Justice prevailed

The verdict is in. Robert Choi has been found guilty of breaching his Specialized employment contract, while the jury found for Barley Forsman, clearing him of any claims by Specialized against him. On the other side, the jury sent Specialized a message that speaks volumes, awarding them a mere $1 in damage.

As I discussed yesterday, I was conflicted in how I would decide if I were a juror. The good news was that only one simple claim, that of breach of contract, remained. The bad news was that given all the damaging emails that Specialized discovered in which Choi sent sales report to the Volagi team, it would have been very hard for me as a juror to say that he did nothing wrong at all. The story was obviously easier for Forsman, who left pretty much right after his resignation.

I can’t look into the jurors mind; I read this post from Bike Radar.com, where Choi was speculating that he was found guilty because of the overlap of contract, in other words for pursuing a bike business while still working under contract for Specialized. I do strongly believe that Choi was just trying to help Specialized in good faith to finish up projects. I don’t buy the Specialized story at all, where they claimed that Choi just stayed on in order to get more access to confidential information. I also don’t believe that Specialized “enticed” him to stay with any wicked motives. Maybe the company or at least some managers really wanted to find an arrangement that worked for both their as well as Choi’s passion to pursue an entrepreneurial career. Be as it may, once the Volagi bike came out, things got pretty nasty.

Robert Choi presented plenty of evidence that showed that he was acting in good faith and told Specialized repeatedly that he was working on his company in parallel. Specialized tried to portray him as building his bike company on their dime by going on business trips for Specialized, yet at the same time visiting future Volagi suppliers. Robert Choi came across credible when he said that he told them about the dual purpose of his visits. They presented hard evidence because Choi gave Specialized a check for the portion of the trip that he did on Volagi business. All that in my view was completely fine.

Because of all of this, I found the Volagi folks credible when they said that they tried to avoid a conflict of interest. As a result, if I were a juror, I would not find either Choi or Forsman guilty because they created their business, even if it was competing. I also wouldn’t care that Choi waited until August 2010 to tell Specialized that it Volagi bike was competing with the Roubaix. The judge specifically advised the jurors that as long as employees are loyal to their employer, in other words were working dutifully on their assignments, they don’t violate the law and have no obligation to tell their employer, even if they are working on a competing business.

But, when Robert Choi while he was still an employee sends company-confidential sales reports to his Volagi team, even making specific reference that those report demonstrate the success of the Volagi company in the marketplace, it is really hard to deny that a company confidentially agreement was breached. Even worse, when Robert Choi, from his Specialized email account, introduces a fictitious person named “Robert Volagi” to a Specialized supplier for potential Volagi business opportunities, it is also very hard to say that nothing was done wrong.

So, in the end I think the jury found Choi guilty of breach of contract, because they just couldn’t possibly look the other way and pretend that none of this evidence was ever presented by Specialized. At the same time, they used their good judgement and scoffed at Specialized’ sob stories and outrageous claims against the Volagi folks and just awarded them $1. That was necessary because as we learned, a breach of contract had to meet a multiple point test, and one of those conditions was that Specialized indeed suffered damages. But I don’t think any of the jurors believed that Specialized was truly harmed, particularly because it was also proven that no confidential information or trade secrets were used to design and produce the Volagi bike.

In summary, I’m strongly convinced that justice prevailed, and most importantly, that the judiciary system has worked as designed. I spent a good part of my week at the trial, and took vacation from my company job. I think it was well worth it. I am very excited to have seen how the judiciary process works in the United States. I learned a lot about the bicycle industry. I’m glad that I got to know the Volagi founders a bit better, and wish them the very best. I’m sure now the big question is whether Specialized will appeal, and whether they will attempt to recover some of their lawyer fees. I keep a last bit of hope that Specialized now finally comes to their senses, their CEO has a bit of decency left and lets this go. If not, I think they are just every bit the litigious company that they are rumored to be, and I will view every attempt to damage Volagi financially as a confirmation of exactly what Volagi’s lawyer Chuck Smith claimed: That this was all about stifling competition and nothing else.

