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February 22, 1999

Wal-Mart V. Amazon.com: The Inside Story

It's a complex web of associations and influence

By Justin Hibbard

hroughout the halls of Wal-Mart's Bentonville, Ark., headquarters hang pictures of the company's founder, Sam Walton, wearing a cap emblazoned with the slogan, "Our people are our greatest assets." Wal-Mart never stood more firmly behind those words than on Oct. 16, 1998, when it filed suit against Amazon.com Inc., Amazon.com CIO Richard Dalzell, Drugstore.com Inc., and the venture capital firm Kleiner Perkins Caufield & Byers. The allegation: conspiring to steal Wal-Mart's trade secrets by recruiting its IT workers.

Wal-Mart claims the defendants carefully recruited members of its staff who, as a group, have the knowledge to replicate information systems and business processes Wal-Mart has spent years and millions of dollars developing. The defendants say Wal-Mart's conspiracy theory is bunk and that Wal-Mart employees joined Amazon.com and Drugstore. com by way of a network of friends and former co-workers--a common practice among IT professionals.

All parties involved in the lawsuit declined to comment directly on the case, and the defendants refused to be interviewed. However, court documents and regulatory filings tell a story of IT professionals, recruiters, and executives criss-crossing the United States, weaving a complex web of associations.

On April 1, 1997, the Reed Group LLC, a San Francisco recruitment firm, began a nationwide search on behalf of Amazon.com for a CIO. By June, Amazon.com's executive team had interviewed seven candidates, including Richard Dalzell, who at the time was VP of IS at Wal-Mart. Amazon.com made job offers to Dalzell and Michael Packer, executive VP of strategy and technology at Simon & Schuster. Both men declined. An internal Reed Group memo quotes Dalzell as saying, "It would take an atomic bomb to get my family out of Arkansas."

The bomb fell in the form of a second offer, which Dalzell accepted in August. Upon starting his new job at Amazon.com on Sept. 2, Dalzell received a base salary of $92,871, a $149,174 signing bonus, $23,747 as reimbursement for relocation expenses, and 125,000 stock option shares, worth about $4 million at the time.

As a Wal-Mart officer, Dalzell had access to information about how much IS employees were paid and how well they performed. Wal-Mart claims Amazon.com began using personnel information known to Dalzell to solicit its employees. On Oct. 4, Kevin Harrigan, a senior programmer analyst who Wal-Mart says had knowledge of its merchandising and data warehousing systems, left to join Amazon.com as an application developer. In an affidavit, Harrigan says he initiated the contact with Dalzell and Amazon.com.

Some observers question why Wal-Mart didn't sue Amazon.com within the first months of Dalzell's departure. "It's amazing that they claim trade-secret misappropriation for an individual who left over a year ago," says Richard Gray, a lawyer at Bergeson, Eliopoulos, Grady & Gray LLP in San Jose, Calif. Wal-Mart's charges, however, are leveled not just at Amazon.com but at three companies and one individual that Wal-Mart says conspired to steal its intellectual property, which apparently didn't become evident to Wal-Mart until 1998.

Wal-Mart's conspiracy charges are based partly on the business practices of Kleiner Perkins Caufield & Byers, the venture capital firm that funded Amazon.com and Drugstore.com. KPCB encourages companies it invests in to share information through an arrangement similar to the Japanese keiretsu, a network of interdependent companies. Amazon.com has connections throughout the KPCB keiretsu. For example, it's the exclusive or premier bookseller on the Web sites of America Online, Netscape, and several other companies funded by KPCB.

In a court document, Jon Comstock, a lawyer for Wal-Mart, explains Wal-Mart's concern about the keiretsu: "The companies that are intertwined with the KPCB partnership have an unusual and potentially devastating business practice of freely 'sharing' knowledge and information from one KPCB-sponsored entity to another. There is a real risk that any misappropriation by Amazon or Drugstore will simply be taken advantage of by another yet-to-be-discovered KPCB-related company."

Amazon.com denies the conspiracy allegations. "There was no orchestration, no conspiracy to steal trade secrets or to 'raid' Wal-Mart," writes Amy Lee Stewart, attorney for Amazon.com, in a court document.

In July, Amazon.com hired Jimmy Wright as VP and chief logistics officer. Wright had retired as VP of distribution at Wal-Mart on Feb. 1. Also in July, the Reed Group contacted Kal Raman, VP and CIO at NationsRent Inc., and former director of IS at Wal-Mart, about joining Drugstore.com as CIO. Raman accepted the job in August.

Around Sept. 7, Raman flew to Arkansas for Labor Day weekend. During his visit, Raman contacted Sridhar Iyer, a strategic applications analyst at Wal-Mart whom Raman describes as a personal friend. Both men give a similar account of their visit: Iyer told Raman he had given Wal-Mart notice of his resignation, and they discussed Drugstore.com but not employment prospects. After Raman returned to Seattle, he spoke to Iyer by phone and suggested that he consider joining Drugstore.com. Iyer interviewed at the company, accepted a position there, and left Wal-Mart on Sept. 26.

