Thursday, October 29, 2009

The Dangers of Listening to Outsiders: The $1.26 Billion Dollar Judgment Against Pepsico

The press is focusing on the mistake of a busy secretary that led Pepsico to miss a court hearing, resulting in a $1.26 billion judgment against the company. Two men from my state of Wisconsin filed a suit claiming that Pepsico stole their trade secret idea for bottled water, obtained from them in a 1981 meeting, and then used that secret information to launch the profitable Aquafina bottled water business (over a decade later).

The legal notice to Pepsico was accidentally ignored by a busy secretary rushing to prepare for a board meeting. With Pepsico a no-show in court, the judge gave a default judgment in favor of the plaintiffs. Over a billion dollars! Ouch.

Pepsico is likely to be given a chance to defend itself after all, and I expect that they will prevail. In any case, there are several lessons here for companies. Apart from the obvious ones about keeping track of incoming documents and not overloading secretaries, I think this case points to the unfortunate risks that companies face in dealing with outside innovators for open innovation or partnerships. In many cases, outsiders feel that their idea--no matter how obvious, how unpatentable, or how well-known in the prior art--has been stolen, when in fact their idea got nowhere in the company or made no difference, and was either already known or independently conceived and developed. But claims of theft, even when highly implausible, can still result in much expense and pain for the company.

Here's some information from the Post-Crescent newspaper:
Charles Joyce, of Juneau, Wis., and James Voigt, of Cleveland, Wis., sued PepsiCo in April, asking for a jury trial and damages of more than $75,000. Their lawyer, David Van Dyke, told The Associated Press the two had worked together and came up with the idea to bottle purified water in individual servings.

Joyce's and Voigt's lawsuit accuses PepsiCo of misusing trade secrets. It also names Wis-Pak Inc. and Carolina Canners Inc., companies that make and distribute PepsiCo products, and Thomas M. Hiles, then the executive vice president of Carolina Canners. . . .

The pair claim they entered written confidentiality agreements about a new beverage they were calling "U.P." with executives of Wis-Pak and Carolina Canners in 1981. The executives violated the agreements and gave the information to PepsiCo, which eventually rolled out a bottled water brand — Aquafina — about a dozen years later, Joyce and Voigt claim. . . .

"The plaintiffs' claim — that in 1981, they gave someone other than PepsiCo an idea for a 'soft drink' and that somehow, 15 years later, PepsiCo used that alleged information to develop the Aquafina Water products — is completely dubious and without merit," [Pepsico spokesman Joe] Jacuzzi said.

Van Dyke, with the Chicago law firm Cassiday Schade, said he is drafting a response to PepsiCo's motion. He said he asked for $1.26 billion based on the revenue and profit PepsiCo has made from the Aquafina brand.

If the agreements were enforceable contracts, the plaintiffs may have a case, said Mark Leonard, a partner at Davis and Leonard LLP, in Sacramento, Calif., who focuses on intellectual property. Typically, patents are the best way to protect ideas, he said, but not everything can be patented.

"In the event it was not patentable, which would not surprise me, then the only way to protect that idea would be contractually," he said.

Readers may wish to review the history of bottled water on Google Answers and Nestle's 1200-year history of bottled water to realize, of course, that bottled water is not a recent invention. See also the history section of Wikipedia's entry on plastic bottles. Single-use plastic bottles for beverages didn't really become feasible and popular until the introduction of PET bottles in 1975, invented by invented by DuPont's Daniel C. Wyeth.

Back to the dangers of open innovation: so what is a company to do? First, many firms now require that innovations submitted to them be public information or even patented information only. In the case of business concepts or business models, information that the outsiders view as innovative may be presented during negotiations, often under confidentiality agreements. Consult your legal team for best practices in this area. Among practices that I've seen, the terms of a confidentiality agreement can require that the outside entity explicitly state what information is regarded as confidential to avoid future surprises, and a company can challenge potentially inappropriate or outrageous claims to prevent future misunderstanding. "Sorry, but the idea of putting water in small bottles and selling them is not yours." A company can also provide an internal firewall to keep potentially confidential information away from those that may be pursuing related paths in the corporation, but that take a lot of work and caution.

I've had numerous inventors claim that their ideas were stolen by a big company. In most of the cases, when I probe, there was little merit to the claims and often it seem that they may not have had anything real to steal in the first place. There are some cases where theft may have occurred, which is a subject for a later post and the subject of some sections in our recent book, Conquering Innovation Fatigue.

Inventors and innovators approaching companies must understand that part of the systematic reluctance to be exposed to outside ideas comes from the risk of facing expensive law suits based on questionable claims of theft, when in fact the ideas brought by the outsiders were obvious, well-known, or independently developed by the company. When you knock on their door, they see you through the "Lens of Risk" and not the rose-colored glasses you think they should use. They see risks, lawsuits, and defamation, not the billion-dollar opportunity you think you have created. That perspective needs to be understood if you are going to get anywhere with them.

Tuesday, October 6, 2009

The Future of Business Method and Software Patents? Keep Your Eyes on the Bilski Case

The pending Supreme Court case of Bilski v. Kappos may do much to clarify the role of "business method" and software patents in the U.S. The In re Bilski case added some new hurdles (offering the machine or transformation test as the test for patentability, not the less demanding test from State Street Bank v. Signature Financial Group), and that decision is now being appealed before the Supreme Court. PatentlyO summarizes the briefs being filed in support of the US Government's position. In discussing the Government's brief, PatentlyO also observes that the Government is taking an originalist position, seeking to apply what the framers of patent law in the 18th and 19th century intended regarding patentable material. Interesting! (And I thought originalist thinking was long dead in D.C.)