My biggest problem right now: I want a Volagi bike, and don’t know how to tell my wife 🙂

Specialized vs Volagi, final day of trial

The trial continued today with a big surprise: Of the three claims against Volagi, only one remained, which was that Robert Choi and Barley Forsman breached their employment contract by not informing their employer Specialized that they were planning to create a competitive business while they were still employed. The most important win for Volagi today was the fact that the trade secret claims where completely thrown out by the judge. In other words, the claim that Volagi could only build the Volagi bike with knowledge of any trade secrets from Specialized did not longer exist. The whole argument yesterday why Volagi should pay royalties to Specialized for the use of their intellectual property was deemed invalid.

Beside the legal victory, I consider this also a moral win for Volagi against Specialized. It means that Specialized had to concede that it’s Choi’s and Forsman’s bike, their invention alone, not just from a perspective of ownership, but also that they conceived the idea of their bike just by their own intellectual and engineering capabilities. Nothing was stolen that made this bike successful. From a legal perspective, it also meant that Volagi LLC was no longer party to the lawsuit, but only Choi and Forsman are.

On the Specialized side, attorney Rob Shwarts made his argument first to the jury why Choi and Forsman should be guilty of breach of their employment contract. I didn’t really hear anything new. Shwarts tried again to rebuild his timeline I talked about yesterday, argued that Choi intentionally delayed terminating his employment in order to gain more access to competitive information and essentially get paid as an exempt employee which according to Shwarts’ interpretation means that Specialized should have the full undivided attention of Choi as an employee to Specialized matters. The fact that he developed the idea of a bike on the side was portrayed as a breach of contract, and that the bike was going to be competing with the Roubaix a violation of their non-compete agreement that they signed.

Personally, to me the most damaging part of the Specialized story is the fact that they could produce emails that showed that Choi was sending sales reports to the Volagi team, with comments to the effect that Volagi used some of the information for their own sales efforts.

I found enlightening in Shwarts’ closing argument that he made some reference to the fact that Specialized was concerned that other employees would do the same thing as Volagi – threatening the very existence of the company. I don’t know if that is the only motive of Specialized legal efforts, but I think that deterring other employees from doing the same thing is an important driver.

In the end, Shwarts asked the jury to award damages of $41,500 to be paid as royalties to Specialized for the sale of Volagi bikes, or for Choi and Forsman to return that part of their salary that they earned from Specialized while they were also working on Volagi. I could find some logic in the salary argument, but the royalty payment was utterly confusing to me. On the one side, Specialized had to concede that no trade secrets were used in the creation and production of the Volagi bike, on the other side they were asking for royalties. For what? I think it was just a number thrown against the wall that the jury could identify with. In the end, there was just one goal: To show that Specialized had damages, because without damages, there can by definition not be a breach of contract.

After that, Chuck Smith attacked the Specialized line of reasoning. He began by pointing out that of the 9 claims that originally Specialized had used to attack Volagi, only one remains in existence. It’s been a moving target with the only goal to stifle competition and stop Volagi from selling their bike. Specialized founder Mike Sinyard tried to portray the company as a true innovator, and as the “Apple Computer of bicycles” and Smith went through great length to point out why Specialized was different from Apple. He closed by saying that “Mike Sinyard, you are no Steve Jobs”.

Very importantly, Smith quoted the California labor code as stating that nothing obligates an employee to inform an employer that they were planning a business. The only thing that an employee had to do was to be loyal to his employer. He quoted section 2863:

An employee who has any business to transact on his own account, similar to that intrusted to him by his employer, shall always give the preference to the business of the employer.

In other words, he argued that Choi and Forsman had to be dutiful to Specialized, which they were by performing their assigned job responsibilities. But nothing  in this section says that an employee need to be working 24×7, 365 days a week for an employer.

Another point that Smith made was the spirit with which the contract was written. He argued that it was understood by their clients that they could not work for a competitor like Giant or Trek. But nothing should preclude the employees from talking with their friends and spouses of thinking of a better life. If it had meant that they could not do anything competitive, not even plan a business or think about something in the bicycle business, then the contract should have said that – and probably nobody would sign it unless they were truly desperate.

