Is a Fungus Among Us?
Beware employee theft of trade secrets, intellectual property and clients
Author, direct marketing guru, and always entertaining Denny Hatch focuses on a major story in the news and shows how businesses can take advantage of—or avoid the pitfalls from—the lessons to be learned in terms of marketing, sales, PR and communications.

Here are two stories about people working for two businesses—an employee in one and members of the board in the other—who knew a lot about their respective companies.

Both allegedly annexed a core product and went into competition with it.

Both cases have resulted in lawsuits and countersuits.

A person that would do this to an employer is a fungus—a parasitic organism that obtains nourishment by locking onto a host and sucking it dry.

What can you do if such a person is loose in your company?

If you have an idea for a new product, do you develop it and then offer it to your current employer? Or do you surreptitiously shop it elsewhere?

If so, why?

A Personal Digression
In 1964 I got a job selling advertising for Library Journal, a magazine published by R.R. Bowker. At the time, book publishers produced seasonal catalogs—usually fall and spring—which were mailed to the Bowker editorial department as well as to booksellers, wholesalers, agents, foreign rights buyers, schools and libraries.

Arriving in the mail at different times, these catalogs came in various sizes and shapes and were stuffed into files, where they spilled out and were a perpetual nightmare to keep current. I figured a better information system had to exist, one that was more efficient, user friendly and less costly to the individual publisher, who was spending a fortune on composition, printing, binding and mailing.

At a client’s office, I discovered how British publishers dealt with the problem of catalogs. In the waiting room was a multivolume set of fat, paperbound books—a compendium of publishers’ catalogs bound together alphabetically. It was produced and shipped by The Bookseller—the British version of Publishers Weekly. From this I came up with the idea for “Publishers Combined Seasonal Catalogs”—same format as the U.K. product, same concept—and quietly floated the idea to a number of my clients who advertised with Library Journal.

Some publishers loved it. They immediately saw that by participating in this format (1) their catalogs would not be lost in an overstuffed file drawer and therefore would be far more easily accessible, and (2) this co-op binding and distribution system would save considerable money. Further, they could produce overruns for their sales representatives and as giveaways at the American Booksellers and Library Association conferences, as well as regional gatherings.

While others hated it, feeling that they would lose their individuality, enough said they liked the idea to make it a viable business. What’s more, once established, other publishers would see the wisdom of the product and come on board. For Bowker, it would represent a brand-new profit center with virtually no editorial expense that could be sold as an add-on by existing sales representatives.

I put together a business plan, designed a cover, made a crude mock-up of the product and sent it in to top management. Word came back from the board meeting that everybody loved the idea, but Library Journal—and its sister publication, Publishers Weekly—was undergoing a redesign, so nobody could get to this project for at least six months.

My salary at Bowker—the junior number three guy in a two-man office—was peanuts. When a very good offer for a job with another company came in, I was immediately interested. I went to Bowker’s VP of advertising and asked him where the catalog project stood, since I had just received a job offer.

“We want to go ahead with it,” he said, “but the redesign of the magazines is taking longer than we thought.”

“If I stay at Bowker and help launch this new catalog project, could I count on getting a piece of the action?”

“We don’t do that,” he said. “You have your salary.”

The idea was worked up with the full knowledge of my employer. I would have had no compunction about shopping the idea elsewhere. But at the time, only two other companies served the book industry, Kirkus Reviews and H.W. Wilson, which published a bunch of directories. Only Bowker had the clout and the contacts to get this show on the road.

I quit. Dunno whatever happened to the idea.

Barbie v. Bratz
I was astonished to discover that Barbie is 47 years old, and that, for all the competitors that tried to knock her off her pedestal over the years, Mattel’s savvy design and marketing staff swatted them all down. In 2005, the Barbie doll franchise brought in $3 billion.

One of the premier Barbie designers was Mattel’s Carter Bryant, whose Cinderella-like Grand Entrance Barbie sent adult collector Kristina Frazier-Henry into orbit. Frazier-Henry of Indiana is a serial blogger who has written 1,325 reviews on Epinions.com under the handle kristinafh. Her take on Grand Entrance Barbie:

I am a fanatical Barbie collector. Fanatical in the way that I would rather have an NRFB (that’s Never Removed From Box) Barbie than just about any other gift. Surprised? Yeah, thought you were.

