Best Buy to pay $27 million in trade secrets case

A company beset by problems now has another: A court ordered Best Buy to pay $27 million for stealing from a California start-up.

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Best Buy signage Thursday, June 7, 2012, in Richfield, MN for an upcoming story.

Photo: David Joles, Star Tribune

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Best Buy Co. Inc. on Thursday was socked with a $27 million jury verdict after being accused of stealing a small California company's trade secrets.

Los Angeles software firm TechForward sued the world's largest consumer electronics retailer in federal court, accusing Best Buy of "misappropriating'' trade secrets and breach of contract in connection with Best Buy's Guaranteed Buyback program.

The jury awarded TechForward $22 million. The judge added another $5 million in punitive damages.

"We are extremely pleased that the jury recognized Best Buy's misconduct, and we hope this verdict puts large companies on notice that there are real consequences to illegally exploiting start-up businesses like ours," TechForward's co-founders Jade Van Doren and Marc Lebovitz said in a statement.

Best Buy said it did nothing wrong and promised to appeal the decision.

"We vehemently disagree with the size of the award given the facts of this case, and intend to vigorously challenge this verdict," said Paula Baldwin, a Best Buy spokeswoman.

For Best Buy, which produces $50 billion in annual sales, the judgment will have little, if any, meaningful financial impact, said R. J. Hottovy, an analyst at Morningstar Inc. "But it's just the latest in a long string of mishaps for the company," he said.

Indeed, Best Buy has been beset by distractions in what has been one of the most tumultuous years for the company. Several key executives have left in the past several months, including CEO Brian Dunn, who abruptly resigned in April amid allegations he had an inappropriate relationship with a female employee. Since then, the company's founder, Richard Schulze, has resigned as chairman and is pursuing a takeover bid.

Meanwhile, the retailer has been forced to close at least 50 stores and lay off thousands of workers in an effort to reduce costs as sales continue to sag.

Like other electronics retailers, Best Buy also had been under pressure to field a buyback program that would allow consumers to upgrade older gadgets with newer ones. Analysts said it was a way to combat major online competitors like Amazon.com.

"As things have gotten more desperate for consumer electronics retailers -- with the rise of Amazon.com and product vendors (such as Microsoft) opening their own retail outlets -- you're seeing more of them resorting to buyback programs," said R.J. Hottovy, an analyst at Morningstar Inc.

TechForward had developed software that calculated the buyback values for televisions, computers, CD players, cell phones and other devices. The start-up company claims that after months of working with Best Buy on the retailer's buyback plan, the Richfield company decided to walk away and develop its own program, using TechForward's technology without paying for it.

"We had just finished a pilot test in several Best Buy stores, and the results were very strong," said Josh Kopelman, a co-founding partner of First Round Capital of New York, in a blog post on CNN.com. Kopelman's venture capital firm invested in TechForward.

"This model was our crown jewel -- we had invested years and millions of dollars building it,'' Kopelman said in the blog post. "But we had signed a nondisclosure agreement with Best Buy, and they had assured us the information would remain confidential and was critical to moving forward."

After Best Buy told the California outfit it didn't need its help, the company launched its buyback program with a Super Bowl commercial in February 2011, featuring Justin Bieber and Ozzy Osbourne.

Under the program, customers purchased a buyback plan at the time they bought a Best Buy product, in the same way they might purchase an extended warranty. The buyback plan gave customers the option of returning a used gadget to Best Buy in the future for a store credit that was guaranteed to be a specific percentage of the original purchase price.

Best Buy said its buyback program was discontinued a year ago and replaced with a more limited trade-in program only for cellphones.

"We found that people were more interested in a guaranteed trade-in value for mobile phones more than other devices," Baldwin said.

Meanwhile, TechForward said it was forced to go out of business after pouring so much time and money into the Best Buy project that never came to fruition. Angered, its venture capitalists, First Round Capital and New Enterprise Associates of Menlo Park, Calif., paid TechForward's lawyers "hundreds of thousands of dollars to keep the suit going," Kopelman said in the CNN blog post.

"If big companies believe they can violate agreements ... because a start-up can't afford to sue them, it is bad news for every start-up," Kopelman said.

Analyst Hottovy said it was unusual for the venture capitalists to get so involved in the legal wrangling. "I've never heard of a case where a venture capital company was bankrolling any lawsuit," Hottovy said.

Baldwin said Best Buy would not comment on Kopelman's remarks.

Steve Alexander • 612-673-4553 • alex@startribune.com Janet Moore • 612-673-7752 • jmmoore@startribune.com

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