Technology start-ups and big companies work together all the time — refining ideas, seeking mutual advantage and accelerating the pace of development of new products and services. But these odd-couple relationships can be fraught with peril, The New York Timess Steve Lohr reports.
Steve A. Stone, a veteran product manager at Microsoft, had an idea for an innovative way to identify and track digital objects across the Web. So he set up shop for a new company in his garage in suburban Seattle, and convinced a few Microsoft colleagues to join him. They began building their software, working late many nights, fueled by spaghetti and takeout Subway and Quiznos sandwiches.
The start-up, Infoflows, began working with Corbis, the big photo library and licensing company owned by Bill Gates, Microsoft’s chairman, and in June 2006, the two signed a multimillion-dollar development agreement.
But four months later, things fell apart, culminating in a Washington State jury verdict against Corbis for misappropriation of trade secrets, fraud and breach of contract. The jury awarded damages of more than $20 million.
In a statement, Corbis said it was “disappointed by the outcome in the trial and believes that the trial court made substantial legal errors.” It plans to appeal and said it was “confident that it will ultimately prevail.”
The Infoflows-Corbis story is a striking case of a partnership between a start-up and a big company gone bad, and a catalog of pitfalls to avoid — courtroom battles, millions in legal costs and a business in limbo for years.
“What you want is the business equivalent of no-fault divorce,” said Josh Lerner, a professor at the Harvard Business School. “You want the ability to experiment, fail and disengage, and move on, to keep the innovation process moving forward.”
There was no amicable split between Infoflows and Corbis.
In court filings and testimony, Corbis asserted that Infoflows was a poorly performing contractor that Corbis had patiently tried to work with, but finally gave up on. Except for a small sliver of technology belonging to Infoflows, Corbis said, all the work produced and the intellectual property was owned by Corbis.
Infoflows saw things differently. “They took our ideas and tried to claim them as their own,” Mr. Stone said. “And they tried to crush a little company.”
Settlement talks a few months ago failed. Mr. Stone and his Infoflows colleagues were willing to be interviewed now because, they say, they want their account of events made public as they try to restart their business. They also say they hope the court ruling in their favor may deter other big companies tempted to bully a start-up, as they say Corbis did.
It is also the case that as a result of the ruling Mr. Gates — who owns Corbis, but is not a party to the suit — had to personally put up a bond of more than $20 million for damages assessed. Infoflows will not get a penny of that money until the appeal process concludes, if Infoflows prevails, or a settlement is reached.
In addition to its statement, a lawyer representing Corbis offered an overview of its position, answered specific questions and supplied court documents and testimony, on the condition that he would not be quoted.
Infoflows may hold the upper hand now, but the long legal battle has taken a toll on the founders, they say. Retirement accounts and savings, they say, have been drained to pay legal fees. Still, unlike many start-ups, the Infoflows founders did have resources to battle the big company. And they had little choice.
In October 2006, Corbis told Infoflows that it was terminating the contract it signed four months earlier. Mr. Stone said he was stunned but just wanted to move on. When Infoflows put up its public Web site in January 2007, Corbis filed suit, claiming any Infoflows digital content-tracking product would be illegally using Corbis’s proprietary technology. Infoflows countersued the same day.
Infoflows, its founders say, talked to potential customers and venture capital backers. But the litigation with Corbis scared them away. “No one wanted to come near us,” recalled Carlo Martin, a former engineer at Microsoft. “It shut us down.”
Infoflows, which had leased offices in Redmond, Wash., retreated to Mr. Stone’s garage. For Mr. Stone, overseeing the legal battle with Corbis was a full-time job, but the other five founders sought outside work, mainly as consultants and contractors.
For Infoflows, the Corbis deal was a big bet on one customer. And the start-up went into the partnership without patenting its software or system for tracking digital rights, a further risk.
Technology start-ups that work with big companies, said Kevin Rivette, a Silicon Valley consultant, should take care to protect their most valuable ideas, even as they collaborate. “Innovation without protection is philanthropy,” said Mr. Rivette, a former vice president of intellectual property strategy for IBM.
Mr. Stone said he felt no rush to patent because he wanted the joint work with Corbis to move closer to a finished system. Infoflows, he said, would develop the underlying system for identifying and tracking digital objects across the Web, and Corbis would own the application for its photo-licensing business.
In December 2006, after Corbis terminated its agreement with Infoflows, Mr. Stone met with Corbis managers to discuss details of the breakup. Corbis said the intellectual property it claimed as its own was covered in the nonpublic patent Corbis had filed back in January of that year. It was the first time Mr. Stone had heard of Corbis patenting the work, he said. “I was shocked,” he recalled.
The Corbis patent, Infoflows said, was a move on its ideas. Mr. Stone said he had an oral agreement with Corbis, supported by an e-mail exchange, that neither side would file for patents until their work was well along. Corbis denied any such agreement.
In court, a Corbis lawyer and a software designer testified that they had put the patent application together fairly quickly over a weekend. The Infoflows lawyer called this the “immaculate invention,” and submitted Infoflows documents intended to show that Corbis had pilfered the start-up’s trade secrets. Corbis countered that most of what Infoflows claimed as its inventions was already in the public domain.
The case included 26,000 pages of documents and 21 depositions. Much of the trial revolved around technical matters of software and business methods. Each point was disputed, as in an interminable he said-she said argument.
For example, Corbis asked Infoflows in 2006 to help it gather evidence on a digital pirate, who was taking Corbis-licensed photos and illegally reselling them. Infoflows did, and a Corbis manager sent an e-mail message of thanks. “First of all, let me just say how friggin awesome you guys are. Seriously, this is HUGE, and you guys ROCK!”
In court, Infoflows presented the episode and e-mail message as evidence that its technology indeed worked. Corbis said Infoflows did a good job, but mainly by working long hours and using software made by others.
Legal experts say accusations of misappropriation of trade secrets can be very difficult to prove — more so than patent infringement — because such business secrets can be hard to clearly identify and to show as being under legal protection. “The court must have felt there was a real injustice here,” observed Mr. Rivette, a former litigator.
That is an issue for the appeals court.
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