I personally found the defense effective because he distracted from the most damaging piece of evidence: The claim by Specialized that Choi and Forsman had indeed used confidential information (the sales reports) to improve or at least validate their sales approach. I was wondering the whole time whether Smith would flat-out admit that this happened, like he did before, and then try to defend why it would not constitute a breach. Instead, he kept on hammering his competition argument, tried to appeal to the jury that they should not give in to saying “guilty” to the last remaining claim because that effectively gave Specialized the piece of paper that said that Volagi had done something wrong. Smith never mentioned the emails again.

It obviously is not a matter of the 40-something thousand dollars that Specialized would get from the Volagi founders. I’m not sure if Specialized has any sinister motives in mind beyond just putting the label “guilty” on Volagi. Perhaps the whole plan would be to use the guilty verdict as a way to reclaim some of the million Dollars of lawyer fees, bury the Volagi founders under even more legal wrangling until the company would really be done.

And that was it. The judge then gave the jury instructions, and sent them on their way to deliberate. As the judge had a small medical procedure, he could resume only at 2:30pm, and the jury instructions were complete by about 3:15pm. The judge reminded them again about the law, and that they in order to find Choi and Forsman guilty of break of contract, a 6 point test had to be completed. One of these tests was that Specialized had incurred actual damages, which I think is the most important one.

That only left 1 hour 45 minutes for the jury to deliberate, not enough for them to reach a verdict.

It’s hard to speculate about what the jury will decide. Having gone the first time through the whole process, and never been a juror before myself, I have a lot of respect for the job they have to do. I followed the process quite closely, and don’t claim to remember all the facts. So, it’s really what sticks in people’s mind, and I’m sure they will discuss among each other what they remember. Shwarts reminded them that they had to ask one simple question: Did Choi and Forsman breach their contract in terms of keeping confidential information within Specialize and honoring their non-compete clause? If I were to answer this question right now, with what I know, I would have to probably say “YES”. While I don’t buy the argument that the Volagi founders intentionally stayed on in order to gain access to more competitive information, the fact that Choi had sent the sales report is in my opinion a breach of his confidentiality obligation. And it’s not the fact that he sent it; instead, it is the fact that Volagi sales were mentioned specifically in a note related to the forwarded Specialized sales reports. Not good at all!

At the same time, as a juror I would ask how likely the whole Specialized story is. First of all, I am not convinced at all that Specialized really had damages because of the Volagi bike. But that’s also because of my understanding of bikes and the purpose of the Volagi bike. Can I really say for sure that even one Roubaix was not sold because a customer bought a Volagi bike instead? I have no idea, but it’s possible. Is it possible with a likelihood of 51% or more? Hmm, that’s another story. The judge had reminded the jury that in civil trials, there is no role of “beyond reasonable doubt”. I most certainly would have reasonable doubt that Specialized had damages. But is it possible with 51% or more likelihood? I suppose so.

So, while the facts in my opinion speak against the Volagi founders, I would need to weigh the overall situation to come to a decision. And that’s exactly where I follow Smith’ line of defense. That in the end, the whole circus is about Specialized wanting to send a message to their employees. That they want to make it harder for Volagi to compete against Specialized. That they perhaps even want to put Volagi out of business. And with that in mind – which I believe to be true with more than 51% likelihood for sure – would I still feel strongly to convict the Volagi founders of breach? Do I really feel so strongly that they intentionally forwarded the sales report in order to damage Specialized? And besides, if Specialized had to concede that no trade secrets were used, why the heck are they even bringing up these sales reports in the first place?

So, with that said, I do believe that there is a good chance that the jury will acquit the Volagi founders precisely for the overall amount of doubt they have despite the evidence that suggests that they breached their contract. I’ll stick with my prediction of 70:30 that Volagi will not be found guilty. The good news is that the decision that the jury needs to make it simple. The bad news is that the decision is so simple, and it is tempting for the jury to answer with a simple “yes” to the question whether a breach took place. They don’t have to award the $40,000 in damages; they may equally do what the judge pointed out as a possibility, which is to award nominal damages of, say, $1.

Either way, I don’t think the jury will sit on the decision over the weekend. This thing will be over tomorrow, that I can say with almost 100% certainty. Stay tuned …

Volagi vs Specialized – an Observer’s Point of View

As a software and open source guy, I’m naturally interested in the use of intellectual property in business. Even though I have five bikes in my garage,  I don’t know much about the use of intellectual property and trade secrets in the bicyle industry. I just go to the store, and buy the one that rides near perfect. I don’t care about looks too much. Some properties are obviously shared among all vendors: The parts, the geometric proportions of a bike, the fact that it has two wheels 🙂 But I guess for every bike vendor just like for every software vendor, there must be a secret sauce, something unique, and that’s why people buy them.

