Amazon lawsuit could sour high-tech startups
Copyright © 1998 Nando.net
Copyright © 1998 Reuters News Service
PALO ALTO, Calif. (October 23, 1998 11:38 a.m. EDT
nandotimes.com) - As software giant Microsoft Corp. fights
charges it unfairly trampled competitors, another lawsuit is calling
attention to ways much smaller players might also gain an unfair
advantage.
Wal-Mart Stores Inc. last week sued Amazon.com Inc., charging the online
bookseller stole trade secrets by hiring a group of Wal-Mart employees
with knowledge of its computer systems.
Although Amazon is a leading merchant on the Internet, it is diminutive
next to Wal-Mart, which generates as much revenue in a day as Amazon
does in a year.
More importantly, Wal-Mart is not suing Amazon alone.
Also named as defendants are Kleiner Perkins Caufield & Byers, the Menlo
Park, Calif., venture capital firm that funded Amazon in its infancy and
helped it put together a management team. Another Kleiner Perkins
start-up, Drugstore.com, is also named in the lawsuit.
Experts said the lawsuit could challenge the practices that are
routinely used to build new high-tech companies, which have been a major
source of innovation and growth in the overall economy.
"It could give one pause about how they do things," said Eugene Weber,
president of the venture capital firm Bluewater Capital Management. "If
you have to consult a lawyer every time you hire a talented person, it
makes life more difficult."
Another investor with ties to Amazon said, "It could be chilling to the
formation of new companies."
Amazon.com may appear to have mastered the business of selling goods
over the Internet, but it is still a very young company and lacks a
cutting-edge technology that for years has supported Wal-Mart's rapid
growth. Wal-Mart's Retailink system, is the envy of the retail world for
the way it minutely tracks inventories and feeds the data back to
vendors.
Knowing how much inventory is needed in different stores can mean the
difference between maintaining a costly warehouse near a store site, or
having vendors ship directly. Such a system could clearly benefit
Amazon, which has plans to eventually sell a range of products besides
books and music, and has even been dubbed the Wal-Mart of the Internet.
Wal-Mart's lawsuit alleges Seattle-based Amazon, and to a lesser extent,
Drugstore.com in Redmond, Wash., systematically hired employees away
from Wal-Mart in an effort to gain knowledge of its successful computer
system.
"These companies are sitting in Silicon Valley and close to Microsoft,
so we find it unusual that they would go to Bentonville, Ark., to hire
people," a Wal-Mart spokeswoman said. "We believe they came looking for
specific information."
Whether hiring an employee from a competitor amounts to stealing trade
secrets is a question most venture capitalists and start-up businesses
would rather not have to answer.
High-tech start-ups have thrived in an environment in which employees
move around a lot. "That's why you hire them," maintains Weber, "You're
looking for certain skills."
Amazon insists it has no interest in Wal-Mart's trade secrets, but only
in finding talent, wherever it may be.
It found a disproportionate amount of talent in Arkansas. Wal-Mart says
Amazon hired 10 of its current or former employees, including Richard
Dalzell, who is now Amazon's chief information officer.
Although it is a fuzzy area, legal experts say there is precedent for
individuals being barred from going to work for a competitor if it seems
inevitable they will take confidential information along with them.
This principle of so-called inevitable disclosure has been used to block
an employee with a bagel maker from going to work for a competitor,
among other cases. It has generally not been enforced in California,
where most venture capitalists are based, and where most high-tech
start-ups are formed.
"It would be a very hard case to win in California," said Tom Peterson,
a venture capitalist with El Dorado Ventures.
"California is more liberal on this issue than the others. Our whole
economy is built on the knowledge you acquire in companies. You can
market yourself based on your worth."
The Wal-Mart lawsuit, however, was not brought in California but in its
home turf of Benton County, Ark., which has less sympathy for the
startup-driven economy of Silicon Valley.
"If they try to replicate our systems, it wouldn't really be a new
start-up, would it?" a Wal-Mart spokeswoman said.
By ANDREA ORR, Reuters |