Doll Description
This Grand Entrance Barbie is the first collector doll designed by Carter Bryant. It came out in 2001 and was met with a lot of oooh’s and ahhh’s from the adult collecting world. Here’s why.

Close your eyes and imagine an elegant ball. Your hair is blond (natural of course) and shiny. There’s no frizz to be had. The sides of your hair are gently gathered back while the back of your hair is curled in waves and lays gently across your shoulders.

Your gown is a steel blue taffeta creation made by designer Carter Bryant. The bodice is fitted and compliments your elegant waist. Underneath your gown is a thin, slip-like layer of tulle the color of ivory. Sewn into the middle part of your gown is a creamy pink silk sheath. The way the light shines off of the creamy pink makes a total stranger want to come over and touch you.

A Sabbatical
In 1998, Carter Bryant decided he needed a hiatus from Barbie and the fast life in Los Angeles. He returned to his roots in Springfield, Mo., and moved in with his parents. Driving by a local high school, Bryant claimed that he saw some local high school girls “wearing kind of, you know, oversized clothes, big, baggy jeans ... just got me to kind of thinking, you know, wouldn’t it be cool if there were some characters that kind of accurately represented today’s teenager.”

He dashed home and made sketches for a new doll to compete with Barbie. Its name was Bratz, described by Margaret Talbot in a 2006 story in The New Yorker titled “LITTLE HOTTIES: Barbie’s New Rivals,” as a design that “showed a face in which the lips and eyes were cartoonishly prominent and the nose was vanishingly small: it was as if the doll had undergone successive rounds of plastic surgery.”

Back to L.A.
In 1999 Bryant returned to Mattel as a Barbie wardrobe designer but continued to refine Bratz, which he presented to Isaac Larian, president of MGA Entertainment—a minor, money-losing electronic games company located in the San Fernando Valley of northwest Los Angeles.

The story gets murky as to who did what when, but a Mattel phone record paper trail indicates that Bryant was working on Bratz and talking to Larian from his Mattel office until he handed in his notice in October 2000 and went to work for MGA.

Bratz was launched in 2001, caught on big and began generating $1.25 billion a year in sales while the Barbie business declined some 12.5%. In 2006, Mattel decided it had been ripped off and instituted a lawsuit. Among the charges made by Mattel was that former employee Bryant’s 3% royalty on Bratz brought him $30 million.

Bryant and Mattel settled out of court, but Mattel is going after MGA in a trial that started last Tuesday. Meanwhile, MGA is countersuing Mattel.

The question here is not about dolls—or even this trial—but rather about a corporate culture that causes a creative employee to take a hot idea to a competitor, rather than bring it in-house and jointly reap the rewards.

Craigslist v. eBay
As readers know, I am no fan of eBay. Last Feb. 7, this cranky little e-zine published, “Should Congress Shut Down eBay? Is this auction site the world’s biggest criminal conspiracy?” I wrote:

If my numbers are remotely correct, it means that eBay is the supreme enabler of counterfeiters, forgers, hooligans, miscreants, petty crooks, pirates, rapscallions, reprobates, rogues, scallywags, scamps, scoundrels, swindlers, thieves, thugs and villains on a scale heretofore unimagined in human history.

If my numbers are correct, eBay is perpetrating the largest, most pernicious worldwide criminal conspiracy and fencing operation the world has ever seen.

If my numbers are correct, eBay is costing consumers whose homes have been burglarized—and businesses and copyright holders of all sizes whose property has been plundered and who have lost legitimate sales—billions upon billions of dollars, not to mention the insurance companies that have paid for the losses.

I am no fan of Craig Newmark and his Craigslist, a Web enterprise that seems bent on (1) taking over the classified advertising business and (2) putting traditional newspapers out of business. My problem is not that Craig Newmark is unhorsing a vestigial medium, but rather his service in 100 cities on five continents is mostly free. The free market, freebooting buccaneer in me screams, “For Pete’s sake, if you’re going to revolutionize an industry, do it to serve customers and make a killing while you’re at it!”

Now these two highly questionable organizations are in a fascinating death struggle.

In 2004, eBay bought out a former employee of Craigslist and wound up with 28.3% ownership. The two companies said that deal would allow eBay and Craigslist to “share expertise, resources and creativity.”

