A Challenge to High-Tech Hiring

As software giant Microsoft Corp. fights charges that it used its power to trample competitors, another lawsuit is calling attention to ways that much smaller players might also gain an unfair advantage.

Wal-Mart Stores Inc. last week sued Amazon.com Inc., charging that the online bookseller stole trade secrets by hiring a group of Wal-Mart employees with knowledge of its computer systems.

Although Amazon.com is a leading merchant on the Internet, it is diminutive next to Wal-Mart, which generates as much revenue in a day as Amazon.com does in a year.

More important, Wal-Mart is not suing Amazon.com alone. Also named as defendants are Kleiner Perkins Caufield & Byers, the Menlo Park venture capital firm that funded Amazon.com in its infancy and helped it put together a management team. Another Kleiner Perkins start-up, Drugstore.com, is also named in the lawsuit.

Experts said the lawsuit could challenge the practices that are routinely used to build new high-tech companies, which have been a major source of innovation and growth in the overall economy.

“It could give one pause about how they do things,” said Eugene Weber, president of the venture capital firm Bluewater Capital Management. “If you have to consult a lawyer every time you hire a talented person, it makes life more difficult.”

Another investor with ties to Amazon.com said, “It could be chilling to the formation of new companies.”

Amazon.com may appear to have mastered the business of selling goods over the Internet, but it is still a very young company and lacks a cutting-edge technology that for years has supported Wal-Mart’s rapid growth. Wal-Mart’s Retailink system is the envy of the retail world for the way it minutely tracks inventories and feeds the data back to vendors.

Knowing how much inventory is needed in different stores can mean the difference between maintaining a costly warehouse near a store or having vendors ship directly. Such a system could clearly benefit Amazon, which has plans to eventually sell a range of products besides books and music and has even been dubbed the Wal-Mart of the Internet.

Wal-Mart’s lawsuit alleges that Seattle-based Amazon, and to a lesser extent, Drugstore.com in neighboring Redmond, Wash., systematically hired employees away from Wal-Mart in an effort to gain knowledge of its vaunted data-tracking system.

“These companies are sitting in Silicon Valley and close to Microsoft, so we find it unusual that they would go to Bentonville, Ark., to hire people,” a Wal-Mart spokeswoman said. “We believe they came looking for specific information.”

Whether hiring an employee from a competitor amounts to stealing trade secrets is a question most venture capitalists and start-up businesses would rather not have to answer.

High-tech start-ups have thrived in an environment in which employees move around a lot. “That’s why you hire them,” Weber said. “You’re looking for certain skills.”

Amazon insists it has no interest in Wal-Mart’s trade secrets but only in finding talent, wherever it may be.

It found a disproportionate amount of talent in Arkansas. Wal-Mart says Amazon.com hired 10 of its current or former employees, including Richard Dalzell, who is now Amazon’s chief information officer.

Although it is a fuzzy area, legal experts say there is precedent for individuals being barred from going to work for a competitor if it seems inevitable they will take confidential information along with them.

This principle of so-called inevitable disclosure has been used to block an employee of a bagel maker from going to work for a competitor, among other cases. It has generally not been enforced in California, where most venture capitalists are based and most high-tech start-ups are formed.

“It would be a very hard case to win in California,” said Tom Peterson, a venture capitalist with El Dorado Ventures. “California is more liberal on this issue than the others. Our whole economy is built on the knowledge you acquire in companies. You can market yourself based on your worth.”

The Wal-Mart lawsuit, however, was not brought in California but in its home turf of Benton County, Ark., which has less sympathy for the start-up-driven economy of Silicon Valley.

“If they try to replicate our systems, it wouldn’t really be a new start-up, would it?” a Wal-Mart spokeswoman said.