Posted by: Todd Erickson
Two of the storage startups with large bankrolls will have to spend a big piece of their cash lawsuits rather than business.
EMC Inc. fired a legal salvo at all-flash startup Pure Storage Inc. and NetApp Inc. has sued hybrid storage vendor Nimble Storage Inc. In both cases, the establish vendors allege that former employees who are now employed by the two startups stole trade secrets, customer lists, and solicited other employees in violation of employment agreements.
Both industry heavyweights are seeking monetary damages, injunctive relief to stop the defendants from using alleged stolen materials, and the return of alleged company secrets. They are also making sure everyone knows how they feel about their upstart competitors.
Pure completed a $150 million funding round in August, and has a total of $245 million in venture funding. Nimble has $98 million in funding. Both startups plan to go public, and Nimble already filed its S-1 registration for an initial public offering. They also both face serious legal bills now.
EMC claims the theft of confidential information by former employees “arises out of a deliberate scheme advanced by Pure Storage through a nationwide pattern of collusion ….”
NetApp’s complaint describes Nimble as “a company built on unlawful hiring and business practices.”
EMC v. Pure Storage
In its complaint filed in the U.S. District Court in Massachusetts on Nov. 4, EMC said the theft of “tens of thousands of proprietary, highly confidential, and competitively sensitive EMC materials” by former employees and in the possession of Pure Storage are in violation of the Key Employee Agreements (KEAs) each former employee signed when they joined the company.
The agreements require employees to return any EMC materials in their possession when they leave the company, not to divulge any “company secrets” after leaving the company, not to solicit any EMC customers as employees of Pure Storage, and not to solicit any current EMC employees to leave the company.
The EMC complaint alleges that “These claims arise from conduct apparently orchestrated by or known to the highest executive management levels of Pure Storage.”
Most of the former EMC employees named in the suit are in sales, and the lawsuit is weighed heavily towards allegedly stolen sales trade secrets, including customer lists and “sensitive pricing solutions and strategies custom-tailored for each individual customer.”
Pure Storage CEO Scott Dietzen returned fire at EMC in a blog post Nov. 5, claiming EMC’s charges have “no merit whatsoever,” that Pure Storage will defend themselves vigorously, and that it has the resources to do so – citing the company’s recent funding round.
Dietzen also criticized EMC’s own hiring practices, claiming that “in general more mature companies risk forgetting the golden rule—they are happy to recruit great people to join their companies from competitors (indeed they aggressively solicit such hires), but then resort to onerous non-compete agreements and lawsuits to deter the same employees from exercising their freedom to seek employment elsewhere.”
NetApp v. Nimble
NetApp’s filed its lawsuit against Nimble and three former employhees Oct. 29 in the U.S. Northern California District Court. It claims that two of the three former employees violated the Computer Fraud and Abuse Act by using unauthorized access to NetApp’s computer systems to acquire confidential and proprietary information and pass the information on to Nimble.
NetApp also alleges that the three former employees violated their NetApp employment agreements by taking or keeping proprietary NetApp materials, and soliciting NetApp employees to join Nimble.
Generally, lawsuits against former employees that involve non-compete and employment agreements that last after an employee has left a company are hard to win because the courts view such agreements as restraint of trade that could hinder a person’s ability to gain employment.
But these cases center more around people who joined direct competitors directly after leaving the plaintiff companies and whether they took sensitive information with them that is helping their new companies gain competitive advantages.
Ultimately, the question probably won’t be how “onerous” the EMC and NetApp employee agreements are. The key legal questions are whether the courts uphold the agreements, if the former employees breached the agreements, and whether EMC and NetApp suffered harm.