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 …


About Michael Bechauf

Once in a while, there are things that I feel strongly about. Those are my thoughts. Follow me at @mbechauf.
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