The Explainer: A dollar and a dream

Here’s one legal fight from which no winners emerged … unless you count the guys in pin-striped Italian suits.

Dear Readers,
Over the past few weeks I’ve received a number of emails – including a fair share of them from ol’ Padraig himself – asking for my thoughts on the now-completed battle between Specialized and the upstart bicycle company, Volagi.

I’ve been reluctant for a lot of reasons. Yeah, I’m a bike geek and yeah I’m a lawyer (but not a patent lawyer, by any stretch) … but I just hate watching these things unfold. Over the years, I’ve reported on more than my fair share of patent fights, allegations of intellectual property theft and classic pissin’ matches over bike, wheel and component designs. I’ve never enjoyed it. Emotions run high (people make their living from this stuff, after all), the issues are often esoteric and, when it comes to bicycle designs these days, we’re really fighting over a dime-sized area on the fifty-yard-line of human ingenuity. The issues can lead to big fights over small variations. Such was the case in Specialized v. Volagi, et. al., but it did offer up some interesting issues and I’ll try to touch on a few of them.

For those of you have missed the outcome, let me first mention that the lawyers over at Specialized scored a huge win in court yesterday – at least according to the prepared statement issued by the company, following Friday’s verdict – in that a Santa Clara County jury found that Volagi co-founder, Robert Choi, had breached a contract with his former employer. Yup, they ruled in favor of Specialized and awarded the company the princely sum of (drum roll, please) $1. Nope, that’s not a typo. That’s 100 pennies … in case you thought I’d forgotten to add the word “million” to that figure. (For you Leon Uris fans, think “QB VII.”)

So, what is all this fuss about?
How did two guys – Choi and his business partner Barley Forsman – who had just started a little bike company get into a legal battle with one of the world’s biggest bike companies?

Well, to start, both men used to work for said big bike company. That’s about all the parties who appeared in Santa Clara County Superior Court agreed upon. Everything else, from that point forward, was pretty much in dispute.

To hear Choi and Forsman tell it, they had – outside of their normal daily duties as Specialized employees – come up with an idea for a bike, a bike that no one, including Specialized, was producing at the time. So, back in 2009, the two left their jobs and set up shop as Volagi, right there in Morgan Hill, home of their former employer.

Volagi's LongBow Flex patent.

They filed for – and received – a patent (US D637,527 S) for a relatively unique (but not entirely unprecedented) design, which incorporated a bike’s top tube into a “LongBow” that included the two seat stays. The resulting bike, the disc-brake-equipped “Liscio,” received a terrific critical reception in the bike press. Sales were brisk, especially for a new start-up.

But wait! Specialized claims the idea was theirs and that the two had scampered away with an idea that had been developed while Choi and Forsman were employed by the company. The company claimed that the two men had violated the non-compete clause of their employment contracts and that they had engaged in the theft of intellectual property. The company’s attorneys filed suit, demanding that ownership of the idea should revert to Specialized and that Volagi be ordered to pay a royalty on bikes they had already sold and any bike the sell in the future if it’s based on the LongBow Flex patent.

Whose bike is it, anyway?
Specialized asserted that the Liscio was really just a variation on a theme already solidly established by its own “Roubaix” model and that Volagi was simply established to compete directly against the larger company’s most significant source of revenue.

Indeed, there are similarities and they essentially designed to meet similar demands, namely for a comfortable, but high-performance, road bike. My own gut reaction, though, is that’s where the similarity ends.

What Specialized had to prove, in order to win on the intellectual property theft claim, was that the basic concept behind Volagi’s LongBow Flex design had originated at Specialized. They didn’t succeed at that one.

Specialized's 2012 Roubaix - Sure it's similar, but there are noticeable differences.

During arguments, lawyers from both sides pretty much turned the court room into a high-end bike shop, parading 25 bikes of various designs in front of the jury. Included, too, was a discussion of precisely where it was that Specialized – particularly company president Mike Sinyard – got the inspiration for the Roubaix.