Some of my bikes are innovative, like the Ritchey Breakaway, which I bought a couple of years ago so I could go for a ride during business travel. The frame breaks apart into two pieces that fit into a medium-sized suitcase that normally every airline carries without additional fees. In order to assemble it, a tiny joint at the bottom bracket holds it together. However, the bike rides like a normal bike. I’ve kept it in the suitcase for far too long, only to be brought out when I travel. Recently, I put it together and now ride it as an everyday bike. That is what I call unique. Ingenious. A great invention that sets the company apart. There are others, like the kind of strange elasticity that Scott seems to have built into their CR1 SL frames that make the carbon stiff, but at the same time comfortable on longer rides.

At the heart of every company there is this incredibly valuable piece of intellectual property that is the core of their business model. I respect intellectual property. As a software guy, IP pays my salary. And as the above examples show, I do believe that even bike companies have valuable IP that they must protect in order to survive.

So, IP is good. But too much IP is bad. No company should be allowed to patent fundamental computer science principles, like a search algorithm. Too much IP can stifle innovation, as it may exclude others from utilizing certain methods, or make it economically impossible to be successful in the marketplace due to unreasonable royalty payments.

With all that, I was naturally interested in the Specialized lawsuit that they brought against a small company called Volagi founded by ex-Specialized people. Specialized claims that the Volagi founders stole their intellectual property, trade secrets and misappropriated their confidential information. The trial was happening this week in Santa Clara Superior Court, so I sat in for about 2/3 of the trial. I had no preconceived notions going in other than what I stated above. If the founders took away part of Specialized’ secret sauce, such as like manufacturing processes for the best carbon in the world, Volagi most definitely did something wrong and should pay Specialized for what they took. That may even mean that Volagi may shut their doors, if Specialized wouldn’t want to share their secret sauce with anybody. I don’t own a Volagi bike and I met the Volagi founders Robert Choi and Barley Forsman at trial for the first time. The only connection I have is that we have mutual acquaintances that ride in the same South Bay bike club.

The trial started by Specialized lawyers picking apart the timeline: When were the meetings held when Volagi the company was created and the Volagi bike was conceived? Were the Volagi guys at this point still employees of Specialized, and as such bound to their non-compete clauses they had in their contracts? Robert and Barley were smart enough to eventually resign before diving head-on into developing the Volagi bike, but the Specialized lawyers tried their very best to implicate them of trade secret theft nevertheless. They worked hard to convince the jury that even though Barley had no exposure to frame design as part of his job duties, he would still have implicit knowledge of Specialized trade secrets simply because he sat in the same area as the rest of the designers.

On top of that, neither Robert nor Barley told their managers that they would work on a bike competitive to the Specialized flagship Roubaix. As a result, they weren’t walked out of the door the same day. Specialized lawyers tried to portray that the Volagi guys intentionally withheld information in order to stay as long as possible. Even worse, Specialized offered Robert a part-time job at full-time salary for another couple of month, which he accepted. During this time, Robert sent a couple of Specialized reports to his business partner and their spouses from his Specialized email address.

As usual, depending on who tells the story and what questions are being asked, all of this can be portrayed in one way or another. The fact that Robert accepted the part-time position while working on the Volagi bike could mean that he extended his stay in order to maximize his access to Specialize trade secrets, or simply that he assumed that Specialized was ok with him pursuing a business “in the bicycle industry”, and as such implicitly waived the non-compete clause that was in his contract. Of course, Specialized completely denied that version, and used an email that Robert wrote to Specialized founder Mike Sinyard in August 2010 – indicating that he was working on a competitive bike – as a way to illustrate that Robert intentionally waited for several month before actually disclosing this information.

All of these timeline issues and emails were honestly damaging to both sides. On the one side it was clear that Specialized did everything they could to portray the Volagi guys as intentionally stealing trade secrets and confidential information. I wouldn’t go as far as saying that they fabricated a story line but it was close. On the other side, the emails with confidential information that were sent by Robert supported that story line, even though the Volagi lawyer worked hard to provide reasonable explanations for any of this: Either that Robert was sending emails on official Specialized business, or that he simply admitted that sharing this confidential information was wrong, but that Specialized had no damage because of it.

