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...

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.

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.

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

August 1st, 2016

what's the illegal action?

Paul Garcia marketing exec & business coach

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.

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.

Robert Honeyman Financial Consultant at Michigan Small Business Development Center

August 2nd, 2016

from your description, it doesn't sound like a civil complaint. if not, you're actions are likely limited to alerting the proper authority to the misconduct and hoping they care.

K. Robbins Head Moose at Moose WorldWide Digital

August 2nd, 2016

A simple legal battle in civil court will cost thousands and thousands of dollars and drag on for a year. The winners will be the attorneys.

Reporting things to the authorities may also take a very long time.

I'd report to get in the queue and forget about lawyers.

Ernest M. Kestone CEO, Co-founder, Clear Protocol, Inc.

August 2nd, 2016

Realistically, you would only sue if it's significant activity. Maybe they took away market share or had some impact, worth many times the cost of litigation. At the very least, you turn them in to the police or regulator. It's a sort of civic duty, you owe it to all the people in your marketplace to keep the playing field clean.

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