The defense offered testimony that Sinyard came up with the idea only after seeing the custom-built Seven Cycles bike ridden by a former employee. Indeed, the similarities between the Roubaix, the Seven and other bikes available on the market were greater than they were to Volagi’s Liscio.

Court room observers suggest that the jury was impressed by that testimony, but we’ll never know how impressed. The whole question of intellectual property – and some of the contract claims – were thrown out by the presiding judge before the case ever reached the jury.

When it all came down to it, the only issues to be weighed by the jury of six men and six women were the two breach-of-contract claims against Choi and Forsman, for having violated the non-compete clauses of their employment contracts.

The promise not to compete isn’t a promise to starve
So what the jury had to weigh was whether either one of the former Specialized employees had breached the non-compete clauses of their contracts.

While the non-compete clause in employment contracts is enforceable, even if it is violated, the case isn’t always a slam dunk in most jurisdictions. There is often an over-riding “public policy” concern that traces its roots all the way back to British Common Law, namely that a worker’s former employment really shouldn’t constrain his ability to earn a living after he leaves a company.

If that is carefully viewed in most jurisdictions around the U.S., the standard is even higher in California, where this case was heard.

In 1872, California enacted a law (California Civil Code §16600) banning the inclusion of non-compete clauses in employment contracts, except in the narrowest of circumstances. While many have argued that the 19th century statute is inappropriate in a 21st century economy, driven by invention and innovation, California courts have repeatedly upheld the law, most notably in two recent cases, Google Inc. and Kai-Fu Lee v. Microsoft Corporation, 415 F.Supp.2d 1018 (2005) and Edwards v. Arthur Andersen, LLP, 44 Cal.4th 937 (2008).

In Edwards the California Supreme Court upheld the statute because “ “the law protects Californians and ensures `that every citizen shall retain the right to pursue any lawful employment and enterprise of their choice.’”

Despite that strong affirmation of §16600, the lone issue presented to the jury in Specialized was precisely that, a breach of the non-compete clause in a California contract. I have to admit, I wasn’t there, but given the statute and the applicable case law, I am still wondering why the court didn’t toss that last issue along with the others. Nonetheless, it went to the jury.

The jury found that Choi had violated that provision of his contract, but didn’t reach the same conclusion when it came to Forsman. After finding that Choi had breached, the jury then had to wrestle with the question of damages … the actual cost to Specialized by Choi’s violation of that provision.

A smart move by the big guys?
Calculating damages didn’t take long and this is where Specialized probably faced an uphill battle anyway. No matter how you look at this case, the minute you put a multi-million-dollar corporation up against a couple of guys trying to make it on their own with a small start-up, the case suddenly transforms from Specialized v. Volagi into the far more difficult case of David v. Goliath, Valley of Elah, 1 Samuel, chapter 17, (1025 BC), and we all know how that one turned out for the big guy.

Now don't go spending it all in one place.

Juries composed of regular folk tend to sympathize with the little guy. They sure did here. Choi has to pay a buck to Specialized, which will cover about two or three seconds’ worth of the legal services the company had to pay in order to pursue this case. (Had the award been substantial, I frankly think it could have been shot down on appeal.)

According to court records, Specialized spent at least $1.5 million dollars in legal fees in this case. The guys at Volagi had to mortgage their homes and have spent far more than they have ever earned from their bikes just to fight this thing.

Frankly, it should have never gone beyond the usual bluff-and-bluster cease-and-desist letters lawyers send out as a matter of course. This is a case that should have been settled long before anyone even paid a filing fee to the clerk of the court. (It is, by the way, worth clicking on that ‘cease and desist‘ link, if you need a laugh.)

I am not sure whose decision it was to pursue the case beyond that, but even without the benefit of hindsight, it’s pretty obvious it was a dumb call.

Indeed, the only thing worse would be if Forsman follows up on his threat to file a frivolous lawsuit claim against his former employer.

Don’t do it. Take a deeeeep breath. Put the lawyers down (they’re dangerous and expensive). Step away slowly and think about your next step.

