Corporate Raider A joint venture with a big company sounds great -- until they back out and take your idea with them.
By Chris Penttila •
Opinions expressed by Entrepreneur contributors are their own.
The year 2000 started out well for Doug Augustine. His more than75-employee San Diego company, Bidland Systems, had developedsoftware for online auctions and was pursuing a joint-venture dealwith multinational telecom company Telefonica for Spanish-speakingmarkets outside the United States.
The good times ended when Bidland sued Telefonica in 2000 forbreach of contract, alleging that Telefonica promised a jointventure to access Bidland's marketing strategy andtechnology--information Telefonica then used to start its ownauction site, Katalyx.com. The case was settled in November 2004for an undisclosed amount, but Bidland didn't live to see thatday--unable to raise funds or sell the business with the lawsuit inprogress, the company ceased operations in 2001. "At least wegot our investors their money back," says Augustine, 47."[But] it's a hollow victory."
Welcome to an entrepreneur's worst nightmare: A largecompany calls, promising the moon, and you end up out of business,watching your ideas go to market without you. As intellectualproperty increasingly drives business, more companies are fightingover it: 2,978 U.S. patent suits were filed between March 2003 andMarch 2004, an increase of nearly 8 percent over the prioryear.
Such lawsuits can be costly. Trade secret misappropriation suitswith $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 anaverage of $2 million, according to the American IntellectualProperty 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 joiningforces 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, apartner with New York City law firm Berg & Androphy who has represented Bidlandand other small firms alleging idea theft. In many of these cases,Berg says, the smaller company protects itself throughnondisclosure agreements and by withholding information early on.But the smaller company can feel pressure to spill the beansbecause it needs the larger company's resources. "A lot oftimes, 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, butmost leave room for either party to claim that nothing new has beeninvented. "Whatever's in the public domain is fairgame," Berg says. "That gives both sides room to comeback later and say, 'Oh, we always knew how to dothat.'"
Who brought what to the table during a brainstorming session isanother problem. This is why documentation, starting with a patentor copyright, is so important. A full patent application, however,can cost $10,000. Another option is the provisional patent apreliminary step to filing a regular patent that provides 12 monthsof patent protection. It requires less attorney time and oftencosts less than $1,000. "It's a good investment,"says Jennifer Albert, an intellectual-property attorney in theWashington, DC, office of Hunton & Williams who has represented bothstartups and Fortune 100 companies in such cases. "It alsoshows that you're serious about your claim of right."
Next, have the other party sign a short agreement upfront thatsays the two companies met and includes a general definition of theconcept being discussed. The agreement should also say that theinformation is being disclosed so the other party can decidewhether to enter a joint venture, and that this is the only way theinformation can be used.
Entrepreneurs sometimes shy away from tough negotiating, but aFortune 500 company "wouldn't think twice about askinganother 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 atrisk if months pass without a deal in place. "The cases I havein my office generally have a nego-tiation period of six, seven,eight months, sometimes longer," Berg says. "It'simportant 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 neverknow what you might find.
Bidland's negotiations fell apart after more than six monthsof starts and stops. "Don't get so excited that [you]allow yourself to be taken advantage of," says Augustine, whonow works in Norwalk, Connecticut, for global sports marketing firmOctagon Worldwide. "You've got to be careful."
