Parr Brown Saves Promising Technology Company

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BACKGROUND: LIQWID is Hit with Lawsuit

On December 23, 2011, LeftsNRights, a young, rapidly-growing Internet technology and marketing company doing business under the name of LIQWID and its principals were served with an “everything but the kitchen sink” complaint that sought to shut down LIQWID, to obtain its intellectual property, to preclude its lead inventor from working in the industry, and the disgorgement of all LIQWID’s capital.

Notwithstanding the holiday season, LIQWID immediately sent the complaint to Parr Brown Gee & Loveless, its corporate counsel, asking about the appropriate strategy in dealing with such an aggressive claim and wishing to consult on how business operations could and should go forward during the pendency of the lawsuit. LIQWID and the Parr Brown attorneys immediately began focusing on how to best refute and dismiss the allegations made against LIQWID, take the offensive in the lawsuit, bring to bear significant pressure on the plaintiff, and proceed in an efficient, economical manner that, very importantly, minimized disruptions to the business operations of LIQWID and its standing in the marketplace.

Parr Brown had assisted LIQWID’s principals and experienced entrepreneurs, James Rowan and Nikolai Mentchoukov, in forming the company. Parr Brown had also provided corporate assistance to LIQWID over the previous two years. LIQWID had developed, was continuing to develop and refine a technology that revolutionized the way advertisements could be created and delivered to internet users. Among other benefits, the technology allowed advertisers to more effectively reach their intended audiences.

Mentchoukov had previously been affiliated with the plaintiff but had executed carefully worded agreements delineating his obligations and responsibilities toward plaintiff and each party’s ownership in certain intellectual property, in an effort to try to avoid the very type of dispute that the plaintiff initiated. With business growing rapidly and product development and improvement consuming the attention of LIQWID management, LIQWID, Rowan and Mentchoukov were served on the eve of Christmas Eve with an $80 million lawsuit alleging, among other claims, patent infringement, trade secret misappropriation, unfair competition, breach of contract, breaches of fiduciary duties, and business claims, and seeking an immediate injunction that would have effectively shut down LIQWID’s business. In short, it was a case that LIQWID simply could not lose. Not only would an adverse result in the lawsuit have led to the demise of LIQWID, but it also would have resulted in the loss of all intellectual property developed and owned not only by LIQWID, but also by Rowan and Mentchoukov. While every effort had to be made to prevail in the lawsuit, at the same time the effort could not become so expensive and consuming that LIQWID was irreparably harmed during the course of the litigation.

Given what was at risk for the client, the exigent time pressures, and the wide-ranging claims and areas of substantive law involved, in consultation with the client, Parr Brown assembled a team of attorneys with varied areas of expertise to work with LIQWID in bringing about the best result possible (indeed, the only acceptable result), in an expeditious, cost-beneficial, and efficient manner. Attorneys with significant experience in intellectual property, corporate governance, forensic accounting, complex commercial litigation, and securities partnered with LIQWID to achieve the desired result.

CHALLENGE: Tight Timeline with Substantial Scope and Risk

The most pressing and immediate challenge was to defend against plaintiff’s claims for a preliminary injunction, an order from the Court that would have shut down LIQWID’s business during the pendency of the lawsuit and, as a practical matter, been the death knell of the company. Evidence gathering, case preparation, strategy development, and posturing with the Court that usually occurs over a 12- to 18-month time frame was compressed into a matter of a couple of weeks. This challenge was heightened by counsel’s need to quickly get up to speed on relatively complex technologies so as to understand subtle but crucial distinctions among the various technologies at issue in the lawsuit – All while not overburdening Rowan and Mentchoukov who had a business to run, apart from this lawsuit.