I think it’s time to shut up and ride.
– Charles

The Explainer is now a weekly feature on Red Kite Prayer. If you have a question related to the sport of cycling, doping or the legal issues faced by cyclists of all stripes, feel free to send it directly to The Explainer at Charles@Pelkey.com. PLEASE NOTE: Understand that reading the information contained here does not mean you have established an attorney-client relationship with attorney Charles Pelkey. Readers of this column should not act upon any information contained therein without first seeking the advice of qualified legal counsel licensed to practice in your jurisdiction.

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29 comments

  1. Sal Ruibal

    I’m shutting up and going for a ride. Without my lawyer. And may the record show that I own a very nice Specialized Roubaix SL, but don’t need a “no compete clause” because I’ve never been much of a competitor.

  2. Doug Page

    Excuse me while I catch my breath and get used to all the heavy hitters at RKP. What happened to the little blog I used to read? Y’all have moved uptown! This post is by far the best analysis of the S vs. V lawsuit I have read. Thanks Charles!

  3. Champs

    Two ironies, the first being all the publicity Specialized bought for Volagi, and second, the purported source of the aforementioned C&D is now defunct.

    Putting the lawyers down would be wise, but the damages are easily calculated, and cheaper than a vigorous defense. There will be a settlement with undisclosed terms, then Specialized will put out a Roubaix with disc brakes and bury them.

  4. David Peoples

    In terms of bicycle design, this also brings to mind the designs of John Castellano. Specifically his headtube-to-dropout bowing Bow-Ti, a titanium frame made popular by Ibis Cycles in the 1990’s. Conjuring the often heard industry adage that loosely declared there are rarely genuinely new designs, just new materials that utilize existing ones.

  5. BikeRog

    Not only did Specialized spend $1.5M in their silly lawsuit, they lost that much and more in the damage done to their public image in the process.

    I think they would have done much better had they initially congratulated their two former employees on their entrepreneurial skills and vision, and then set up some sort of distribution deal that would have enabled the nascent manufacturers to sell more bikes while generating profits both for Specialized and their former employees.

  6. Anthony

    I hate this stuff. I dislike the way the world has gone with patents and IP, and I definitely dislike what specialized has done here and in other cases, such as the case of Epic Designs (now Revelate).

    I have canceled an order for a Specialized bike this year. It was going to be my first, I don’t own one currently and now I’m glad for that.

    I fervently hope that the backlash from this lawsuit it will have an impact on Specialized but I don’t think it will have a measurable one. Someone else will buy that bike and business will continue as usual.

  7. Skippy

    I have 2 specialised allez alloy frames , both given to me . If Specialised want publicity then i will be happy if they give me a Carbon frame to ride on this year’s Grand Tour routes ! I won’t ask for $US1.5 Million to help them out with the publicity !
    Had these guys paid Specialised a ” Buy out fee ” to leave their employment then i could understand there was a legal case to answer but this was a disaster waiting to happen !

    Wonder if UCI will demand a ” scrutiny fee ” from Volagi , Pat is in desperate need of funding now that Rolf Aldag has added to his woes !

  8. grolby

    I have to disagree, BikeRog; while a big deal to those deeply invested in the industry, especially those parts of it that are endemic to California, Specialized sells to far too big a market to worry about this making an impact on sales. They’re out $1.5 million, and that’s pretty much all. I only hope that the Volagi guys haven’t dug themselves too deep of a hole by fighting this case.

  9. Michael Bechauf

    Charles, I was at court for most of the trial. The non-compete clause in Robert’s and Barley’s contracts were only one point of Specialized arguments. I don’t think the jury bought that, specifically because the judge instructed them that it was lawful in California to “plan” a business as long as an employee would not betray the loyalty to his employer, i.e. work on what they are paid for. The other point was confidentiality and Specialized discovered some, in my view, really damaging emails written by Choi. Nothing like that existed for Forsman. In addition, Choi stayed on until August whereas Forsman quit in February 2010. During those couple of months that Choi stayed longer, Specialized came up with all sort of claims, but I didn’t buy most of them. But those emails where he sent sales reports was a clear breach of contract when he shared confidential information with his Volagi team mates. If you are interested, I wrote some more about the trial in this blog http://shyperspectives.wordpress.com/2012/01/13/volagi-justice/

  10. Touriste-Routier

    Having been brought into litigation on IP issues previously, it always makes me wonder why any party would want to have their fate concerning the minute intricacies of IP law decided by a bunch of people who couldn’t/wouldn’t/didn’t talk their way out of jury duty.

