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Technology
startups 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.

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, fuelled by homemade spaghetti and
takeout Subway and Quiznos sandwiches.

The startup,
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 court awarded damages of more than $20 million.

In a statement
last week, 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, it seems, is a striking case of a partnership
between a startup 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,” Stone said. “And they tried to crush a little company.”

Settlement talks a
few months ago failed. 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 favour may deter other big
companies tempted to bully a startup, as they say Corbis did.

It is also the
case that as a result of the ruling 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. A newspaper article on the suit and the ruling
could be a prod to settle the case, or harden positions on both sides.

In addition to its
statement, a lawyer representing Corbis offered an overview of the
company’s 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 protracted legal battle has taken a toll on
the founders, they say. Retirement accounts and personal savings, they
say, have been drained to pay legal fees. Still, unlike many startups,
the Infoflows founders did have resources to battle the big company.
And they say they had little choice.

In October 2006,
Corbis told Infoflows that it was terminating the contract it signed
four months earlier. Stone said he was stunned but just wanted to move
on. When Infoflows put up its public website in January 2007, Corbis
filed suit, claiming any Infoflows digital content-tracking product
would be illegally using Corbis’ 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 Stone’s garage. For
Stone, overseeing the legal battle with Corbis, which is based in
nearby Seattle, 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 startup went into
the partnership without patenting any of its software or system for
tracking digital rights, a further risk.

Technology
startups 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 Rivette, a former vice president of intellectual
property strategy for IBM.

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, 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
non-public patent Corbis had filed back in January of that year. It was
the first time 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. 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 there was any such agreement.

In court, a Corbis
lawyer and a software designer, neither of whom still works at Corbis,
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 startup’s trade secrets. Corbis
countered that most of what Infoflows claimed as its inventions was
already in the public domain.

The case, tried
over three weeks, 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 sharply 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 the e-mail message as evidence that
its technology did indeed work. Corbis countered that Infoflows did a
good job, but mainly by putting in long hours and using software tools
made by other companies.

Despite the
mountains of documents in the case, some crucial ones – technical
drawings and certain contract details, for example – remain sealed,
though they were shown to the jury.

Legal experts say
accusations of misappropriation of trade secrets are often 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 Rivette, a former lawyer and litigator.

That is an issue for the appeals court.

© 2010 New York Times News Service