Iyer was one of three Wal-Mart IT employees who signed on with Drugstore.com within three weeks after Raman's visit to Arkansas. On Sept. 19, David Saunders left his position as manager of DC Unix systems at Wal-Mart to join Drugstore.com as manager of merchandising and marketing systems. On Sept. 29, Steve Rhyne gave up his job as a systems engineer at Wal-Mart to join Drugstore.com as a Unix developer. Both men say in court documents that Raman didn't contact them over Labor Day, though Saunders says Raman called him at another, unspecified time to talk about working for the startup.

At least one other employee and two contractors left Wal-Mart's IS division during 1998. On June 14, Jeffrey Parker, an analyst, left to join Nationwide Insurance before joining Amazon sometime between June and Sept. In April, Quinten Shay, a Hewlett-Packard contractor working in Wal-Mart's IS division, left his post and later joined Amazon's IT group. At some time during 1998, John Laks, an Informix consultant working in Wal-Mart's IS division, resigned and later joined Amazon.

In a court document, Dalzell says Wal-Mart's IS division had been losing employees before his departure and he'd heard the company was losing more IS employees late last year. So far this year, Wal-Mart says, the division has had 12% turnover; the industry average is around 15%.

During the third quarter last year, Sue Brann, people director in Wal-Mart's IS division, says she noticed a pattern of employees leaving. "It became apparent there was a trend in terms of individuals leaving the company and going to Amazon.com or one of its associates," she says. "And there was a trend in terms of the expertise they had."

On Sept. 22, Robert Davis, strategy manager at Wal-Mart, left to join Amazon. Four days later, Charles Slifko, a strategic applications analyst at Wal-Mart, joined Amazon as well. In court documents, Slifko says former analyst Parker contacted him on his own initiative and asked if Slifko would be interested in working at Amazon. On Oct. 10, Chris Arnold, an operations manager in Wal-Mart's logistics division, left to join Amazon. In court documents, Arnold says he approached Jimmy Wright at Wright's home in Bentonville about joining Amazon.

Six days after Arnold's departure, Wal-Mart filed its suit. The case is pending, and no hearings or motions are scheduled. If the case goes to trial, it's slated for May 22, 2000.

Q&A with Randy Mott, CIO of Wal-Mart

Randall Mott, Wal-Mart's CIO, is at the center of the legal firestorm surrounding his company's suit against Amazon.com. Although Mott wouldn't comment directly on the suit, he recently sat down with InformationWeek senior editor Justin Hibbard and news editor-at-large John Soat to discuss issues raised by the case.

InformationWeek: Why is there an increased focus on intellectual property in the IT industry?
Mott: The number of startups and IPO activity has brought about a new generation of business change. The role that technology plays in business today is bringing the whole question of intellectual property and how you protect it to the forefront. Companies that take a risk and make investments in IT put financial and technical resources into achieving business objectives. You spend considerable time and effort to do that. To continue to motivate companies to innovate in this area, it's important that we establish some general guidelines in this whole arena.

InformationWeek: Will the courts set those guidelines?
Mott: If there are rulings by the courts, they'll certainly be precedents that others will use. The laws that our litigation revolves around are the trade-secrets laws--we're talking about systems developed for a company's internal use.

A lot of intellectual-property law has been around products for market. The time frames courts have given companies in the past [for trade-secret protection] have been short because they're dealing with products that come to market. We'd like to see the length of time the courts use for products for internal use lengthened. Here you're talking about business processes that don't change as quickly and that deserve a longer period of protection.

Understand that things for internal use, because they're not in the public forum, can't be as easily protected. If we were to apply for a patent, that puts it in the public domain. If people use software for internal use, we're going to ask the courts to view that differently.

InformationWeek: How do we set guidelines?
Mott: If you establish guidelines in terms of what belongs to companies, then the industry can manage that. I don't know that we need a lot of bureaucracy. Most companies can make good judgment choices on what's violated.

InformationWeek: What happens if there are no guidelines?
Mott: We've seen an opportunity to develop applications tailored to our business that give us a competitive advantage. Those are good investments, but only in that they afford us some kind of competitive advantage. If competitive advantage isn't protected through trade-secrets legislation, companies are going to be less likely to make decisions on self-development. If you get intellectual property siphoned off from different points in the industry, the net result is, people stop innovating. If you settle for off-the-shelf software, and businesses see that as the solution, then you can stifle the creativity and innovation we've seen over the last few years. The net result is you have less innovation.

InformationWeek: Are there other risks?
Mott: You don't want to find yourself in a position where you stop sharing information internally. If you get very protective and try to guard too much what people know in certain areas, then you stifle creativity. We have a very free form of information sharing in this company--that's something we take pride in. Without that interaction with the business and with one another, you miss opportunities where there's potential to change processes and move the business forward. The other risk involves IT professionals' getting close to the business. If the business side starts to view IT as mercenaries, what they share about business plans and processes becomes limited. Our people need to understand those business processes.

Return to main story, "Protecting Innovation."

Photo by Mary Lou Uttermoblen