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!