Litigation as competition by other means

Appellate Division, Second DepartmentAnyone involved in intellectual property litigation, whether as a party or an attorney, is aware that it has become a method for eliminating competition or threats to competition, without  regard to legalities.  I’ve written about this so many times here that it is tiresome even to link to myself.  (UPDATE:  But I went back, and I did.)  Even under the best of circumstances — where judges really perceive, substantively, what a meritless lawsuit is really about — the legal system is hopeless skewed against innovation and free enterprise.  Under the American Rule, the cost of maintaining a meritorious defense to relentless litigation is prohibitive and what fee-shifting is available favors is applied with sickening asymmetry, virtually always favoring the party to which legal fees mean the least.  And that, again, is the “good judge” scenarios.  There are others.

Eric Goldman links to a heart-rending account of a particular high-profile version of this all-too-familiar narrative, a piece by Dmitry Shapiro, founder of Veoh Networks.  He says it better than I can (or did), and puts his company’s experience (and his sad personal experience) into the framework of the SOPA / PIPA debate:

We did EVERYTHING that we could to make sure that our business was sound, legal, and good for the world at large.

Unfortunately, Universal Music (UMG), the world’s largest music company didn’t agree [he is giving them an undeserved benefit of the doubt — RDC] and in September 2007 they sued Veoh in federal court claiming that we are infringing on their copyrights. Even though we had worked with many big media companies in protecting their copyrights, following the provisions of the DMCA, UMG scoffed at their responsibilities to notify us of infringement and refused to send us a single DMCA take down notice. They believed that the DMCA didn’t apply. They were not interested in making sure their content was taken down, but rather that Veoh was taken down!

As you can imagine the lawsuit dramatically impacted our ability to operate the company. The financial drain of millions of dollars going to litigation took away our power to compete, countless hours of executive’s time was spent in dealing with various responsibilities of litigation, and employee morale was deeply impacted with a constant threat of shutdown. Trying to convince new employees to join the company in spite of this was extremely challenging.

To make sure that our money supply was cut off, in an unprecedented move, UMG sued not only the company, but our investors (Michael Eisner, Art Bilger, and Spark Capital) personally. This move raised lot of eyebrows in the legal community, and at one point was thrown out by a judge, only to continue to be appealed and litigated by UMG. This completely choked off all of our financial oxygen, as trying to convince investors to invest with the threat of them personally being sued is insurmountable.

There were many a times when we thought about simply giving up and moving on, but my father taught me early in life that you “never back down from bullies”, and we really felt that we were fighting not only for ourselves but for the very freedom of the Internet. I was so fortunate to have brave people by my side to get me through those tough times.

With money running out, we had to “reduce our staff” (fire people that worked their asses off for years, at startup pace, people that were our family). Doing this was by far the hardest thing that I have ever had to do, and makes me emotional to this day!

We reduced our workforce from over 120 people to under 20 and continued to operate the company in “hibernation mode” to live out the lawsuit, as we expected a decision to come down in our favor.

In Sept 2009, the decision did come down with the judge ruling in our favor, but there was no time to celebrate, as UMG with their practically infinitely deep pockets simply appealed.

With the appeal looming, financing continued to be choked off for us, and in April 2010 we had to sell the company in a fire sale to a small startup. The company that we had built, that was once valued at over $130 Million was gone. Along with it went the livelihoods of over 120 people and their families, $70 million of money entrusted to us by investors, and a big part of me. I had sacrificed so much to live the life of an entrepreneur. My marriage couldn’t stand the strain of this lifestyle and ended in 2009, and while all of this was going on, my father was dying. Instead of spending time with him at his bedside, I was sitting in depositions with lawyers, and stressing over the lawsuit. He died July 13 2009, two months before we won the original judgement on the lawsuit. He would have been proud of me for following through with the fight.

I felt so beaten down after this experience, that I couldn’t imagine going back to being an entrepreneur. I was disenchanted, disgusted by the system that would allow these kinds of behaviors to go on, and it is not until recently that I have been able to come up to bat again. In fact, you are reading this on my new endeavor

I hope that this one will not meet the fate of Veoh 🙂

Coincidentally, last month a federal appeals court once again ruled in Veoh’s favor. The DMCA works, but proponents of SOPA / PIPA want something else, because they feel that the DMCA doesn’t give them the power they need to stifle innovation and protect their turfs!

It’s not just SOPA and PIPA stuff.  Every day plain old garden-variety business disputes and threats to established businesses and business models are responded to by lawsuits dressed up as intellectual property claims, sold by law firms as cure-alls for obsolete business models, cloaked price-fixing or tone-deaf customer service and responsiveness, and dressed up with outrage over the audacity of the upstarts’ ethics, “free riding,” “diversion” or other phony offenses.

For every Righthaven situation where not only a single judge, but an entire court, decides that enough is enough and makes a plaintiff pay for its abuse of the courts, a hundred plaintiffs either drive a legitimate startup into the ground by securing a legally indefensible ruling — whether in an injunction hearing, a discovery dispute or in some pathetic parody of a trial — or providing the lawyers for such companies the dubious chance to achieve that bitterwseet folk glory that comes with accumulating Pyrrhic legal victories for companies that, like Veoh, can’t afford enough justice to keep the lights on by the time it arrives.

It is relentless, and the real scandal is that while in many cases the plaintiffs in these cases are very much in the drivers’ seats, often it is hard to tell what possible business rationale there could be for their actions.  In the last few months I have, with God’s help, achieved successful outcomes in two, or depending on how you measure it, three post-trial motions seeking fees or the imposition of an appeal bond against parties who could never have paid those fees or posted those bonds if they had been imposed, or imposed as requested by the respective plaintiffs.

In each case, the legal issue of whether the relief sought should, under the applicable statutory standards, have been awarded was not particularly close — in other words, I am not claiming that these “victories” were particularly brilliant legal achievements.  I am just lamenting that they had to be achieved — and that someone had to pay tens of thousands of dollars in legal fees for this patently frivolous motion practice in and of itself.

What exactly is going to be the straw that breaks the camel’s back before the next Veoh?

Originally posted 2012-03-12 15:41:32. Republished by Blog Post Promoter

By Ron Coleman

I write this blog.

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