Autopsy of a Dot Com: The Legal Briefs

The Legal Briefs

While our business experts pour over the details on corporate side of the ledger, our legal experts weigh in with a few opinions of there own. Here attorneys Rose Auslander and David M. McDonald give us a briefing on what they think went wrong with brains inside the sock puppet.


Rose Auslander

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The $27 million spent promoting its sock puppet in 1999 managed to give it a high enough profile that Conan O'Brien made fun of it. Unfortunately, instead of either counting its blessings for the free publicity, or at worst growling quietly in a corner, squandered heaven only knows how much of its capital in suing O'Brien for defamation and trade libel. Oops.

Why was that puppet so important to Maybe because the company had a great address in but not much of a name. So it had to use something (or in this case, some puppet) to distinguish itself. Or maybe its founders secretly yearned to shed the problems of selling pet supplies over the Web and switch to the puppet business.

Not too many e-retailers will fold because they spend too much money on puppets. But it's not unusual to spend too much money bringing or defending lawsuits. Some of those battles -- like the sock puppet litigation -- could be avoided by swallowing hard and muzzling the impulse to sue. And some of those battles could be avoided by a dose of preventive medicine. For example, an e-retailer that spends the time and money on thorough trademark clearance before adopting its domain name, trademark, logo and slogan is much less likely to be sued than one that skips that step.

Good branding can help a marginal business succeed, but as David points out, even the best branding decisions might not have sustained the doomed business model. Of course, when the worst happened and the business went under, looked to its brands to provide something of value to salvage. In the end, was able to sell the prime Internet real estate of its generic domain name to its former rival I haven't heard that anyone is bidding for the puppet.

What other intellectual property might be able to auction off? If it's got a good customer list and a privacy agreement that allows a successor company to use it, that list may be worth good money. If it has licenses to any famous brands or any other intellectual property licenses -- and those licenses are transferable -- they may be valuable. If it's got any copyrighted software, that may be worth something. Any patents may also be valuable (although the jury's still out on the business-method patents now cropping up on the Web).

Adding it up for all you e-retailers out there, a domain name that's nothing more than a generic word attached to a .com suffix, like, is a great Web address, a good transferable asset if you fold, but not much of an identifier while you're in business. Develop distinctive identifiers such as trademarks, logos and slogans, and take steps to clear and protect them. Take steps to protect any copyrightable or patentable materials you may have developed. Try to negotiate so that any licenses you take to intellectual property are transferable. Be sure your privacy policy allows a successor company to use your customer list. And stay clear of puppets.


David M. McDonald

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 may have had a chance for success. However, numerous factors were against it from the start. Most, if not all, new businesses require significant resource commitments in order to gain entry and compete in their chosen markets. This requirement is the same for an established corporate conglomerate or entrepreneur who happens to be living in his one-room office peddling Version 37 of a half-baked business plan. A difference arises however in the source(s) of those resources. A corporate conglomerate may fund a new business simply with cash flows, while the entrepreneur (assuming he isn't independently wealthy) must locate and secure venture capital, which often carries a significant price tag, including among other things, the beginnings of expectations and consequences. The result of disappointing expectations can be brutal, not only to the company itself, but also to its entire business sector.

For an Internet start-up in the 1990s, venture capitalists were angels, the entrepreneur's best friend. Carrying boat loads of money from home runs hit through initial public offerings of the start-ups that came before, the VCs were often competing to get that money into new Internet companies as soon as possible. That free cash wasn't to be left on the sidelines of a market whose momentum was positive, and would be forever, or so it seemed at the time. Now, however, the positive momentum of the capital markets has reversed. As VCs are no longer flush with cash from endless IPOs, venture money is growing scarcer. In April and May of last year, as Nasdaq shuddered, you could almost hear the venture money drying up in the streets.

In the aftermath of the Internet bubble, numerous fledgling companies have either folded or been beaten to within an inch of their lives by the capital markets due in large part to a failure to meet expectations that were first sown when the seed financing closed -- and with each of these failures come the inevitable questions as to what, if anything, might have saved these companies. is only one example. Some might say the company had solid chances for success if it hadn't spent significant resources promoting its sock puppet. But did it have a choice? I agree with Rose that when operating any business, particularly one in a medium that is continually in flux and where competitors can potentially appear from all corners of the globe, branding and name recognition are very significant parts of the formula for success. I, for one, often quote a small part of a commercial where the infamous sock puppet is trying to negotiate his way past a New York City doorman with a $4 bribe: "You're talkin', I'm listenin'."

Unfortunately, branding alone can't salvage a bad business model. In this case, the branding was relatively effective. Yet, as a pet owner who uses the Internet on a daily basis and has been fully aware of the availability of for some time, I have never once thought about ordering pet food online. No matter how strong the brand, is pet food something that people are looking actively to purchase on the Internet?

If we know one thing about the Internet, it's that the Internet and its uses are unpredictable. From a retailer's perspective, it can be a no brainer: You mean I can open a virtual storefront and customers from all over the globe, instead of just locally here in Tiny Town, will buy my stuff? Unfortunately, the business analysis is much more complicated and must reach beyond the base concepts of equipment and operating costs, and extend to the nature of the Internet itself as a marketplace. For instance, many consumers use the Internet to shop and research products, but they ultimately purchase in their local stores as they fear the possibility of fraud, theft and invasions of privacy resulting from casting sensitive information onto the Internet. While an Internet purchase is likely more secure than running a credit card over a phone line at a department store, the public tends to hear and remember the story of hackers gaining entry to FBI, CIA and even Microsoft computers -- stories that can quickly dispel a secure feeling about transacting on the Net.

Not all Internet-only retailers are destined to fail. However, without the support of significant strategic relationships and resources that enable a company to find its sea legs and navigate the inevitable choppy spots, such companies can be subject to unforgiving market forces. Instead of growing into self-sustaining, well-founded businesses, many are destined to become just another dream being sold to the investing public. Those "dreams" come with a significant degree of risk and no guarantees.



Copyright © 2001 IDG Communications, Inc.

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