Smule CEO Defends The Company’s Lawsuit Against Former Employees

Is Smule being a bully? Or is it just mounting a reasonable defense of its intellectual property?

In a nutshell, those are the questions I was trying to answer during interviews with Smule CEO Jeff Smith, and with Mike Allen and Mark Godfrey, the former employees being sued by the company.

Here’s the context: Smule makes music apps including Sing! Karaoke. Allen and Godfrey both left the company last year, and then, this summer, launched Shred Video, a service that takes sports footage from a user’s GoPro or iPhone camera and turns it into 90-second clips, synced to music from the user’s iTunes library.

Now Smule is suing Shred, alleging that its founders violated their employment agreements and illegally retained Smule property.

In a blog post, Allen denied using any of Smule’s intellectual property for Shred, and accused Smith of employing “a classic siege strategy: use Smule’s money and the legal process to make it hard for us to fundraise, and bleed us until we surrender.” Y Combinator partner Geoff Ralston (Shred was incubated at YC) published a post of his own where he admitted that he “cannot know whether Shred actually stole code from Smule or not,” but he said Smule “seems to be neither honest nor sincere in their efforts to resolve this.”

Smith, on the other hand, argued that while painting Smule as a bully makes for a good story, “it’s not supported by the facts.” He said he’s not trying to squash a potential competitor. After all, he’s invested in startups founded by former employees (albeit ones that are less competitive with Smule) — and he’s been in a similar situation himself, having left Frame Technology in the 1990s to start Tumbleweed Software.

So instead, Smith said the case is really about setting a precedent.

“We can’t accept ex-employees retaining access to our IP and source code,” he said. “And worse, we can’t accept a precedent where said ex-employees would retain access while building a related product.”

Both companies said they’ve actually offered to resolve the situation by having someone inspect Shred’s code — the question is who would do the inspecting. Smith said it needs to be a Smule employee, not the third party that Shred is pushing for. At the same time, he also said a third party inspection would be more acceptable than the Black Duck scan that Shred had previously proposed.

“We would have been amenable to that before they had access to our code for nine months,” he said. “Now we’re concerned that the contamination is potentially more serious, so we would want somebody who’s more of an expert in the field [to look at it].”

In other words, Smith is saying that Shred’s extended access to Smule code could have given them time to hide any potentially infringing activity — something a Smule employee would be better equipped to spot.

“I can see that it’s a higher standard than the one they’re proposing, but I don’t think it’s an unreasonable standard, and it would provide reasonable protection to both companies,” Smith said.

Allen countered that Smith’s claims about the shortcomings of a third-party audit are “preposterous, and disingenuous.” He insisted that “a knowledgeable, accredited third party could review whatever version of Shred Video’s code they want, and verify whether it had any Smule IP.”

He added, “Giving Smule our code is the equivalent of Smule asking us to let them play judge and jury, and trust that they would deal with us fairly. With all the evidence of bad faith on Smule’s part … this is of course an absurd expectation.”

Given the contrasting claims here, I was hoping that some outside observers could shed some light on who’s being reasonable here. So for what it’s worth:

  • Jeffrey Lefstin, a professor of law who focuses on patent and intellectual property law at UC Hastings, said, “To be the best of my knowledge, there’s no standard practice” in these situations. (Update: After reading the lawsuit, Lefstin also said, “The complaint seems carefully crafted to avoid any allegation that the Shred founders are using anything that is actually Smule intellectual property. Whether that gives rise to questions about the sincerity of the lawsuit, given how broadly the courts have interpreted California Business and Professions Code § 16600 against claims based solely on breach of contract, is not something I would speculate on.”)
  • Attorney George Grellas, who runs a small firm focused on startups, said that Smule’s claim seems more “unreasonable,” because in most suits, you’d end up showing the code to a neutral party (though he added that this wouldn’t resolve IP questions that extend beyond the code itself).
  • And software engineer/TechCrunch columnist Jon Evans agreed with Allen that any infringing code should be apparent to a third-party analyst.

Smith said this is an unusual situation because of the amount of time Shred Video has had access to Smule source code, and because the code in question “came from 10 years of research at Georgia Tech, Khush and Smule.”

“There are very few who would understand [it],” he said.

Moving on to that “evidence of bad faith”: Allen pointed to a leaked recording of a company meeting where Smith discussed an unidentified legal case and said, “If it goes to litigation, if we’re wrong, we’ll win.” In other words, compared to Shred Video, Smule has plenty of resources (it recently raised a $26 million round, bringing its total outside funding to $68 million), which means Smule can outlast Shred if this goes to court.

Smith didn’t dispute the quote, but he said that if you look at his full comment, where he describes this as “not a great scenario” and “a big mess,” it’s clear that he’s expressing regret that the companies weren’t able to resolve the situation without lawyers. He also said his comments were part of a larger discussion about why it’s better for employees to work out any potential IP issues before leaving the company.

Smith did take issue with other things that have been written about the situation. For example, Business Insider reportedly saw an email thread where “Godfrey tried to meet with Smith, but the CEO never took him up on it.” Smith showed me what I’m guessing is the same email thread, and while the meeting didn’t happen (he said it was sidelined by a serious illness), the thread suggests that he did try to schedule a meeting or phone call.

(Update: Allen pointed out that those scheduling emails were sent in May, after the lawsuit had already been filed. He sent me an earlier, pre-lawsuit thread where Smith reached out to Godfrey, who offered to meet or talk. Allen said Smith did not respond.)

And while Ralston said Smule has “consistently refused” to identify what ideas (aside from code) might have been stolen, Smith pointed to a court memorandum outlining the company’s concerns around Smule tech, including its synch technology.

“Code is only one example of IP,” Smith said.

There’s plenty more being disputed, some of it revolving around a laptop with Smule code. Godfrey said that Smule team members asked him to keep the laptop so he could continue helping out (Allen and Godfrey documented several instances after Godfrey’s departure of Smule engineers asking him for technical advice involving Smule code), that at the time, he had no inkling he would be working on this product and that he’s turned the laptop over to his lawyers, who in turn handed it over to Discovia eDiscovery as evidence.

Smith, on the other hand, said there was no reason for Godfrey to keep the laptop at all, since he declined to sign a contract to continue working for Smule as a consultant. And he said that in the ensuing months, “If they had returned the laptop, the [encryption] key, and returned all source code, this never would have gone to court — it would have been much simpler to resolve.”

There are other issues, but perhaps the other big question is: Could this still be resolved without a trial?

“Smule deserves to know that their IP is safe and we’re more than willing to give them that assurance,” Allen told me. “I’m perfectly optimistic that we’ll find a way to make this work.”

Both sides have accused the other of bad faith behavior, but both have also said they’d prefer a resolution outside the courts.