What's the dollar value of a defunct Internet start-up that never launched a single product? According to a lawsuit filed last week by PowerAgent, a Web marketing company that ceased operations last September, the answer is US$3.5 billion.
The suit, which even has its own domain name, alleges that a key PowerAgent partner, board member, and investor - Electronic Data Systems Corp., or EDS - wanted PowerAgent's online marketing technology so badly that it drove the company into the ground to get it.
"...PowerAgent alleges that EDS sabotaged PowerAgent's product launch by engaging in numerous unlawful acts of fraud and economic extortion," the company said in a statement.
The startup alleges that the mega systems integrator used "bait-and-switch tactics" to wrest control of its technology in exchange for already-promised financing, and that when PowerAgent refused to cede control of its product, EDS pulled out of its financial commitment, leaving PowerAgent to shut its doors.
EDS has seen the suit but refused comment. "We can't talk about cases that are under litigation," said Jaya Tharimala, public relations manager for the c2o Interactive Architects unit of EDS that worked closely with PowerAgent.
PowerAgent was started in 1994 by president Dale Sundby - and later joined by ex-Poppe Tyson executive David Carlick - with the goal of constructing a massive database of consumer information, then connecting advertisers with individual consumers for a fee. In return for participating, consumers would get paid to pay attention to marketing messages, a technique that has worked for companies like CyberGold and Netcentives.
The startup partnered with EDS for its Internet design and information architecture services, and EDS developed several key applications for the PowerAgent product, including technology to protect a consumer's identity and Java-based applications for advertisers wanting to create dynamic ads.
PowerAgent raised more than $15 million in financing before closing its doors - just a few weeks prior to its scheduled launch. According to the suit, the company's demise was due to EDS' last-minute withdrawal of a promise to inject another $10 to $20 million into PowerAgent (EDS had already put $5 million into the company), and EDS' interference with other investors.
Some see the suit as sour grapes. "The PowerAgent method just wasn't going to work, and the execution left something to be desired," says Evan Neufeld, an advertising analyst at Jupiter Communications. "I'm no lawyer, but this looks like flogging a dead horse to me."
But Andrew Hayes, an attorney at Boies & Schiller who is representing PowerAgent, said the suit is about lost opportunity. He compares PowerAgent's potential to that of successful Internet companies like Amazon.com, CyberCash, and DoubleClick.
"This was a technology that was a billion-dollar opportunity last fall, and EDS tried to steal it," says Hayes. "You've got an incredibly fast-growing market, and a premium placed on companies that are 'firstest with the mostest.' PowerAgent had the opportunity, and EDS destroyed it."
Hayes says that seeking $3.5 billion in damages, which could be tripled to $10.5 billion under the federal Racketeering Influenced and Corrupt Organization Act, is reasonable. "If EDS had given [PowerAgent] the promised financing, launched the product, and gone public this year, as everyone knew it was planning to do, it would've been there first and built the brand name."
Analyst Jim Nail at Forrester Research offers a less-enthusiastic endorsement of PowerAgent's business plans. He says that Forrester surveys have shown that advertisers don't anticipate spending much on "one-to-one" targeting before 2000.
"They've got other things they have to worry about right now," says Nail. "So any company that hopes to get into the business will have to wait around a while. And it takes money to get yourself going, stay afloat, and really establish yourself in that space."
PowerAgent may have one more trick up its sleeve, though - a plan to retrench and return to the market. Although the company pared itself down from five offices to one in September, and cut the payroll from 60 employees to six, it didn't vanish completely. PowerAgent still has an office in San Diego, and though Carlick has since left, president Sundby remains. Sundby declined to explain his motives for sticking around, or for filing the suit, other than to say he hoped to satisfy the company's many creditors.
But last fall, when the company experienced what Sundby terms its "financial crisis," he announced his intention to be back with a new product by the first quarter of 1998. Today, Sundby said, "People think the business model, by all accounts, is big. The financing crisis we experienced didn't change that, but it stripped the company of its resources and badly stained it in the market."
Will the company try to have another go of it, if it wins an award in the EDS suit? "That's speculation at this point," said Sundby.
"We think we've hired the best lawyers in the country," he added, "and we intend to take our case to trial as soon as possible."
Legal observers said the case sounded like a typical example of a business partnership gone bad, but pointed out the novelty of registering a URL for the suit itself: www.poweragentvseds.com.
"Does putting up a site for your case help you win your case?" asks David Post, a Temple University law professor and co-director of the Cyberspace Law Institute. "The answer to that is probably no. But in a broader sense, this seems to be a recognition of the fact that ideas matter, and public opinion matters. It brings legal discussion to the people who are ultimately responsible for making the laws, so they can really participate in the debate."
PowerAgent registered the domain for its lawsuit site, and while attorney Hayes says the site probably won't play a role in persuading judge and jury about the company's case, he claimed it has other benefits. "It's an appropriate way for the client to publicize his claims, and counteract the negative press coverage the company got [last fall]," Hayes said.
Bad publicity or not, even Hayes admits that it might be difficult to resurrect a start-up that seems to have missed its moment, even with an award in the millions or billions of dollars.
"It's very tough to put Humpty Dumpty back together again," Hayes says.
Neufeld at Jupiter offers this advice: "Take the money and retire to the Bahamas."
