A Silicon Valley jury has awarded a little over $1 million to a placement agent in his suit against Jerusalem Venture Partners (JVP), Shalon Ventures, Worldview Technology Partners and several others.
The agent, Spencer Cleveland of San Francisco, filed the breach of contract suit back in November 2000. It went to a jury trial in California’s Alameda County Superior Court on Jan. 5. The jury delivered its verdict on Feb. 20.
The judge had not made a final judgment in the matter before VCJ went to press on March 11. Documents filed with the court showed that the attorneys in the case were still wrangling.
Cleveland declined to comment and said that his attorney, Richard Harrington of San Francisco’s Chandler, Wood, Harrington & Maffly, would have no comment. The defendants’ attorney, Kara Andersen of San Francisco’s Keker & Van Nest, did not return calls for comment.
In court filings, Andersen asked the judge to not enter a final verdict until the judge “decides whether plaintiff brought his trade secret misappropriation claim in bad faith…” Andersen also filed a brief that asks the court to award sanctions against Harrington for allegedly filing documents with the court that contained false statements attributed to defendants. Andersen suggested hearings in April.
Cleveland’s suit alleged that failed optics company InLight Communications Inc. hired him to raise capital for it, but it later pursued two rounds of venture financing without him. The jury found that JVP, Shalon, Worldview and others caused InLight to breach an “engagement contract” with Cleveland, and it awarded the placement agent damages of $1,015,812.70, according to the verdict form filed with the court.
The award is a fraction of what Cleveland originally sought, but the fact that the jury found in his favor could give venture capitalists pause.
Asked whether the verdict in the case could spawn more suits or have a chilling effect, Grant Collingsworth, a partner at Atlanta law firm Morris, Manning & Martin, said: “This strikes me as a fairly isolated case – most likely a jury just looking to stick someone with the bill after the company folded its tent. However, one successful lawsuit does tend to lead to others. If a trend of these lawsuits develops, it will increase the risk of a failed investment for the VC, but I doubt it will have a great chilling effect on VCs making investments.”
Collingsworth adds: What this case really demonstrates is the benefit of having an orderly wind-down when a portfolio company fails.The more loose ends you leave out there, the greater the chance the investor could get left holding the bag.”
As bad as it is for the defendants, it could have been a heck of a lot worse. Cleveland’s suit originally asked for damages of about $128 million, including punitive damages and damages for emotional distress. It also listed six causes of action. Later, the court reduced the total amount that Cleveland could seek to $54.55 million, and it reduced his total number of claims from six to three, said Kara Andersen, who represented all the defendants in the case. Cleveland’s claims for emotional distress and punitive damages were also tossed out, Anderson said before the jury reached a verdict. She could not immediately be reached for comment late Tuesday.
Cleveland’s suit alleged that InLight hired Cleveland to raise a minimum of $2 million in funding, of which he was to receive a fee of 7% of the amount raised. Cleveland identified E-Tek Dynamics as a company “interested in InLight as part of a group investing $15 million in a first round and investing $50 million in a second round,” the suit claimed. Had the deal gone through, Cleveland stood to make $4.55 million, or 7%, of the $65 million total.
The lawsuit also claimed that rather than pursue the deal with E-Tek, InLight executives broke their non-disclosure agreement with Cleveland and shared information (about E-Tek’s interest and a business plan drawn up by Cleveland) with Teddy Shalon, a consultant and investor in startups. Shalon then shared the “confidential and proprietary information” with other prospective investors, who ultimately invested $2.48 million in InLight’s first round and $11.5 million in its second, the suit alleged.
JVP and an undisclosed venture investor made a first-round investment in InLight in June 2000, according to Thomson Venture Economics, publisher of Venture Capital Journal. JVP and Worldview did a second round in the company in September 2000 at a post-money valuation of $26 million, according to Thomson VE.
InLight Communications, formerly known as MEMS Inc., filed for bankruptcy in 2001.