    I imagine Specialized could have purchased Volagi for less than the cost of litigation.

  11. Fausto's Schnauzer

    Oh the irony of Specialized/Mike Sinyard going after someone over intellectual property, especially when the Roubaix was inspired by the Seven bicycle owned by one of Sinyard’s minions.

    And then there’s the very foundation of Sinyard’s the mountain bike empire, which began when he bought a Ritchey and sent it to Japanese frame builder with the instructions to “copy and make this.” Of course some 15 years later Sinyard and Tom Ritchey had their brief “alliance.” When the cycling press was called to meet with Tom and Mike to learn the details of what this “sharing of ideas and resources” really meant, Tom himself seemed to be a bit in the dark about the whole thing.

    You’ve done a lot for the sport and the industry Mike, but sometimes you’re your own worst enemy.

  12. Dave

    And I thought it wasn’t about the bike.

    Put photos of two said bikes side by side. Some variation, they look nothing alike to me. The Roubaix has some fugly seat stays while the Volgai’s are clean, elegant and sweeping.

    I’m with BikeRog.

  13. CAT4Fodder

    More reason to stay away from Specialized IMHO.

    Look – they were taking this lawsuit not because they were specifically threatened by Vilogi. This was more a bigger picture issue to them.

    Let’s break down the industry right now:
    1) Most of the frames are now manufactured and sourced to a few contract manufacturers;
    2) Carbon technology has advanced substantially in the last ten years, but, there are diminishing returns, and suddenly, companies like Fezzari, Ritte, Aerocat, November and Volagi (not to mention the scorn of non-Fred’s…BikesDirect), can order and provide frames which, for a substantial sum less than the big guys, sell a frame which honestly, for all but the top professionals, will provide performance-wise a very similar ride/experience. I am not even sure you could say this 5 years ago.
    3) The general public is becoming more aware of this, and is increasingly wondering what they are getting in value from the large players in the industry.
    4) Except for Giant (and maybe Merida), all bike companies are now design shops. What separates a Specialized from a Ritte is quite frankly, small, highly specific designs derived from costly R&D incurred by the large companies. The ROI for them is the marketing and price inflation they can charge to customers as this allows them to differentiate their products from others.

    Specialized is spending $1.5 million not to protect the Roubaix from Volagi (it will do fine), but they are sending a message to all their current and former employees. The biggest risk to Specialized is that they are unable to continue to push the technological envelope in order to convince the public to spend an extra grand or so on a Specialized versus an open-sourced tubing generic brand.

    If they did not fight Volagi, and potentially bankrupt these two founders, then it increases the risk others within the Company (who likely have contacts with the CM’s) could either take ideas or even inspiration from R&D at the Company, and take away a potential product differentiation design from Specialized.

    1. Padraig

      CAT4Fodder: I feel a need to respond to your comment because you make some sweeping generalizations that aren’t really accurate, as well as suggest a few other ideas that aren’t really accurate either. First, there are literally dozens of factories through Asia that make carbon bikes. Product managers I know have spent weeks on the road checking out places they hadn’t even heard of the year before. Second, I’ve ridden open mold bikes and I’ve ridden creme de la creme stuff from companies like Felt and Cervelo. There’s a real difference between the two. The value of open mold stuff is that you can get 80% of the ride for 50% of the cost, provided the brand isn’t overly marking the bike up. Third, this is why more people should do more test rides. Fourth, to call a bike company a design shop is to underestimate the work that goes into designing a top-of-the-line bike. Frames like Cervelo’s R3 are really the result of a partnership that takes place between the bike company and the production facility. It’s not like Subway where you look through the glass and just say, “Yeah, pickles, onions, mayo, hold the mustard.” If you’re going to paint bike companies with that brush, be sure to call Apple a design shop.

