Why the TechForward victory over Best Buy is so glorious

In some respects, Best Buy's theft of trade secrets from startup TechForward is a fairly routine matter.  Small company pitches idea to large company.  Large company signs an NDA.  But large company likes the idea so much that it basically makes the idea (and the methodology behind it) its own.

The context around the resulting litigation, however, described in a blog post by a venture capitalist whose firm funded TechForward, is fascinating.  For me, it's also uplifting.  "Send your business plans to these guys" inspiring, in fact.  And not merely because TechForward won the lawsuit.

First and foremost, the venture firm, First Round Capital, really understands the importance of the little guy in the technology world.  In deciding to fund a lawsuit against Best Buy, where many would have just moved on, First Round was speaking with actions, not just words, about sticking up for the entrepreneur.  First Round partner Josh Kopelman wrote, "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."

There are a couple other great learnings from this story.  NDAs, those throwaway documents so many business people sign without reading or don't bother to sign at all, can really become a critical agreement that governs the course of a relationship - always make sure you get them reviewed by counsel and signed.  Finally, the litigators that some business people like to point to as "the problem" were, in this case, the solution - while the Best Buy business people were crass and manipulative, the TechForward lawyers saw that justice was done.

Congratulations to the teams at TechForward and First Round Capital.  And thank you, from all of us who work with emerging technology companies.

Finally, mainstream media provides a balanced piece on copyright

My experience is that the mainstream media struggles to explain legal issues.  Often, in trying to simplify complex concepts, the meat gets trimmed beyond recognition.  Other times the piece becomes an editorial, riding some populist wave that uses a famous case merely as a backdrop.

A recent article in Fortune magazine, however, hits the mark, providing a balanced perspective on the evolution of file sharing services, the related copyright law and what it all means.

My favorite part is actually a sidebar that clearly illustrates that the latest iteration of file sharing, the so-called cyberlockers, is not without victims.  The common argument in favor of file sharing is that the artists will keep producing artistic works, but will find other ways to make money.  The sidebar illustrates that this isn't always true.  An independent filmmaker named Ellen Seidler went into debt to make a movie, only to see it pirated in over 56,000 locations.  Seidler said she "probably won't" make another movie in the wake of that experience.

Some may say that there is no real need to pay for music, for example, when bands make so much money from playing live.  But people became fans of those bands that can fill big stadiums through conventional methods of music distribution.  They paid money for CDs or MP3s, encouraging the bands to make more music, then tour.

Enjoy the articles.  Then go buy a DVD of your favorite movie out of gratitude that the file sharing phenomenon didn't prevent the movie from being made.

Ownership is (still) everything

With open source software being widely popular and Larry Lessig becoming a household name, is the concept of intellectual property ownership dead?


Absolutely not.


Inventors are still applying for patents as aggressively as ever.  Ownership comes up in almost every commercial sales contract, in every M&A transaction and in every IPO.  Today we even have companies claiming ownership in LinkedIn contacts.


This is all because ownership remains a great differentiator.  Generally, ownership entitles you not just to engage in some kind of lucrative activity.  It also allows you to prevent others from doing it.  Companies sue others for patent infringement or negotiate for ownership of software in commercial contracts because millions, potentially billions, of dollars are at stake.


How should companies react to this reality?


Embrace it.  Recognize this value and work to maximize it.  Invent, develop and patent using the best engineering talent you can find.  Once you have intellectual property, protect, nurture and grow it.  Negotiate hard when the topic of intellectual property comes up, because revenue and enterprise value are up for grabs.  


By acknowledging that ownership of intellectual property remains a foundational issue in company valuations, companies set the philosophical groundwork for business practices that will help them win.   

The death of the simple NDA

Non-disclosure agreements may never have really been simple, but they do seem to have become more complex in recent years.  No doubt part of the reason for this is the increasing sophistication of those writing and managing NDAs.  


Whatever the cause, the result is a substantial amount of risk for companies and individuals who dismiss NDAs as mere "boilerplate."  It is now as crucial as ever that those doing business with others use NDAs and, when using others' forms, read them carefully.


