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Amazon v. Smartsheet: Round 1 to Amazon-More to Come

June 18, 2017

 

When most of us think about Amazon, the first thing that comes to mind is Amazon Prime. Who doesn’t love their Amazon Prime? Amazon is into a lot more than just Prime. One of the major parts of Amazon is Amazon Web Services (“AWS”). AWS is  a secure cloud services platform. It is a major player in cloud computing that provides business with databases, computing and applications. What they do and how they do it is beyond my pay grade. I bet that, in one way or another, we are touched by an AWS product offering and don’t even know it.

 

Smartsheet is a startup that recently received about $52 million in venture capital financing. Smartsheet is in the business of providing a SaaS platform that allows teams to manage and automate collaborative work. Although $54 million sounds like a lot of money, it isn’t when you are about to get into a squabble with a company that can spend a billion dollars with about as much thought as you give to ordering your morning latte.

 

It seems as though these two companies had an existing business relationship and were able to play nicely together.  When two companies are pursuing the same piece of the market it is only a matter of time before one is going to upset the other. That brings us to Lesson #1: When you have $52 million in your bank account it might be a good idea to think twice before you pick a fight with a $430 billion competitor.

 

Smartsheet decided it was going to hire Gene Farrell, the AWS Vice President of Enterprise Applications and EC2 Windows team. Before hiring Farrell, Smartsheet had his non-compete vetted by their legal counsel (Lesson #2: When hiring always ask whether the employee has a contractual restriction and have it vetted through your legal counsel). Smartsheet’s legal counsel felt the non-compete would not cause a problem.

 

Farrell accepted the offer and told AWS he was taking the position of Head of Product at Smartsheet. (Lesson #3: Employees with non-competes should be transparent about their intentions. Not telling your current employer will only make you look bad if you get in a legal battle. The employer always finds out and, if they feel you are in breach of the non-compete, they will assume the worst.) Although Farrell handled this properly, AWS told him the move violated his non-compete.

 

When Smartsheet learned that AWS felt differently about the non-compete, it commenced a dialogue with AWS before on-boarding Farrell. (Lesson #4: Try to diffuse disagreements over non-competes by attempting to find some common ground.) When it appeared that a workaround was not in the cards, Smartsheet followed through on its decision to hire Farrell.

 

AWS filed suit against Smartsheet. AWS alleged that hiring Farrell would violate the non-compete would result in the disclosure of proprietary data concerning their cloud products. Farrell allegedly developed or was part of many proprietary matters including AWS enterprise applications, strategies for growth and sales and future Amazon product offerings. AWS is not just arguing that the non-compete should be enforced. It is arguing that Farrell may disclose trade secrets could give rise to a claim under the Uniform Trade Secrets Act or the Defense of Trade Secrets Act. In plain English, AWS  took the position that Farrell knows all the super Secret Squirrel information in Bezosland. (Lesson #5: When you feel someone has violated your non-compete or may abscond with proprietary information, you have to take steps to enforce you rights. Doing so has a deterrent effect and sends a message that you are dead bang serious about protecting your business.)

 

When lawsuits are filed to enforce a non-competition agreement a lot of things happen in a relatively short period of time. After filing, AWS asked a Court Commissioner to enter a Temporary Restraining Order (TRO) prohibiting the Farrell’s move to Smartsheet until a Judge can make a determination of whether a permanent injunction should be in place pending the outcome of the litigation. At the TRO hearing, the Court Commissioner is task with the job of making a determination of whether the non-compete should be enforced to avoid irreparable harm to the party asking for the TRO. Unlike most Court hearings, this is an abbreviated hearing with limited evidence and the Judge or Court Commissioner has to make a judgment call with an incomplete body of evidence. (Lesson #6: When it appears the case may go the legal route, start preparing for the TRO hearing.) Since there is an incomplete record, in many instances the court will err on the side of caution and enter a TRO but will require posting a bond to offset any financial losses in the event the court later rules that the non-compete is unenforceable or does not apply.  

 

The Court Commissioner ruled in Amazon’s favor and imposed a restraining order. Currently, the matter is set for hearing on a permanent injunction on June 23, 2017. The hearing on the permanent injunction is where both parties will have a mini-trial and the judge will then decide whether to keep the restraining order in effect until the lawsuit goes to trial (typically in 12 to 18 months). As a practical matter, the results of the permanent injunction hearing will determine the outcome of the case. If the Judge finds in favor of AWS, then Smartsheet will have to decide whether to back off and allow Farrell’s 18 month non-compete to expire or wait 12 to 18 months to go to court. If Smartsheet wins the permanent injunction hearing, it’s not over. AWS will likely pursue its trade secrets claims under the Uniform Trade Secrets Act. Regardless, of the outcome the hearing should be interesting, I plan on attending and I am bringing my popcorn!

I’ll keep you posted on the outcome of the hearing.  

 

Finally, thanks to  Nate Levy at Geekwire for an excellent article on the genesis of this lawsuit.

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