The year 2000 started out well for Doug Augustine. His more than 75-employee San Diego company, Bidland Systems, had developed software for online auctions and was pursuing a joint-venture deal with multinational telecom company Telefonica for Spanish-speaking markets outside the United States.
The good times ended when Bidland sued Telefonica in 2000 for breach of contract, alleging that Telefonica promised a joint venture to access Bidland's marketing strategy and technology--information Telefonica then used to start its own auction site, Katalyx.com. The case was settled in November 2004 for an undisclosed amount, but Bidland didn't live to see that day--unable to raise funds or sell the business with the lawsuit in progress, the company ceased operations in 2001. "At least we got our investors their money back," says Augustine, 47. "[But] it's a hollow victory."
Welcome to an entrepreneur's worst nightmare: A large company calls, promising the moon, and you end up out of business, watching your ideas go to market without you. As intellectual property increasingly drives business, more companies are fighting over it: 2,978 U.S. patent suits were filed between March 2003 and March 2004, an increase of nearly 8 percent over the prior year.
Such lawsuits can be costly. Trade secret misappropriation suits with $1 million to $25 million in assets at risk cost an average of $875,000 to litigate in 2003, while patent infringement suits (again, with $1 million to $25 million at risk) cost businesses an average of $2 million, according to the American Intellectual Property Law Association, an Arlington, Virginia, intellectual-property advocacy group.
Whose Idea Was This, Anyway?
A small company has a lot to gain--and a lot to lose--by joining forces with a bigger company on a project. "In most instances, [a joint venture] works beautifully, but when it doesn't work, the story line is somewhat familiar," says Gabriel Berg, a partner with New York City law firm Berg & Androphy who has represented Bidland and other small firms alleging idea theft. In many of these cases, Berg says, the smaller company protects itself through nondisclosure agreements and by withholding information early on. But the smaller company can feel pressure to spill the beans because it needs the larger company's resources. "A lot of times, they just need the big company's money," he says. "It's a difficult spot to be in."
It's easy to think nondisclosure agreements are enough, but most leave room for either party to claim that nothing new has been invented. "Whatever's in the public domain is fair game," Berg says. "That gives both sides room to come back later and say, 'Oh, we always knew how to do that.'"
Who brought what to the table during a brainstorming session is another problem. This is why documentation, starting with a patent or copyright, is so important. A full patent application, however, can cost $10,000. Another option is the provisional patent a preliminary step to filing a regular patent that provides 12 months of patent protection. It requires less attorney time and often costs less than $1,000. "It's a good investment," says Jennifer Albert, an intellectual-property attorney in the Washington, DC, office of Hunton & Williams who has represented both startups and Fortune 100 companies in such cases. "It also shows that you're serious about your claim of right."
Next, have the other party sign a short agreement upfront that says the two companies met and includes a general definition of the concept being discussed. The agreement should also say that the information is being disclosed so the other party can decide whether to enter a joint venture, and that this is the only way the information can be used.
Entrepreneurs sometimes shy away from tough negotiating, but a Fortune 500 company "wouldn't think twice about asking another company of equal size to sign such an agreement," Albert says.
Wrap It Up, Already
A big company has to do its own due diligence, but you're at risk if months pass without a deal in place. "The cases I have in my office generally have a nego-tiation period of six, seven, eight months, sometimes longer," Berg says. "It's important to keep pushing for a deal."
Research the other company's joint ventures, partnerships, and legal cases for red flags before the first meeting. You never know what you might find.
Bidland's negotiations fell apart after more than six months of starts and stops. "Don't get so excited that [you] allow yourself to be taken advantage of," says Augustine, who now works in Norwalk, Connecticut, for global sports marketing firm Octagon Worldwide. "You've got to be careful."