VCs, Protecting Ideas, and NDAs -- the Nextdoor.com Abhyanker Saga ContinuesBy http://profile.typepad.com/6p0191045dccff970c // July 23, 2013 in Courts, Founders, Lawyers, Legal Docs, NDAs & Trade Secrets, Startups, VCs
Nextdoor.com, Inc. v. Abhyanker, C-12-5667 EMC (N.D. Cal. July 19, 2013)
[Note from Bill: this is a post by Venkat Balasubramani, legal blogger par excellence. I am thrilled that Venkat is breaking, here on Counselor@Law, fresh new developments in this important, ongoing lawsuit. The case is not over, but it's getting juicy, and it throws into one package many of the disparate topics we like to cover on this blog (all that's missing is a securities law angle). Click here for a pdf of the written court ruling Venkat is analyzing.]
Abhyanker, who is a lawyer and well known entrepreneur, alleges that he tried to develop a neighborhood-based networking concept known as “Nextdoor,” that someone else ultimately took and ran with, to form Nextdoor.com. According to him, his Nextdoor idea was a spinoff from his concept called LegalForce, which was a private social network for inventors. He also developed “Fatdoor,” a Wikipedia-like public database of neighbor profiles. [sounds scary from a privacy standpoint!] Fatdoor’s assets were ultimately purchased by Google. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea.
Abhyanker alleges that he told two people about his Nextdoor ideas and trade secrets: (1) Benchmark Capital; and (2) Sandeep Sood, a designer and contractor for LegalForce. At some point, Abhyanker pitched the Nextdoor idea to VCs, including Benchmark Capital. Although he did not discuss any confidential information in the initial meeting, he supposedly sought and obtained “assurances” from Benchmark that any confidential information disclosed by Abhyanker would be kept confidential. According to him, relying on these assurances, he pitched the Nextdoor idea to Benchmark. In 2007 Abhyanker left Fatdoor (who wanted to bring in a new CEO) and came back to work on his Nextdoor idea. According to him, while he returned to focus on his Nextdoor idea, others were independently working on the Nextdoor concept, and used confidential information and trade secrets to swoop in on the nextdoor.com domain name that Abhyanker had been pursuing for years. The Nextdoor.com founders were Benchmark capital “entrepreneurs in residence,” and Abhyanker alleges that the founders gained access to Nextdoor trade secrets through their work at Benchmark.
These were just the counterclaim wranglings. The case was preceded by a (still-ongoing) proceeding in the Trademark Trial and Appeals Board, and a short-lived state court proceeding (which Abhyanker filed and dismissed).
Abhyanker initially asserted several other counterclaims, but withdrew those and filed an amended pleading asserting only a trade secrets claim. Nextdoor.com (& Sood) moved to dismiss Abhyanker’s trade secret claims.
Adequacy of trade secrets allegations: Nextdoor argued that Abhyanker’s trade secrets claim failed because he failed to set forth the alleged trade secrets with the sufficient degree of particularity. The court rejects this argument, saying that Abhyanker’s laundry list is sufficient, and requiring him to be more specific would run the risk of forcing him to disclose his trade secrets at the pleading stage. Nextdoor also argued that there were no allegations of how it allegedly exploited Abhyanker’s trade secrets, but the court says there are some allegations—principally, Abhyanker alleges that Nextdoor used the bidding history for the nextdoor.com domain to its advantage.
The court does say that the parties should work together to come up with a process for identifying the trade secrets and whittling down Abhyanker’s laundry list. After this process is over, the court says that Nextdoor can revisit the trade secrets issue at the summary judgment phase, hinting that Abhyanker's trade secrets claim may not be all that they are cracked up to be.
Public disclosure of trade secrets: Nextdoor also argued that Abhyanker disclosed the trade secrets in question in a patent application. Nextdoor says that Abhyanker had filed a patent application disclosing much of the trade secrets at issue in connection with his Nextdoor idea; Abhyanker disagrees, and says that the patent application covered Fatdoor (the wiki site) technology. The court does not delve into the details regarding what facts were disclosed in the patent application (presumably because the facts regarding what Nextdoor does are as yet undveloped), but does say that the patent application discloses the use of nextdoor.com in connection with a networking site. The court dismisses Abhyanker’s trade secrets claim to the extent it’s based on Nextdoor.com’s alleged misappropriation of “using the name nextdoor.com in connection with a neighborhood-based social network.”
