In that case, the jurors were instructed to treat the deleted emails as incriminating.

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.

Actually, I believe in the end the court didn't give any kind of jury instruction about the deleted e-mails in Apple vs Samsung. Apple's contention was that Samsung should've anticipated that they were about to be sued and retained any relevant e-mails even before the lawsuit had been filed, and the judge sided with Apple on this until it turned out Apple hadn't bothered to retain their own e-mails from that period either despite having actual firm knowlege they were going to file a lawsuit.

Through a process called discovery.

Here you go: http://en.wikipedia.org/wiki/Discovery_(law)

When there is a lawsuit, one of the pre-trial phases is called "discovery". During this phase, both parties can compel the other party to hand over documents and information relevant to the lawsuit.

I think the really painful part of this is that, realistically, most start-ups won't go anywhere without an exceptional level of trust (I'm talking very early stage) as founders need to trust potential investors, early customers, etc. You're stuck in this space where you look at big companies and don't expect them to trust each other but, as the little guy, are left with no choice.

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...

Here is a similar story I saved from a while back:


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.

There's a celebratory tone to this article that I find misplaced given the company failed and was sold as an asset to a 3rd party. I'm sure the VC feels vindicated to have covered their money and taught Best Buy a lesson. To the founders though they clearly built something great (BB generated $140 mil in revenue from their approach) and lost their company well before there was a legal resolution that could have saved them. I expect this outcome makes them feel better but I'm suspect it feels like too little too late.

Minor nit: according to Google Finance the market cap of Best Buy is $4B not $50B. Revenue is around $50B.

Moving the assets of the company into another and leaving only the lawsuit behind is a neat idea, isolating all the legal risks within the old shell company. Kudos to the lawyers.

What risk does a dissolved company have? The article seems to state that the only real 'risk' was that the VC company spent their own money to fight this, not knowing whether they would win.

Well they might be counter-sued or asked to pay for both parties' legal fees.

I'm pretty sure the lawyers did the same thing with BeOS when it was acquired by Palm. [0] They sold the IP/copyrights and Be retained the lawsuit against Microsoft which eventually settled for US $23 million.

[0]: http://www.internetnews.com/ent-news/print.php/3073811/

Sorry for the ignorance, but could someone explain what an "analytical model" is, and what it composes?

One of the points that this should highlight for you if you are an entrepreneur talking to lots of people is that NDA's are only of value if you have enough money to defend them. I say this from first-hand experience. Someone with deep pockets can violate agreements such as NDA if they know full-well that you don't have the resources to sue them (or sue and survive the process).

Question: what's the story with the processes Best Buy developed that were pirated from TechForward? Does this mean they can't use them? Or can they? How does one prevent Best Buy from re-developing something similar going forward? After all, it won't take long for BB to make back their $27 million "investment."

They discontinued the program after 18 months.

Okay that makes a lot of sense now. I was wondering why there was nothing about a high ongoing royalty rate mentioned in the article. If even trivial patents can get ~3.5% on revenues, such blatant theft of actual files and ideas should get substantially more.

Very interesting read. This sort of thing is pretty much the bread and butter of corporate litigation, though you usually don't get to read the details like this if you aren't involved in the suit.

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!

I personally do not have http://www.fundingforlawsuits.com that are working for me, but I am seeing some major differences between my lawsuits from others. Thanks for sharing your thoughts on this subject.

Does the financing come from the funds operating budget, or what?

This exceptional story of business street justice (is there any other kind?) is a nice little look into the real world of consultation, startups and big business. It's not a surprising or groundbreaking story, but you don't usually see this kind of perspective due to settlement terms. Just nice to see how things are really run as apposed to the political spin you often see in Washington and other places that specialize in growth hacking, and I think it also shows how the economic incentive can get in the way of the incentive for real technological innovation, especially when incentives are so diametrically opposed in these two "cooperating" entities.

How could they have written their contract so that their profit motive aligns like a positive sum instead of a zero sum?

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