Ultimately it was the plaintiff that requested more time from the Court to prepare its case for the preliminary injunction, as the LIQWID-Parr Brown team quickly formulated and presented to the Court a thorough and comprehensive defense to all of plaintiff’s claims — a defense broadly consistent not only with LIQWID’s overall strategy and theory of the case but supported by even the most minute facts, and technical details, as well as controlling case and statutory law. It quickly became apparent that the LIQWID-Parr Brown team understood plaintiff’s case, along with its weaknesses, even better than the plaintiff. Upon consultation with LIQWID, Parr Brown attorneys acted quickly to secure the testimony of important third parties, such evidence being consistent with and greatly bolstering the strength of LIQWID’s theory of the case and overall strategy. Within a matter of a couple of weeks, plaintiff went from the position of an invading army to one besieged, spending all its efforts fending off LIQWID’s counterattacks rather than successfully developing its own case.

At every step in the litigation, the Parr Brown attorneys consulted with Rowan and Mentchoukov as to how the litigation strategy could be maintained consistent with business goals and needs. For example, it came to LIQWID’s attention that negative and untrue information about its involvement in the lawsuit was leaking out into the market and reaching customers, potential customers, and potential business partners. The decision to obtain “discovery,” including documents and deposition testimony, from certain key third parties was based in part on the need to educate the market as to the strength of LIQWID’s intellectual property rights, the viability of its business, and its intent and ability to prevail in the lawsuit and continue successfully developing and marketing its technology. The strategy worked as LIQWID suffered no adverse consequences in the market as a result of the lawsuit.

Concurrent with obtaining information from key third parties, at the outset the Parr Brown team tested plaintiff’s legal theory and factual underpinnings of the patent infringement claim. Given the significant time and expense required to litigate infringement claims, counsel and the client saw a great advantage in vitiating that claim early in the lawsuit. It was determined that the best way to accomplish this goal was to immediately and aggressively depose plaintiff’s principal technology persons. At the conclusion of those depositions, it was clear not only to LIQWID, but also to the plaintiff, that the infringement claim was very tenuous – In fact, the claim was so legally and factually deficient that LIQWID argued that it was entitled to recover the legal fees expended defending against charges of patent infringement. In a matter of a few weeks, LIQWID had gone from defending against an infringement claim that, if proven, would have been the end of LIQWID’s business to aggressively seeking the recovery of its fees.

From the outset, the decision was made to be proactive rather than reactive. Instead of allowing the lawsuit to follow its natural course, through an aggressive use of options available under the federal rules of procedure, the Parr Brown team set the course for the litigation. They turned plaintiff’s request for an expedited preliminary injunction hearing against plaintiff by demanding a full and complete disclosure of all evidence in plaintiff’s possession on a very short timeline. In addition to the depositions of plaintiff’s key technology personnel, the Parr Brown attorneys served written requests on plaintiff demanding, as was LIQWID’s right to demand, a detailed recitation of all bases for plaintiff’s infringement claim. When plaintiff’s responses were reviewed among LIQWID, counsel, and a consulting expert in the relevant field of technical expertise, the weakness of plaintiff’s position was confirmed, thus adding traction to LIQWID’s counterclaims for legal fees. Plaintiff’s apparent strategy of intimidating LIQWID into a quick settlement had utterly failed.

STRATEGY: The Best Defense is a Good Offense

As the tide turned against plaintiff, it continued to delay what all saw as inevitable – the Court’s denying plaintiff’s request for a preliminary injunction. Ultimately, plaintiff abandoned its preliminary injunction claim altogether, the same claim that on the eve of Christmas plaintiff had posited as one on which it was very likely to prevail and that must be litigated and decided as quickly as possible.

Because LIQWID wanted to preserve the option of raising capital, from a business perspective it was important not merely to deflect the claims asserted against it but to defeat them. To this end, Parr Brown filed a motion with the Court asking the Court to throw 12 of plaintiff’s 15 claims out of the lawsuit. Here, plaintiff could not delay the end result, and after the matter was fully briefed and orally argued by the parties, the Court issued a detailed, written opinion dismissing 12 of plaintiff’s claims as well as dismissing Rowan from the lawsuit entirely.  The Court agreed with LIQWID’s counsel’s arguments on every point.