In other words, it depended whom the jury would believe more.

With that, I wasn’t sure whether I would spend the time to come back for a third day, but it was well worth it. Specialized never illustrated what secret sauce Volagi really took from Specialized, so when they put lead designer Robert Egger on the witness stand, I expected to finally hear what Volagi stole from Specialized. It couldn’t have been the manufacturing processes, as producing the Volagi bike was completely outsourced in Taiwan and China. If Specialized had an issue with these vendors sharing production process that may have been used on Specialized bikes as well, that’s an issue they should discuss with those vendors, not Volagi. The ingenious Long Bow Flex construction was certainly Volagi’s invention, even though Specialized worked hard to portray the split top tube bikes that they had in their company’s design area, and to which Barley had access to, as similar to the Volagi design. In my view, it was all an attempt to confuse the jury with a lot of facts and claims.

But instead of explaining the secret sauce that Volagi has taken from Specialized, Robert Egger kept going on about how unique the Roubaix design was, what amazing “design language” was used to convey a fast bike to the consumer and how its beauty contributed to its success in the marketplace. All good, I said to myself, and I would certainly agree that the Roubaix is a pretty bike – my wife has one as well. It combines beauty with a great stable ride, which is exactly why she got it. But at the same time, since when were the particular design curves that lead from the seat stays to the head tubes patentable subject matter? They could have certainly not protected it with a utility patent that describes an abstract concept of a certain unique functionality. It’s design, not function. It’s not like the Ritchey Breakaway joint that I was describing above. And in order to protect a design, I think the Volagi bike would have had to look exactly like the Roubaix so that Specialized maybe could have used copyright infringement as a basis to take action. Instead, other than a bunch of artsy expressions, Egger gave nothing that could convince me that Specialized had anything there which would warrant the term “trade secret”.

Instead of providing substance, they made matters worse by mixing up “design” and “geometry”. At some point, I felt they suggested to the jury that the geometry of the Roubaix was a trade secret.

The story continued by Specialized calling an economist as an expert witness for evaluating   the value of intangible goods. I wasn’t sure where they were going with this; I expected him to propose that the design language explained by Egger had a specific value in the market place, for which Specialized should be able to collect a royalty payment. The guy certainly had an impressive list of academic titles, so I tried to listen carefully to what he was proposing. In the end, he calculated a 5% average royalty on Volagi sale as damages for Specialized. This was then picked apart by Volagi’s lawyer. He tried hard to understand where the 5% came from. I learned that there is a Website called Royalty Source from which the expert witness derived the data. But a royalty requires a piece of intellectual property that can be licensed – and it wasn’t clear what this would be for a bike. There is certainly no patent on a bike, and if there ever was, it would long be expired.

Chuck Smith, Volagi’s lawyer, tried to understand the material which the expert had shared, which contained sports equipment like fitness devices for gyms as potential source of intellectual property for which a royalty would be warranted. Instead, the expert explained that he excluded the gym stuff, and instead used a calculation for a piece of machinery whose abstract description vaguely sounded like it could claim to fit a bicycle as well.

At this point, I really lost it. First, I do get the point that patents describe utilities in abstract terms, so theoretically there could have really been the description of what is either a whole bicycle, or a unique bicycle part. I hope that the good people at Ritchey have a great patent on their joint for their Breakaway bike. I hope that Volagi will be able to get a patent for the functional characteristics instead of the “design language” used in the Long Bow Flex seat stays. These are all unique functional elements that are patentable. But the expert completely owed any kind of logical description of why Volagi should pay Specialized a royalty based on any unique invention that they supposedly took from them. In the end, I felt like the expert was claiming that anybody who produced a bike could potentially owe royalties to Specialized, a thought that would probably make the whole bicycle industry shake their heads.