Here are a few challenging positions I have seen in NDAs that I suggest users approach with caution.  


1.  Assignment of intellectual property ownership.  An NDA is designed to simply allow two parties to start talking to one another about a deeper relationship.  Yet, in a couple cases, I have actually seen an NDA provide for one party's ownership of everything created over the course of the relationship.  No proprietary technology company will sign up for this.    


2.  Non-competition provisions.  Occasionally, NDAs will prevent one party from competing with the other.  This is another aggressive position with economic implications far beyond the NDA's typical "Let's talk" premise.  Non-competition provisions may also raise anti-trust issues.


3.  No-hire provisions.  Some NDAs will prohibit the solicitation of the other party's employees or customers.  Others will take the next step of seeking an actual no-hire clause.  Either provision will drive how the parties interact with one another.


4.  Lack of an independent development carve-out.  Most NDAs provide exceptions for what kind of information is deemed confidential.  A crucial exception that is sometimes missing regards independent development.  It's important to be able to retain the right to come up with good ideas independently of those that a vendor, customer, reseller or joint venture partner might have.


5.  Inappropriate period of protection.  NDAs will typically provide for a confidentiality period of about five years.  But, a business providing access to its most sensitive secret sauce that it expects to be valuable for decades would certainly want more protection than that.  It's important to think through how an NDA will be used in a given situation before signing up for a certain period of protection.


6.  Venue provisions.  Parties will often agree in advance where to litigate a dispute arising out of a contract.  But, this choice of location could create leverage for one party over the other.  Be thoughtful about agreeing to venue in your business partner's backyard if it's thousands of miles away from where you work. 


7.  Inconsistencies with other applicable documents.  If some other commercial agreement is signed as a result of the initial discussions, it will be important to consider how it relates to the NDA.  A new agreement with its own confidentiality provisions could create confusing conflicts with the NDA.  The NDA needs to be either completely superseded or carefully integrated into the new agreement.   

Googlerola emphasizes importance of strong patent portfolios

Google's $12.5 billion bid for Motorola Mobility, at a 63% premium, is generally thought to be about using Motorola's large patent portfolio to help protect Android and Google's other mobile communications interests.  The deal has renewed debate on the weaknesses of our patent system and generated some interesting discussion about Google's plans.  It also emphasizes the reality that today, meaningful patent portfolios are still critical to business.


One would think that Google would have developed a much larger portfolio of its own.  The company has generally had a long term view, is indeed very innovative and has plenty of talented engineers, product managers and lawyers to write patent applications.  The reality, however, is that creating in-house patent development programs is challenging.  There are many reasons for this but a primary issue is simple - since time spent on patents doesn't necessarily turn into extra revenue until years later, patent work can be hard for young companies to prioritize.


So how does a company start a serious patent program that increases its valuation?  There are a few simple steps most any company can take.


All company stakeholders need to recognize the value of intellectual property and regularly review metrics.  Examples of such metrics include number of applications filed per quarter and competitor comparisons. Patents are probably the most objective measure of technological innovation, and yet often take a back seat at many board meetings to a deep dive on short term financials and sales data.  Management, board members and shareholders of technology companies, having seen the valuation premium paid for Motorola's portfolio, should all expect measurable productivity from their teams in this regard.


In addition, have one point person ultimately responsible for developing a patent strategy.  Whether this person is the company's Chief Technology Officer, VP Marketing, General Counsel or has some other role such as a VP of Intellectual Property, having one owner is much more likely to create accountability, clear goals and success.  Committees can be helpful, but identifying a leader will help tremendously.


Finally, create company-wide incentives for, and recognition of, inventors. Simple incentives such as cash bonuses are a sure way to increase productivity in patent programs.   Give, as an example, $1,500 per named inventor for granted patents and watch the number of patent applications increase rapidly.  I also like awarding plaques and certificates to inventors as recognition for their innovation.


These building blocks can help you establish your own successful patent program.  And developing a deep patent portfolio can help a technology company create significant enterprise value while protecting core assets.