With plaintiff’s claims largely gone from the lawsuit, and with LIQWID’s pending claim for attorneys’ fees, the Parr Brown team made an additional strategic decision to maintain the offensive in the lawsuit: Based on evidence of past financial improprieties that had been uncovered through Parr Brown’s careful forensic analysis of plaintiff’s records obtained during the lawsuit, and with Mentchoukov’s continued ownership interest in the plaintiff company, the Parr Brown team had the basis to assert a claim that the plaintiff company should be put into a court-appointed receivership. Parr Brown filed extensive papers with the Court, detailing scores of apparent financial improprieties with copious factual support, requesting the appointment of a receiver. Now, plaintiff faced a serious downside risk should it continue the lawsuit.

Not surprisingly, plaintiff resisted providing the requested financial records that ultimately provided much of the basis for the receivership claim. Some of these records were held by accountants in other states and therefore subject to those states’ privilege and confidentiality laws. As a founding member of Meritas, a national and international network of law firms held to very rigorous membership standards, Parr Brown has immediate access to local legal counsel in every jurisdiction in the U.S. as well as over 100 countries worldwide. Parr Brown contacted and retained the Meritas-affiliate firm in the relevant jurisdictions to obtain the requested financial records, and despite plaintiff’s resistance, Parr Brown was able to obtain the complete records. Having direct and immediate access to a high-quality local law firm proved an invaluable advantage for LIQWID and the Parr Brown team over plaintiff who needed to seek out and retain an unknown law firm each time a legal issue arose in another jurisdiction, which often occurred.

In an attempted quid pro quo, plaintiff subpoenaed sensitive LIQWID records and data stored in Colorado that LIQWID felt were irrelevant to the lawsuit. Again with the help of an affiliated firm, Parr Brown moved to quash the subpoena and no documents were produced. Plaintiff repeated the same arguments in an effort to obtain the documents in the Utah Court, but again its efforts were futile.

The fatal blow to plaintiff’s case came as the result of a careful examination of plaintiff’s own corporate governance documents. Counsel for LIQWID found an innocuous provision in the lengthy documents that could be read to provide that plaintiff corporation was obligated to pay Mentchoukov’s legal fees in defending claims asserted against him for actions he undertook while an officer or director of plaintiff.  What’s more, the document included an indemnification provision that obligated plaintiff to not only pay Mentchoukov’s legal fees but to reimburse him for any judgment obtained against him. In other words, plaintiff was obligated to reimburse Mentchoukov’s legal fees and any judgment that might be obtained against him by plaintiff itself. Essentially, plaintiff was suing itself.

The key document was governed by Delaware law, so with the assistance of the Delaware Meritas affiliate, the Parr Brown team filed an action in Delaware court seeking the recovery of Mentchoukov’s fees against plaintiff and a declaration that plaintiff was obligated to pay any judgment that plaintiff might eventually obtain in the Utah lawsuit. It was a legal check mate. Plaintiff had nothing but downside in continuing the lawsuit.

Two weeks after the commencement of the Delaware action, plaintiffs inquired about settlement.

Within a few months, the lawsuit had gone from being one about shutting down LIQWID, transferring all its intellectual property to plaintiff and a damages claim of $80 million to a lawsuit with essentially no claims remaining against LIQWID, Rowan and Mentchoukov and all financial risk of going forward with plaintiff. The final settlement reflected that reality.

“For a guy that likes to talk, I find it hard to find the words of how much we appreciate all that you have done for us. This case was handled brilliantly by all of you. The strategy, the thoroughness, the quality of the court filings and the guidance and emotional support were all so impressive and spot on. At the end of the day, I am most appreciative that you believed us and fought for us. To have a team that is always there, even in the middle of the night and on weekends with calls and emails, is so reassuring. I am a strong believer in surrounding yourself in life and in business with people of the highest caliber. And frankly, I am honored that we can earn the respect and friendship from each of you.”

-James Rowan, Co-Founder, Chairman and President at Liqwid