      As to Specialized, while the court has decided they were wrong about what took place, there are people at the company who truly believe that Volagi’s founders stole work from Specialized. That’s why they went to court. I know, I’ve spoken with some of them. Most bike company employees like where they are just fine and have zero dreams of going out to launch their own companies.

  14. CAT4Fodder

    Padraig:

    I appreciate the response, and your clarification. I was in part speculating on the motive for Specialized, given the insignificance of Volagi to Specialized’s overall sales and strategy. However, the math is quite peculiar, and any company that spends that much to defend something so insignificant means there were other threats (whether real or perceived) causing them to fight Volagi and potentially ruin the lives of the two founders.

    I also was not implying that Specialized employees were intending to jump or wanted to jump. But if you do not think any company with intellectual property is not worried about losing this competitive advantage, and will do what it takes to mitigate this risk, I think you are failing to understand this risk. It is why Specialized would spend $1.5 million.

    Additionally, I never meant that to imply that a design shop was a pejorative. In fact, most US companies are now more ore less all design shops (hell – even my employer, which used to manufacture its own technological product, now outsources to Foxconn, and is nothing more than a engineering/R&D shop). But I still take pride in the work of my employer. It is the way our world is organized economically currently. This is called specialization. It allows entities to focus on their core competencies (see Cervelo). However, this creates a risk, which is that when your only differentiation is technological improvements (and not the craftsmanship side of production), you either innovate or die.

    If you want to talk gross assumptions, I think to argue that a Ritte bike is only 80% of the quality of a Specialized Tarmac is the gross generalization. I agree, some of the current aero bikes clearly have a design innovation that makes them truly a better bike than your standard open source. But again, that aero design will be replicated soon enough in the open source world, and then what? Do you see my point? The public is less and less inclined to pay the significant increase in cost for what most of us will at best get actual marginal gains and at worst, only perceived benefits due to our own biases.

    Carbon has been a great asset to the large bike companies, as they have had the capital and design advantages in the last decade to differentiate themselves. And who knows, maybe they can continue to push the envelope.. But carbon eventually will hit its technological design limits, and it will become a commodity. I personally believe we are starting to see this now. More and more of my ride / race buddies are deciding to buy from these smaller, open source companies, when in the past, they would have clearly gone to the large players.

  15. Bob Log III

    This one lawsuit may have only netted them $1.00USD, but what is it worth them to have every single Specialized employee have to look deep inward to reevaluate just how much of a go at it they think they can make?

    I know if I ever decided to leave my current employer to go it alone I’d at best give myself a 50/50 chance. The guarantee of $1,500,000.00 being spent in order to sue my ass would certainly make me want sufficiently better than a 50/50 shot at it. After all, I like that roof over my head & that is exactly what Specialized was after here – they could give a shit about a bike company that sells less than 1% of the bikes they do.

  16. CAT4Fodder

    As an additional response, the fact that there are additional factories in Asia that a new and riding up to offer contract manufacturing is an indication that this is an even bigger threat to the margins of the large companies. Look – I do not like this model. It drives out innovation in the long-run, as the ROI will not be there to support all of the research.

    Will there still be R&D…sure, but I am not sure if will be in frame design going forward. There may still be some high-level R&D at a few of the biggies, but it will be limited to those bikes for pros, and really wealthy folks looking for their schwag bike. The rest of the public will balk at the prices being charged for most of the mid-range (even lower-high end range). Can someone really tell me that a Cannondale Synapse is some awe inspiring piece of design worth the price inflation? Or that a Specialized Roubaix is really worth the mark-up compared to some of the lesser known Companies? Is any Bianchi now worth the price?

    Now – I will agree that one of the last market benefits to the large players is oddly the brick-and-mortar LBS. Bike consumers I think are savvy enough to realize that fit matters. And the risk currently with the generics is that too many people, lacking their overall bike fit metrics, buy a bike too large, small or otherwise ill-fitting for their body types. But soon enough, these smaller players will gain some distribution, and eliminate this barrier to entry.

