Legal · Legal agreements

Would you sue an illegal competitor?

Greg Lipinski Patent Examiner at USPTO

August 1st, 2016

As a startup, I know that lawsuits are probably a waste of time, but we're considering it because some budding competitors in our space are breaking regulations. To add some context, this is consumer facing product where all the companies in the space are less than a year old and have raised less than $1.5 million each.

1. Are we required to report illegal actions as soon as possible, or can we wait until later to make a case?
2. If you're an investor and a company you invested in gets sued for an illegal action, how do you respond? Ask the company to pivot or demand your money back?

Joseph Wang Chief Science Officer at Bitquant Research Laboratories

August 1st, 2016

It really depends on the regulations. For example, in the financial space, you are legally required to issue a report to the Treasury Department if you suspect money laundering. If they are breaking health and safety regulation, I'd report just because I'd prefer to sleep better at night.

However:

1) In most cases you can file a report to the authorities. It's up to the authorities to do something about your report. If you find someone that is violating environmental regulations, and the EPA decides to do nothing, then you can't do something on your own.

2) In a lot of situations, the authorities will do nothing because everyone recognizes that the regulations are extremely broken. Also, it could turn out that the people involved really aren't breaking regulations, but rather bending them really hard. The regulators will look at how "bad" the breach is, and they may conclude that the situation isn't bad enough for them to take action.

One thing that you should expect is that people that bend or break the law (regardless of whether that's a good thing or not) generally have an *excellent* understanding of the law.  I found out from being a landlord that people who are problem tenants have an encyclopedic knowledge of landlord-tenant law, so if you are going to fight them, you should expect to spend a lot of time and energy, and for them to fight back.

3) If an investor invests in a company that gets sued in a way that the investor doesn't expect, then they should kick themselves for not doing due dillegence. Usually the types of lawsuits that one should expect are something that you should be able to figure out in advance. In some cases, being sued is a good thing. If you are a high tech company, and someone issues a *private* law suit for securities fraud or software patent infringement, then call your lawyer and break out the champange. Once you get big enough, you *will* be sued for securities fraud and IP infringement, and getting sued for those things means that you are a success.


Dave Lemley Consulting Technologist

August 1st, 2016

Probably a waste of time at this juncture. You're a patent examiner, so you probably already know, but the endgame of most legal actions is not to win the case in court, but settle or just exhaust the opponent. You need to be prepared to spend (waste) a lot of resources to do that on the offensive, and as you say you (and 'they') don't have them.  "Mutually Assured Destruction" (mad, haha)
Rather, I would suggest spending your resources on getting market/mind share as quickly as possible. You already know your competition, so fight them on merits. Sometimes 'merits' is 'doing the right thing' (i.e. complying with regulatory requirements).
So if you want to wage war on this ground, you could instead make a marketing initiative emphasizing your compliance with regulation XXX. E.g. "naturally we comply with, and exceed, ISO-xxx, as you should ask any of your vendors to do as well".
Think creatively, and play nice. Your enemies sometimes become your allies. 
E.g. oldie but goodie:  SEA vs PKWare.  Legal actions are so 1750 bc; too bad we really haven't come up with much better since, alas...

Marcia Allen Founder and COO BioTech Solutions Enterprise Group, Ltd, LLC

August 1st, 2016

what's the illegal action?

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

August 1st, 2016

Greg: As a lawyer I can tell you that litigation should never be entered into lightly. It is almost always expensive  and can be time consuming. Analyze it as risks versus rewards. The questions you asked cannot be answered in the abstract or hypothetical. You say "breaking regulations". Whose regulations? Is there an agency with enforcement authority? Who is being impacted? Consumers? Competitors? As to what investors would do if teh company gets sued there is no right answer either.  A VC fund or professional investor would likely have done due diligence. If thy missed something they may have no remedy. If they were lied to, or something was concealed, they might.  

Paul Garcia President at TABLE

August 4th, 2016

Often a CEO to CEO phone call is a good way to start. Even when companies hate each other, executives can reach out and be gentlemen about the situation, because both of them want to stay in business. Start by deciding what it is you really want. If you don't know what you want the outcome to be for certain, it's best not to pursue a course of action to drive things there. Always communicate before you litigate.

Kendall Jones Attorney

August 1st, 2016

In short, probably not. I would need to understand a lot more about your business, the nature of the regulations being broken, your own obligations under those regulations, and the damage that might result from those broken regulations. But in general, unless your direct product or service is being stolen (i.e. your IP is being infringed), a start-up should focus all available resources on being the best (and most legal/ legit) in the field. You rise to the top by excelling in your own right, not by taking out others, including others who cheat. I've been practicing business law for 21 years and as cliche and cheesy as it sounds -- those guys who are cutting corners will get theirs soon enough. Just stay out of their way, keep your nose down, and keep doing things the right way. Now if you "need" to report them to regulators as part of your own legal duty under those regulations, then you might do so after mulling over the pros and cons of that, but that's a far cry from suing them yourself.

Irwin Stein Very experienced (40 years) corporate,securities and real estate attorney.

August 4th, 2016

Respectfully, Mr. Chan, I do not recommend a cease and desist letter unless you are prepared to follow through with a court action to get a cease and desist order from a judge. Making threats that you cannot or do not intend to back up is a waste of everyone's time.  And I would not threaten to go to a regulator. If a regulator has jurisdiction, I would advise filing a formal complaint and following up. But there must be a demonstrable harm to someone.  Government agencies all have budget constraints. A situation like this does not lend itself to a discussion on this type of public forum. The devil is very much in the details and no details have been disclosed.  And just to state what should be obvious, somethimes there is nothing to be done in a situation like this. Sometimes the bad guys win. 

Marcia Allen Founder and COO BioTech Solutions Enterprise Group, Ltd, LLC

August 2nd, 2016

I agree with all the responses.  No one wins but the criminals going to court because you really will be driven down financially as a small company and it takes a long time to recover even when it's a clear-cut case.  I've been involved in three lawsuits and it really benefits the criminals.  We are a Service Company and the latest is one of our territories being hijacked by veteran staff.  10 months into it and about $75,000 we're only halfway home. We got a restraining order and preliminary injunction they continue to do business and we got a new judge from family law who doesn't understand IP law the way the other judge does. She actually said she doesn't want them to have an injunction because they could go out of business. I told our lawyers will this small woman owned business which may be out of business if you don't continue with an injunction.

Michael Meinberg Teacher (iOS Development) at The Mobile Makers Academy (A Hack Reactor School)

August 1st, 2016

Instead of suing, start with a demand letter (from a law firm would be best).  It is inexpensive, and may do the trick.

Peter Kovalsky Principal at Law Explainer

August 7th, 2016

I'm going to start with an unhelpfully lawyerly "It depends." You're certainly right that filing suit yourself is likely to exhaust your resources without really achieving your aims.

That said, it very much depends on the regs/laws being broken. This is because different laws have different enforcement mechanisms in place -- some create what's called a "private right of action" (the ability of an impacted private party, in this case you, to sue), some create or appoint regulatory bodies to ensure compliance (like the EPA or the EEOC), and some do both. 

If the particular rules being broken here are enforceable by some government oversight body, filing a complaint/notice with that body is a relatively costless option for you.

Another possibility is to go directly to their investors, if you know who they are -- especially if you can track down a "big name" investor whom you can be sure has lawyers looking over this stuff. Investors as a general rule are (1) not interested in participating in or facilitating lawbreaking, and (2) interested in getting a return on their investment, which is generally anti-correlated with illegal activity.

Which is all to say that no, you almost certainly shouldn't sue, but there are very likely other ways of applying regulatory and/or financial pressure.