The Competitive Dangers Of Startups Partnering With Business Goliaths
David M. Kleiman – U.S. Patent Attorney

According to a July 2020 article in the Wall Street Journal, Amazon has, in recent years, repeatedly met with startups under the auspices of providing funding or strategic partnerships only to use the proprietary information gained from the startups to launch competing products. Sadly, this type of behavior by a large company like Amazon (if true) is not unprecedented. It highlights the many challenges a startup faces when engaging with a more established company for acquiring funding or other resources while also protecting what is often the startup’s most valuable asset – intellectual property rights.

As a patent attorney, I help businesses secure intellectual property rights against theft and misuse by competitors. Of course, when it comes to securing exclusive rights in an invention, patent protection is often essential.

However, relying upon patent protection alone is rarely, if ever, a prudent competitive strategy: This is especially so for any startup or small business enterprise that will be engaging with other companies to seek out funding or a licensing deal to develop and commercialize an invention. Good contracts when dealing with a third party in such situations are critical. To show how true this is, consider the case of Celeritas v. Rockwell (a lawsuit won by my former law firm who represented the plaintiff Celeritas).

Celeritas was a small startup company in the early 1990s co-founded by the inventor of an apparatus for increasing the rate of data transmission over analog cellular telephone networks (“de-emphasis technology”). This de-emphasis technology had particular applications to computer modems widely used at the time. The inventor had filed a U.S. patent application in July of 1993 for his de-emphasis invention. In September of 1993, the inventor and other officials of the small startup Celeritas met with representatives from Rockwell to demonstrate their proprietary and patent-pending de-emphasis technology, hoping to strike a deal. Rockwell was the leading manufacturer of modem chipsets that contained the core functions of commercial modems. Celeritas and Rockwell entered into a non-disclosure agreement (NDA), which covered their meeting’s subject matter.

However, In March of 1994, Rockwell informed Celeritas that it would not license Celeritas’ proprietary technology, and concurrently began a development project to incorporate de-emphasis technology into its modem chipsets. Significantly, Rockwell did not independently develop its de-emphasis technology but instead assigned the same engineers who had learned of Celeritas’ technology under the NDA to work on the de-emphasis development project. In January 1995, Rockwell began shipping its prototype chipsets containing de-emphasis technology and soon experienced sales that surpassed its projections. In September of 1995, after successfully receiving a patent, Celeritas sued Rockwell for breach of contract, misappropriation of trade secrets, and patent infringement.

Unfortunately, the Celeritas patent did not survive the court battle. BUT the court found the signed NDA was a valid contract and that Rockwell had breached its agreement with Celeritas. The result? A nearly $58 million breach of contract win for Celeritas.

The lessons of the Celeritas case are two-fold:

  1. When sharing confidential information with others, don’t just rely upon a patent application or a patent. Protect your interests further by making sure the necessary contracts are first in place.
  2. There is always some risk that the other side in a deal won’t hold up their end. Consider this risk when considering the potential rewards of any agreement. As shown in the case of Celeritas, a court battle can last years before coming to any resolution, and there is no guarantee of success. A prolonged legal action is financially out of reach for a startup or small business in many cases. Larger competitors often take advantage of the uneven financial playing field.

While Celeritas v. Rockwell happened many years ago, as shown by the recent Wall Street Journal article, the same dangers to startups and small businesses continue to exist today. Ask yourself if your business has the resources (financial and otherwise) to take on a Goliath company like Amazon in court and win?

There are David vs. Goliath success stories out there, like the case of Celeritas v. Rockwell. Just remember that David beat Goliath because he was smart enough to have a sling he knew how to use. Celeritas beat Rockwell because it knew how to use the law and had a contract claim to fall back on when its patent didn’t survive.

Minimize your risk when dealing with other companies by first:

  1. Filing all relevant government applications (e.g., patent, trademark, and copyright) to protect intellectual property rights; AND
  2. Having strong contract protections in place.

Hopefully, you will only deal with those companies who stay true to their word and compete fairly. But if not, you will at least be well-armed legally to protect what is rightfully yours. How well-armed you are legally (i.e. how strong your case is) is often a deciding factor in the availability of legal representation on a contingency fee basis. In many cases a lawsuit will be out of reach financially to a startup without a contingency fee arrangement.