In addition to the above rulings, the court also (1) says that Abhyanker’s alleged admissions in other proceedings that he does not own the trade secrets at issue (and that the trade secrets were part of FatDoor, which was ultimately acquired by Google) are not necessarily binding against Abhyanker in this matter; and (2) strikes a few of his affirmative defenses.
Finally, the court also denies Abhyanker’s request to disqualify Nextdoor.com’s law firm, Fenwick & West, on the basis that they previously represented LegalForce. Abhyanker says that Fenwick assisted him in protecting his IP for LegalForce, including preparing non-disclosure and invention and assignment agreements. Fenwick, for its part, had an independent Fenwick attorney review the files and billing records. This lawyer concluded that Fenwick did not really help LegalForce with its IP strategy and at most provided LegalForce with some form documents. The court credits Fenwick’s view, rather than Abhyanker’s view, and also says that the matters in question (this dispute and the prior representation of LegalForce) are not related. The court also says that Fenwick was not likely to glean confidential information relevant to this dispute as a result of its limited representation of LegalForce. (The court also notes that Fenwick implemented an ethical screen between the lawyers working on litigation matters against Abhyanker and lawyers who worked on LegalForce, the bulk of whom are no longer at Fenwick anyway.)
Yikes. A messy dispute that weakly promises to get at the answer of whether, patents aside, ideas are protectable in this context. In terms that will resonate with entrepreneurs, this case gets at the perennial question of "if I have an idea and a domain name, or the name of an app" should I require someone to sign a NDA before I disclose the details?" My money is on the parties running out of gas to pay their lawyers and eventually coming up with some sort of settlement.
Abhyanker has weak trade secrets claims overall. But he was undoubtedly pursuing nextdoor.com. The fact that after pitching it to Benchmark, it showed up as an idea pursued by former Benchmark entrepreneurs in residence can’t look particularly good for Benchmark. (In addition to the domain name, he also pointed out that the prototype used by Nextdoor.com was for the same neighborhood that Abhyanker focused on when he was working with concepts around next-door.) That said, VCs don't sign non-disclosure agreements for this very reason, and although they are from time-to-time accused of taking an idea that they may receive via a pitch and running with it using another team, I don't get the sense that what happened here is wildly outside the expectations of most entrepreneurs. (It's possible that I'm way off on this, feel free to correct me in comments. It's also worth noting that as domain names become scarce and more valuable, Abhyanker's allegations regarding the domain name--while seemingly menial--do get at an important part of a start-up's trajectory.)
I’m curious about why Abhyanker withdrew his breach of contract claims that presumably included claims based on non-disclosure obligations Benchmark agreed to? Common wisdom suggests that non-disclosure agreements are over-rated and may even make you look amateurish, but you wonder whether a robust non-disclosure agreement would have helped Abhyanker in this scenario?
Apart from the merits of the dispute, the disqualification ruling is very interesting. Fenwick, which is one of the go-to firms in Silicon Valley (and in Seattle), works with a huge number of entrepreneurs and ventures. To the extent the judge here would have disqualified it, I would guess it would end up taking a second look at its policies around conflicts and whom it can continue to represent when clients (or former clients) have disputes against one another. I’m not saying its representation of Nextdoor.com against Abhyanker here is improper, but I found it very curious that the court relied heavily on summaries of billing records, when it’s widely known that lawyers in this space often work with smaller clients in the hopes that they may grow into more viable clients—it’s not about billing in the early stages of the relationship. Abhyanker’s testimony about him going to his “family friend,” Fenwick attorney Rajiv Patel, for help regarding intellectual property protections for stuff Abhyanker was developing (based on the partner’s IP expertise) did not put Patel in a particularly favorable light. Abhyanker’s argument is that this IP protection involved protection for situations such as when Abhyanker was pitching the nextdoor concept to Benchmark, or working with contractors such as Sood. How can Fenwick, who signed up to help him with these issues, now represent an adverse party in a lawsuit involving these same issues. Not a terrible argument in my opinion.
Anyway, a crazy dispute that continues to grind on, but one that raised some interesting points.
The takeaway: to the extent you are looking to protect something like an idea and a domain name, I wouldn't rely on trade secrets. Any sort of implied confidentiality obligation is tough to enforce as well. You have to weigh the extent to which doors will slam in your face as a result of requesting an NDA, but that's what would have probably saved Abhyanker here.
Added: Check out the comments below. Also, as Jeff John Roberts noted in this story from January of this year ("Kickstarter project wants to expose idea thieves of Silicon Valley"), Abhyanker launched a Kickster project titled "Entrepreneurs in Residence"!
Photo: Kelli Anderson / Flickr.