Best Buy’s TechForward Lawsuit Highlights The Company’s Innovation Challenge

Best Buy‘s (NYSE:BBY) conviction in a case where it was accused of stealing trade secrets from a start-up firm called TechForward has put a question mark over the firm’s ethical practices. The company was ordered by the court to pay $27 million to TechForward, including $5 million in punitive damages. ^[1]

Why Does It Matter?

While the amount of the penalty is not massive to a company with $50 billion in sales, the case might have damaged Best Buy’s image in the public consciousness and give future partners a reason to pause before working with Best Buy.

The consumer electronics retail industry is presently undergoing a paradigm shift with online retailers disrupting the existing business model. Best Buy needs to innovate rapidly in order to survive the competition, and not all of this innovation can happen in-house. Best Buy would need to tap into ideas and concepts of other people, particularly young entrepreneurs, but nobody wants to engage with a company they cannot trust. Innovators’ reluctance to collaborate with Best Buy could see competitors gaining at its expense.

See our full analysis for Best Buy

What Did Best Buy Actually Do?

Best Buy had partnered with TechForward to launch a nation-wide buyback program. TechForward, which had developed its own proprietary analytical model, granted Best Buy access to it under a non-disclosure agreement. But a few months into the collaboration, the former abruptly decided to end the partnership, and shortly launched its own model identical to that of TechForward. The program went on to generate $140 million in revenues for Best Buy.

Funded by venture capitalists, TechForward had invested significantly on the Best Buy deal, and the company was forced to sell its assets to a third party following the financial setback it suffered after the deal was called off. But TechForward investors at First Round Capital kept the case and continued funding it. After fighting the legal battle for 18 months, the verdict was awarded in TechForward’s favor, and Best Buy was held liable for willfully breaching contract and misappropriating TechForward’s trade secrets. ^[2]

Specific Instances Of Unethical Conduct

Among information brought up in court were emails of Best Buy employees openly discussing duplication of TechForward’s model. The company also issued instructions to remove all references to TechForward in file names. One email goes as far as to saying “I don’t think we should be making this company rich….” Best Buy also admitted that the employees who viewed TechForward’s model were also the ones who built their model later.

Best Buy also failed to abide by its promise of building a “brick wall” to safeguard information provided by TechForward. Instead, it circulated the information freely within the company, and shared it with its insurer as well to convince the latter to underwrite the program.

The evidences were enough to indicate that Best Buy had never intended to honor its agreements with TechForward.

While this is an isolated event and will not impact Best Buy materially in financial terms, it could create some mistrust with smaller firms that could be partners that would ultimately hinder Best Buy’s ability to innovate and transform its business model.

We have a price estimate of around $16 for Best Buy after the third quarter earnings results.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. TechForward vs Best Buy Punitive Damages Memorandum, Central District Court California [↩]
2. The defunct startup that beat Best Buy in court, CNN Money [↩]