Why First Round Capital funded a lawsuit
You can imagine the scene in the board room.
The CEO of our portfolio company, Techforward, is discussing a “make the company opportunity" -- Best Buy wants us to to power their nation-wide buyback program. And Best Buy is talking about launching it with a Super Bowl commercial! We had just finished a pilot test in several Best Buy stores and the results were very strong – and now, before we moved forward with the national rollout, Best Buy was asking us to provide them with access to our proprietary analytical model. This model was our crown jewels -- we had invested years and millions of dollars building it. But we had signed a non-disclosure agreement with Best Buy – and they had assured us the information would remain confidential and was critical to moving forward. The board ultimately agreed to share the model – knowing we were protected by our confidentiality agreement.
Fast forward a few months and many more meetings in Minneapolis. Best Buy abruptly tells Techforward that it is not moving forward with them – but rather, they are moving forward themselves. They launch a Super Bowl commercial staring Ozzy Osbourne and Justin Bieber to promote their program. And Best Buy goes on to generate over $140M in revenues through this program.
Now imagine the scene in the Techforward board room. Although the company had been providing services for other retailers (like Radio Shack and Dell), the company had invested well over a year’s effort to get the Best Buy deal underway. And Best Buy’s last minute actions posed a fatal blow. Techforward sued Best Buy – but it would take a very long time before the case made it through trial. And since Techforward had invested so much money working on the Best Buy deal, the cash position of the company was not looking good. The board ultimately had to make a horrible choice – they sold Techforward’s assets to a third party. BUT – they did not sell the lawsuit. Instead, First Round Capital (along with our co-investor, NEA) decided to keep funding the lawsuit. And over the last 18 months, we and NEA gave the lawyers hundreds of thousands of dollars to keep the suit going. This wasn’t an easy decision. We are in the business of funding companies – not lawsuits. But my partner, Howard Morgan, was a board member of Techforward – and he sat in those board meetings. And Howard was convinced that Best Buy shouldn’t get away with their behavior. We needed to send a message to Best Buy – and every other large company – that they can’t blatantly violate agreements and steal ideas from startups. And if big companies believe they can violate agreements with immunity because a startup can’t afford to sue them, it is bad news for every startup in the ecosystem.
Today Howard is smiling. Because after 18 months in court, a nine-person jury found Best Buy liable for misappropriation of TechForward’s trade secrets and breach of contract, and returned a verdict of $22 million in favor of TechForward. And the jury also found by clear and convincing evidence that Best Buy did so willfully and maliciously, so the judge awarded an additional $5 million in punitive damages.
As we saw the information that was produced by Best Buy during the trial (some of which is summarized here), I was amazed by their brazenness. Best Buy had:
- Internal emails that acknowledged that it would “...be a couple of years before we [Best Buy] have a model that is up and running…” and “...I’m not convinced we’d be able to organically duplicate Tech Forward’s model in a reasonable period of time…” so they “…wanted an opportunity to peek under the hood a little bit at their [Tech Forward’s] modeling…”
- The models which Best Buy did build internally were virtually identical to the models that Techforward had provided them. And there were internal Best Buy emails asking Best Buy employees to “…remove the Techforward reference in the file names…”
- While Best Buy promised to build a “brick wall” to protect the information that Techforward provided them, they acknowledged that they did not do so. And in fact, the same people that reviewed Techforward’s model were the ones who built Best Buy’s model.
- My favorite email is one from a Best Buy employee (I am using all my willpower to not put his name here) who argued in favor of running the program internally, saying that “I don’t think we should be making this company [Techforward] rich…”
This has been an educational process for me. I had (naively) assumed that senior-level employees of a $50B company would know right from wrong. (And this is a company that recently launched a “College Innovators Fund” to help discover innovative ideas on college campuses… Applicants beware ;-) Going forward, I won’t be as trusting. This should be turned into a case study that every major company should make their business development people read.
I also learned that our justice system, while slow and imperfect, does work. And while the outcome here is still not what we had expected when we funded the company initially, it’s nice to turn a money-losing outcome into a money-making one. And I am thrilled for the founders of Techforward - Jade Van Doren and Marc Lebovitz - who finally have vindication after doggedly pursuing justice for almost two years.
I hope that going forward we can stop funding lawsuits – and just fund companies. And I won’t be shopping at Best Buy this holiday season.