Be Wary When Partnering
Partnering with large companies is often the most effective way to grow your business. You gain a new sales channel, learn from those with more experience and knowledge than you, and add credibility to your business. Yet the path can be risky. Selling a potential partner on the merits of your business can require you to disclose intellectual property with no guarantee that you will close a deal. You can reduce your risks by taking several steps to protect yourself (see BusinessWeek.com, 4/3/07, "Tip Sheet: Negotiating a Partnership Agreement").
While not indicative of most partnership negotiations, this column follows the ongoing story of one potential match that went sour. I offer it as a cautionary tale for any business considering a partnership that involves intellectual property.
A Bright Idea
In 2003, Kivin Varghese, then a brand manager at Gillette, had a business idea: A Web site that would pay subscribers to view targeted ads. Advertisers could be sure that their messages were really reaching their audiences because the site would prompt subscribers to answer a simple question about each ad. And his fees would beat traditional advertising fees.
So Varghese quit his job at Gillette and spent the next two years building software and perfecting the business model (see BusinessWeek.com, 5/12/06, "Countdown to Product Launch (Part II)") for his startup, which he named BrandPort. He set out to design ways to prevent fraud, make the user experience fun and rewarding, and ensure the subscriber payment system worked effectively. He also filed several patents to protect his technology (see BusinessWeek.com, 2/5/07, "To Patent or Not to Patent?").
Shortly after his site's launch in the spring of 2004, Varghese was running advertising campaigns for companies like Procter & Gamble (PG), Coca-Cola (KO), and L'Oréal. By paying 25¢ for every 30-second commercial watched, BrandPort was able to sign up more than 20,000 subscribers.
Buoyed by his success, Varghese decided to approach Virgin Mobile USA as a potential advertiser in September, 2005. According to a complaint that Varghese filed, this is what happened: Instead of simply wanting to advertise through BrandPort, Varghese says that Virgin Mobile's tests of his platform proved so successful that representatives asked BrandPort to develop a service that would offer cell-phone minutes for watching ads. Varghese says this meant he would have to disclose proprietary information, so he asked Virgin Mobile to sign an agreement not to disclose new information it gained for any purpose other than evaluating his offering. Both parties signed a nondisclosure agreement in late 2005.
Varghese says that he had several meetings with the Virgin Mobile marketing team and other executives at their offices in New Jersey during which he shared his experience and plans. And then in February, 2006, he says Virgin Mobile requested that he send more detailed technical information and a proposal to build a platform along the lines they had discussed.
After submitting his proposal and making a formal presentation to Virgin Mobile management, Varghese says they stopped returning his calls and e-mails. Three months later, he was shocked to see a press release titled "Earn Airtime in Your Spare Time - Virgin Mobile USA Customers 'Ad' Airtime in Breakthrough New Incentive Service: Innovative SugarMama Program Offers Airtime in Exchange for Viewing Web-based or Mobile Advertisements from Top Brands…" that announced Virgin Mobile would be launching a program Varghese found overwhelmingly similar to his business.
Varghese alleges that Virgin Mobile breached contracts, acted in bad faith, and misappropriated his company's trade secrets. On June 13, 2006, he filed a complaint seeking an injunction in New Jersey State Court asking for a delay in the rollout of the SugarMama Program until Virgin Mobile could prove that concepts and methods were independently created. Virgin Mobile denied Varghese's allegations and claimed that the user interface and advertising methods they employed were already in the public domain and that some of their core technologies were developed long before BrandPort came into existence.
Claims of Victory
The judge denied the preliminary injunction on the grounds that BrandPort could not prove it would suffer irreparable harm, and a monetary award could compensate for any wrongdoing if it was later proven to have occurred. The judge's decision stated hardships would actually fall on Virgin Mobile "who would lose millions of dollars in advertising revenue and suffer irreparable damage to its goodwill in the eyes of its customers and advertisers if an injunction was issued." She cited Virgin Mobile CEO Daniel Schulman's certification that he conceived their advertising program prior to any meetings with BrandPort.
I contacted Virgin Mobile for this column. After promising that its CEO would speak to me, the company's spokesperson e-mailed me a statement saying, "Brandport's speculation that any confidential information was misused or that a non-disclosure agreement was breached are unfounded. Last year, Brandport's requests for a temporary restraining order and a preliminary injunction were denied by the courts. From the court order [p. 15 footnote], "This Court notes that Plaintiff has not yet demonstrated that it has any valid trade secrets that warrant protection. You will also note that:
* "many of the similarities between [Virgin Mobile's] Sugar Mama and Brandport's proposal are in the public domain…[and] cannot qualify as trade secrets… [p. 10]
* "[Brandport] has been unable to successfully rebut these certifications or show that it has any likelihood of succeeding on a misappropriation of a trade secret claim." [p. 13]
The spokesperson's e-mail continued: "For more than a year, Brandport has been unable to identify, for us or the courts, any trade secrets which it alleges were misappropriated. In fact, Virgin Mobile USA recently filed a motion to compel disclosure of Brandport's alleged trade secrets. The Virgin companies were founded on, and celebrate, the entrepreneurial spirit. Successful companies, regardless of size, are often the target of unbased litigation. We trust the courts will continue to uphold our position."
Just the Beginning
But I think the Virgin Mobile spokesperson misses the point. The preliminary injunction is only the first step in the process. In my experience, most of the facts are uncovered in the next phase, the discovery process. And although the judge denied the preliminary injunction, the case is now in this fact-finding process. This means both sides are now required to produce requested documents and notes and to provide sworn testimony while they search for facts to prove their position to the judge. It is hard to know what will happen. At this point, the ongoing case provides a look at the downsides of seeking partnerships.
Still, this is not how most partnership negotiation efforts end. I have founded two technology companies and have negotiated dozens of successful partnerships and attribute my greatest successes to these. Most businesses that achieve success do so through win-win partnerships with others. But bottom line: My advice is to always be wary when negotiating a partnership agreement that involves intellectual property.