I missed the testimony of an ex-Specialized executive after lunch. I’m sure it was entertaining, but my main interest was to understand the IP mechanisms in the bike industry, so I wasn’t that interested in it. Regarding those IP mechanisms, I don’t think Specialized expert witness and Egger managed to explain them. I’m fairly sure the jury got the distinct impression that Specialized was trying to desperately come up with something. Volagi finished strong by showing an actual Volagi bike as evidence. I think the whole jury got why this bike is so unique, and Specialize didn’t look good because they just could not pinpoint anything that this bike had which was taken from any Specialized bike. Some of the younger guys on the jury got all excited when they saw the bike. I think all that will help Volagi’s case because it proves how unique this bike is.

After the jury left the room, the lawyers on both sides had a heated legal discussion about jury instructions. Essentially, what instructions about the law will be given to the jury so it’s clear what they needs to decide, and what they don’t need to decide. I’m not a lawyer, so I won’t even try to summarize what was talked about. One part centered around asking the jury to determine damages, and Volagi’s lawyer argued hard to avoid that the jury would be asked to assess damages – simply because Chuck didn’t want to agree that there were any. What is undisputed is that Robert Choi sent confidential reports while his employment at Specialized was still going on, even though on a part-time basis. However, what damages happened because of that is disputed.

The other part was much more interesting, and it again had to do with the timeline. Was the fact that the idea for the Volagi bike was conceived before the employment of Robert and Barley ended sufficient so that the non-compete clause in their contracts kicked in? Volagi’s lawyer wants the jury instructions to include information about the labor law in California that essentially grants every citizen the right to form a business. With respect to coming up with ideas while under employment, California Labor Code 2870-2872 has certain provisions that makes it unlawful for an employer in California to require that inventions of employees that they make in their spare time shall be assigned to them. There are certain tests in the law such as whether the employer already had research going on in this particular area. I can’t quite parse the language, but I’m sure that Chuck Smith will make jury instructions clear, should the judge rule that those instructions are permitted.

In other words, at this point it is really up to legal maneuvering. I suppose this is exactly where jury trials are won or lost, irrespective of what was being said before. If the instructions that are given to the jury don’t clearly inform about the decision to be made, and don’t clarify the law, the resulting decision can be very damaging to either party.

Tomorrow morning, I expect the legal maneuvering to continue for a little while. Then jury instructions will be handed out, and then the Volagi people will eagerly wait for the verdict. I expect to go back tomorrow, but don’t think I will wait until the jury comes to a decision. I’m sure I will hear this first hand by either Specialized communications people or from the Volagi Facebook or Twitter accounts.

My impression overall is that Specialized have very little in their hands other than the hope to convince the jury that whatever Volagi has developed was still subject to the non-compete clause. I have no idea whether this is the case because of the muddled timeline. Of course, it would have been much cleaner had the Volagi people disclosed that they would work on a competitive bike, and that they would have left the Specialized premises the same day. Certainly the fact that Robert went back and shared confidential information was enormously damaging, but I’m not sure if it really will have a material impact on the case.

But hindsight in 20:20. Who can blame these guys, who create their company from their own money instead of a huge chunk of venture capital that they still would like to hold on to a paycheck as long as they can? And would they really have told Specialized in February 2010, at a time when they had no idea whether the Volagi bike could actually become a reality, that they would work on a competive product? That would have been a sure way to be walked out of the door and never been invited back again. Don’t burn bridges unless you have to – that motto certainly also applies to the bike industry.

As to Specialized, I’m still not sure what drives them. Are they afraid of Volagi’s impact on their Roubaix business? Seriously, how many people really would buy a endurance bike with disc brakes? There is a small segment that will find the idea as amazing, but the average racer won’t. But maybe Specialized is simply paranoid. Or maybe it’s about egos that Specialized simply does not want to allow it again that employees leave to compete on what they consider their turf. Whatever it may be, I don’t think they have a strong case, but that does not mean that Volagi for sure is going to win. There are many factors that may play into the jurors minds. My personal guess is that Volagi has a 70% chance of winning this case. We’ll see if I’m right.

And what will Specialized do if they loose? Will they appeal? I’m pretty sure they will. They are like a pit bull whose teeth have locked on. They won’t give up easily. But in the meantime, hopefully Volagi can recover their legal fees, and all this attention will in the end be good for their business. I, for my part, may really serious consider to buy a bike from them.

Considering everything I heard, I very much hope that Volagi will win this case. Good luck to them!