The Problem In the spring of 2003, Jonathan Hoffman got a nasty surprise. An employee perusing Target's shelves had discovered a line of products that looked suspiciously like the educational flash cards and workbooks produced by Hoffman's company, School Zone Publishing. The competing publisher, Dogs in Hats, wasn't some faceless copycat. It had been started by Peter Alfini, a former School Zone vice president who had left the company two months earlier and taken two other employees with him. Worst of all, sales were slipping at the Target stores that carried products from both companies. School Zone sued Dogs in Hats for copyright infringement, in September 2003. A year and a half later, after Hoffman had spent $200,000 on legal fees, he and Alfini went into mediation. Hoffman had considered skipping mediation and holding out for a shot at total victory in court. But his family, including his mother, Joan, the company's co-founder and president, advised him against it. By July 2005, when Inc. went to press, the two parties had yet to reach an agreement.

What the Experts Said Lisa M. Tittemore, a partner at Boston-based Bromberg & Sunstein, said litigation would have been worth the price. Chris Cicchinelli, president of Pure Romance in Cincinnati, said he had faced a similar situation and had since developed a "very tight noncompete, nondisclosure agreement with our employees." Bradford Smart, president of Smart & Associates in Wadsworth, Illinois, said Hoffman's case was proof of the importance of thorough reference checks.

What's Happened Since Hoffman and Alfini settled the case soon after the story appeared, and Hoffman says the terms were favorable to School Zone. The phone number for Dogs in Hats is disconnected, and Alfini works at a company called Sourcebooks. (He did not return calls seeking comment.) But Hoffman says School Zone has had other problems, including a licensee that cheated the company out of royalties and an employee who sold company equipment on eBay. The events led him to bring in an outside HR company to filter candidates.

What's Next School Zone wants to double online revenue by the end of 2008 and is aiming for $40 million in revenue by 2010. Hoffman says there are things he should have done differently during the dispute with Alfini--like keep his employees in the loop. "They are our frontline, and they deserve to know what's going on," he says.