    The real money will be in after-market components such as power meters, drive-trains etc… where the public is just now seeing the benefits of technology. And oddly, I think there are lots of inroads in other areas (speaking of Specialized, just look at the most recent water bottle they designed. Brilliant in terms of the benefits you get).

    1. Padraig

      CAT4Fodder: Let’s try to keep the discussion out of speculation, to the degree that we can. I’m going to make a few small points that are based on information I have.

      The point to the case was the belief on Specialized’s part that former employees had stolen from them. No speculation required.

      I’d try to impress on you the difference between the work of companies such a Cervelo and Specialized from the open-mold bikes (let’s leave Ritte out of this—not everything they offer is open mold), but your belief that carbon bikes are commodities suggest that the only solution is a race to the bottom.

      People told me before I started RKP that information is a commodity, that there was no way I’d offer anything of greater value than any other source. Had that been true, you wouldn’t be reading this.

  17. CAT4Fodder

    Padraig:

    Hey – your site.

    But my comments on the industry as a whole and the direction I think it will go is speculation, but then again, all forecasts are just that, speculation. So I was not intending to offend anyone. As for a race to the bottom – errrrr yes and no.

    A good example – toaster ovens. When they first came out, they were amazing new technological gadgets, for which a premium could be assigned. Now? They are literally based on who can produce the cheapest version.

    Apple’s constant move into new technology and innovation, which provides consumers with enough value (both real and perceived), allows them to continue to both charge a premium and differentiate themselves.

    Bikes are no different. Look at custom steel. Sure, not the lightest, stiffest or corrosive resistant. But the advantage in the market is the craftsmanship, art, customization, and beauty will always leave a place for custom steel bikes. No matter how many steel bikes certain companies put out en-mass to try to capitalize on this wave, there is a market for people who crave that dedicated craftsmanship. So it is not always a race to the bottom.

    My point on carbon was that once you outsource production, and your product is made in the same factory (or by the same overall contract manufacturer as others), your ability to differentiate relies solely on your ability to design a bike both striking in appearance as well as technologically innovative. No one buys a Specialized because there is some pull or attachment to the overall production of said bike. Faceless CM’s in some far-flung Asian factory turns building a bicycle frame from a craft/art into an assembly line. Even if some of this is real or perceived, it results in a different lure of bikes produced by the large manufacturers.

    The lure of a Specialized or a Cervelo is based on associations with engineering and R&D. A far cry from the lure of a Colnago Master. The first is constantly dependent on keeping ahead of open-sourced options, while the latter is based on reputation and quality that really cannot be lost. A great example is Bianchi. I am sure their bikes are solid pieced of equipment. But has that brand really held any allure in the last 10 years? Once people realized almost all of their bikes were made in Taiwan/China, suddently, it was nothing more than a more expensive version of some generic, with Celeste green. And sorry – but unlike Specialized, Cervelo, Cannondale etc…, Bianchi has done nothing innovative for road bikes. Name me something revolutionary about a Bianchi product? Anything?

    That is all I am trying to imply, is that under the current global supply chain model, the end result often ends in a race to the lowest cost producer as technological improves slow over time. So protecting the time between a technological advancement of a design to eventual standard within the industry is a key imperative of all enterprises which are focused and committed to R&D as a key market strategy.

  18. JohnG in Miami

    You know what, I prefer this thought provoking discourse better than reading stories about did he cheat/didn’t he cheat. Those blog entries bore me when one person’s opinion is pressed up against another’s opinion. Good topic Charles and Padraig/CAT4fodder thanx for your comments.

  19. Jesus from Cancun

    I don’t really have an opinion, since I am not in the market for a new bike soon. I like the Volagi features a lot, though. It would be at the top of my list if I was.

    I just want to say that I am very glad to see an intelligent exchange of opinions between a reader with some very valid points, and the editor.
    You don’t see that very often, and that’s one of the things that keep me clicking in here first thing in the morning.

    Thank you Padraig. You could just leave your writers write and your readers whine, but I am very happy to see how you stay on top of things.

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