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SECURITY

Jonathan Hoffman Was Sure a Former Staffer Had Stolen His Company's Ideas

His gut told him to litigate aggressively. But was that a smart move?
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Jonathan Hoffman rushed to the local Target store and stood dismayed before a shelf filled with books and flash cards. His employee, he quickly decided, had been right. The products looked uncomfortably similar to the ones made by his family's educational media company, School Zone Publishing. The composition, fonts, language, and concepts screamed copycat. Then he noticed the name of the competing publisher--Dogs in Hats--and it all made sense.

Dogs in Hats was a start-up founded by Peter Alfini--School Zone's former vice president of national sales and marketing. Alfini had worked at School Zone for two years before resigning in February 2003, just a few months prior to Hoffman's trip to Target. The departure had stung, even more so when Alfini hired two former School Zone designers to join his new venture. Now Dogs in Hats' books and flash cards were sitting right next to School Zone's in a chain that accounted for about 10% of School Zone's sales. Alfini says he started Dogs in Hats with his own ideas and resources, and that he had more than a decade of experience in educational publishing before joining School Zone. But it seemed clear to Hoffman that Alfini had used School Zone--its talent, marketing plans, equipment, and contacts--to get Dogs in Hats off the ground. Hoffman was furious.

He immediately called a meeting of his executive team--which includes his mother, Joan, the company's president and co-founder, and his sister, Jennifer Dexter, the vice president of design and development--and his attorney. They reviewed Alfini's products and came to the same conclusion: School Zone's intellectual property had been stolen and the company had little choice but to take Dogs in Hats to court.

Dexter and Barb Peacock, the company's director of design and development, began comparing School Zone's products with those of Dogs in Hats, looking for points of apparent trademark and copyright infringement. In one instance, a School Zone alphabet flashcard featured a drawing of a blonde girl in pigtails with green bows and a yellow shirt collar and with a blue capital G on the card's flip side. A Dogs in Hats alphabet flashcard was nearly identical, except for the girl's hair color, which was brown. "We were all very shocked," Peacock says. "Everything looked like ours."

When sales data from the summer season arrived, Hoffman's worst fears were confirmed. In one six-week period, when Dogs in Hats products were stocked at Target, sales of similar items made by School Zone dipped by 23%. Preparing the legal case became Hoffman's focus. When he suspected that a salesman was leaking information to Alfini, the case became his obsession. No longer sure of whom he could trust, he limited access to the copy room and closed the office on weekends and after hours. It was not the way he liked to manage. But he saw no other way.

In August 2003, School Zone filed a complaint in federal district court in western Michigan listing 84 allegations against Dogs in Hats, seeking payment for damages and attorneys' fees and demanding that Alfini destroy materials using School Zone's copyrighted and trademarked material. In Dogs in Hats' October 2003 response to the complaint, Alfini denied most of the allegations, conceding only that he hired former employees of School Zone and was present at School Zone's offices after resigning.

Thus began an exhaustive discovery process that has lasted more than two years. By the beginning of 2005, School Zone had spent some $100,000 on legal filings and attorneys' fees. Joan Hoffman and Dexter were begging Hoffman to drop the case. But Jonathan kept thinking about what his father would have done. Jim Hoffman had founded School Zone in 1979 and died a few months before the Alfini affair began. "Jim Hoffman would have fire in his eyes," his son believed. The company's attorneys, meanwhile, warned that if School Zone did not defend its marks now, it would be more difficult to do so in the future. So Hoffman stuck with it.

In March 2005, a judge magistrate sent the parties into mediation. It shouldn't have surprised School Zone; western Michigan courts famously favor alternative means of resolving disputes. But Hoffman now faced a dilemma: whether to compromise and put the case behind him or to hold out for a shot at total victory in court.

The Decision

Hoffman's family convinced him to try to settle. Among other things, they argued, a successful mediation meant that the company would not have to ask clients such as Target to sit for deposition interviews and search through records for evidence. School Zone and Dogs in Hats agreed on a mediator, and one day last April, Hoffman and Alfini found themselves sitting across the table from each other. They had not spoken since 2003. But the atmosphere was professional, and Hoffman felt surprisingly optimistic.

Unlike court proceedings, the content of mediation sessions is not a matter of public record, and neither party agreed to discuss pending settlement terms. Hoffman would say only that he sought a monetary settlement and was adamant that School Zone, and he personally, retain the ability to speak publicly about the matter. One reason is that Hoffman, a member of the Young Presidents Organization, hopes to mentor entrepreneurs facing similar dilemmas. After eight hours of negotiations, Hoffman says, he thought they were close to a deal.

As of late July, however, when Inc. went to press, the two parties had yet to finalize a settlement. Alfini's attorney, Jovan Jovanovic, declined to comment about the discussions. "The case is ongoing, and we hope to have it resolved in the near future," he said. Alfini would not comment on the case, but he was happy to talk about Dogs in Hats, which he says is on track to hit $1 million in revenue in 2005. "We've actually turned down business in '05," he says. The company is planning a big push into Spanish-language materials, a growing segment of children's publishing.

Meanwhile, School Zone's revenue has grown about 20%, to about $25 million, over the past 12 months, thanks to the growth of its interactive division, and Hoffman is pleased to be focused again on his customers. "This case created perspective," he says. "I'm whistling to work thinking about how to make customers happier." He hopes to reach a settlement, but if the companies cannot, he has no qualms about battling it out before a judge. "Intellectual property is the lifeblood of my company," he says. "I'm trying to be logical. I sometimes worry this is about 8-year-old me, or my id, but I really do believe in justice."

The Experts Weigh In

It's the hiring, stupid

"School Zone needs to think about how it hires people. It needs top performers who are trustworthy, and should do very thorough reference checking, talking to the candidates' former managers and subordinates. When interviewing, Hoffman should personally take the time--four hours should be normal--to ask 10 questions about every job the person has held and go way beyond the resumé."

Bradford Smart
President
Smart & Associates
Wadsworth, Ill.

Why are you fighting?

"Litigation needs to be viewed in the context of a larger business strategy. Hoffman needs to ask: Has Dogs in Hats really hurt School Zone's reputation, and will this have an effect on business moving forward? If the case is a way to draw a line in the sand, so the industry knows School Zone is serious about protecting its intellectual property, then that supports expensive litigation."

Lisa M. Tittemore
Partner
Bromberg & Sunstein
Boston

Time to move on

"When I took over my mom's company, a former office manager took $100,000 of business from us. We pursued it in court for a few months, but then decided to move past it. All we wanted in the end was a personal apology on record. Today we have a very tight noncompete, nondisclosure agreement with our employees. With these contracts in place, employees know if they do anything to us when they leave, we will come after them."

Chris Cicchinelli
President
Pure Romance
Cincinnati

What do you think? Should Hoffman settle? Ot should be press his case before a judge? Sound off at casestudy@inc.com.

Last updated: Sep 1, 2005




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