How We Survived Getting Sued by the Big Guys

By Bobby Brannigan, CEO, ValoreBooks, San Diego, Calif.
I launched ValoreBooks, an online marketplace for textbooks, with 12 college friends. We devoted years to building the company and went heavily into debt. Then, just as we were poised to become profitable, our biggest competitors hit us with a lawsuit that threatened to destroy us.

We either had to fight it or give in. We decided to fight -- and fight hard -- but in retrospect, I think it would have been better if we had surrendered.

On the cusp of success
My friends and I were still in college when we founded the company in 2002. I took out credit cards in my name and transferred the cash to our business account to pay developers and marketing expenses. It was a risky move, since the interest rate was around 20 percent, but we were really excited by our model.

We wanted to build an online marketplace for textbooks, where retailers could sell new and used books to college students at heavily discounted prices. We would then make a commission on each sale.

We thought it would only take three months to launch the business. But the site took two years to build, and it took another two years to develop a steady marketplace of sellers and buyers.

Finally, in 2007, we had accumulated thousands of sellers, and our site came up near the top of Google results for people searching for college textbooks. We expected to turn a profit that year, which would allow us to pay off our debt. Then I received a nasty letter from the four biggest textbook publishers in America, threatening to sue us for $8.7 million for selling international editions of their books on our site.

Setting a precedent
Many of our online sellers carry textbooks published legally in countries like the Philippines, where they often retail at 10 percent of their American list prices. Sellers from those countries will mark up prices slightly, and sell them to U.S. buyers on our site.

There is nothing illegal about this practice. Indeed, several other companies discount books this way. But the publishers targeted us because we incorporated in New York City, where they are also based, and a lawsuit in the city meant they wouldn't need to travel out of state for court proceedings. Their goal was to set a legal precedent that would prevent companies from selling international publications within the United States.

We had a choice: We could remove the books from our site -- or fight. The legal fees alone would be potentially devastating to any startup. From our perspective, though, surrendering would have been just as bad as losing, since those international versions made up nearly 50 percent of our revenues.

Our only hope, we decided, was to fight.

Battling the publishers
A law professor from our college, SUNY Fredonia, agreed to work for us at a discounted rate. He was up against five guys from a prestigious New York firm.

I naively thought that we'd pay our lawyer a little money and he'd get us out of the situation. But one month of fighting the suit turned into eight, and we soon realized we might get run out of business, either by our legal debt or by losing the case.

So I decided to bluff. I went to the publishers' legal counsel and said, "You guys can keep suing me all you want, but I'm going to keep spending all my money fighting. Your legal fees are 10 times mine, so you're the ones losing out."

Privately, though, I wasn't sure how much longer my company could survive.

Fading morale
There were eight of us on staff at that point, and we spent all of our energy fighting the lawsuit. We worried about money, so we cut back on our marketing budget. The upshot was that we turned a small profit that year, but we didn't grow as much as we'd hoped.

Even though the situation was tough, it brought us closer together. But the ordeal was destroying my faith in the company and my instincts as a businessperson. I founded the company believing that if I made the right moves and skillfully positioned the business, we would grow and make money. But I was learning that even if you do nothing wrong, a big company can flex its financial muscle and kill your entire business.

Settling the suit
Finally, a couple of weeks after I'd approached the publishers' legal counsel, they came back with an offer to settle. We accepted. The amount was equal to the profits we would make the following year -- but after some wrangling our liability insurance covered the legal and settlement fees.

I was so worn out that I took six months off to travel and recuperate, leaving my staff to run the company in my absence.

Although we were forced to remove the foreign manufactured books from our site, the settlement itself didn't really hurt us financially, which meant all that fighting was for nothing. If I had the chance to do things over, I would begin by asking the other side, "What would you like from us?" If we'd just compromised in the beginning, we could have focused on growing the business, rather than fighting the lawsuit.

The hard truth is that sometimes you have to bow down to the big guys to avoid getting crushed.

Bobby Brannigan founded ValoreBooks with friends from his college hockey team in 2002.
-- As told to Kathryn Hawkins

Resources:

• Learn how to protect your company from a lawsuit.
• Find out which insurance policies you might need to cover your small business.