“Craigslist is an excellent example of how the Internet brings people together,” said Meg Whitman, president and CEO of eBay. “Whether it’s to trade goods, help neighbors or speak out on important issues, Craigslist has become the online gathering place for local communities.” eBay was given two seats on the Craigslist board.

Fast forward to the next year, 2005, and eBay announced that it was starting Kijiji—a series of 50 Web sites around the world offering free classified ads in direct competition with Craigslist. Alex Kazim, senior VP of eBay’s new ventures, proudly announced, “Kijiji builds local communities online, giving neighbors a way to come together around local needs and interests.”

On April 30, 2008, eBay filed a 29-page complaint against Craigslist in the Delaware Court of Chancery, claiming in essence:

NEWMARK AND [JIM] BUCKMASTER [CRAIGSLIST CEO]CRAFT A PLAN TO DILUTE AND DISENFRANCHISE EBAY

Let me say, if I were Craig Newmark and Jim Buckmaster, I would sure as hell do everything possible to disenfranchise eBay after buying into the company, learning the business and starting a competitor.

Craigslist filed a countersuit suit in California State Superior Court in San Francisco requesting a jury trial with the following complaints:

* UNFAIR AND UNLAWFUL COMPETITION UNDER CAL. BUS. AND PROF. CODE §17500

* FALSE ADVERTISING UNDER CAL. BUS. AND PROF. CODE §17500

* CALIFORNIA TRADEMARK INFRINGEMENT AND UNFAIR COMPETITION

* CALIFORNIA PASSING OFF AND UNFAIR COMPETITION* DILUTION UNDER CAL. BUS. & PROF. CODE §14200

* BREACH OF FIDUCIARY DUTY

A Personal Digression
In the 1960s, I was at Grolier Enterprises, which was run by four dynamos: founder Elsworth Howell, whose real love was judging dog shows; VP Bob Clarke, a lovely human being who started in the Grolier mail room and died young; Ed Bakal, a rough-hewn ex-paratrooper; and Lew Smith, a brilliant, low-key marketing genius who went on to become Lester Wunderman’s creative director.

Grolier’s business at the time was selling Dr. Seuss books to kids. The competition was Weekly Reader Book Club and Scholastic’s paperback book clubs. All sold books to students in classrooms through the teacher.

Using the Scholastic paperback model, a guy named Joe Archie started the Willie Whale Book Club. Elsworth Howell watched it grow and told Archie he was interested in buying Willie Whale. They signed confidentiality agreements, and, stupidly, Archie laid out his entire business plan, MO and results for Grolier to see. Whereupon Howell told Joe Archie that he had decided not to buy Willie Whale and started the Peter Possum Book Club offering children’s paperback books in direct competition with Archie and Scholastic.

Archie sued and lost.

If history repeats, my bet is that both Mattel and Craigslist will lose.

Takeaway Points to Consider:

* As an employee, you come up with a great idea for a new product that could be a moneymaker. Do you trust your current managers enough to give them first dibs? Or would you keep it secret and surreptitiously offer it to competitors?

* As an employer, do you encourage new ideas from within and—if they come to fruition—are the creators rewarded?

* As an employer, do you engender trust among those who work for and with you?

* If not, why not?

* If an employee is drawing salary and benefits, then according to United States copyright law, if “the work was done within the scope of his employment (whether the work is the kind he was employed prepare; whether the preparation takes place primarily within the employer’s time and place specifications; and whether the work was activated, at least in part, by a purpose to serve the employer), then the work is a work for hire and the employer is the initial owner of the copyright, rather than the employee who actually conceived and fixed the expression.”

* Carter Bryant maintained that he conceived and developed the Bratz doll when he was at home in Missouri and not in the employ of Mattel. Therefore, he reasoned, he owned it and had the right to sell it to MGA.

* Employers and employees alike are urged to look carefully into the pros and cons of noncompete contracts.

* If you’re working up a new idea on your own, always use your personal computer and cellphone. Don’t leave a digital trail of memos, notes, proposals or e-mail exchanges on the company server. Do not use the company phone to make calls or receive calls about your project. Do not leave a paper trail in your filing cabinet.

* If you swim with sharks, chances are you will be eaten.