Get Everything in Writing
Carol E. Frank, Founder and President, Avian Adventures
As a former CPA with an M.B.A., I always considered myself very business savvy. My first business, a pet store in Dallas, generated sales of $800,000 in our first full year. But the profits never materialized as my partners and I had hoped, and retail proved too stressful, so we sold it a few years later. My next venture, Avian Kingdom, was a wholesale distribution company specializing in products for birds, small mammals and reptiles. Starting out in a 600-square-foot "closet" behind the pet store, in four years it grew into a 17,000-square-foot warehouse with 12 employees and about $1.8 million in revenues--mostly from the sale of large, high-end birdcages made for us in Mexico.
Although we were bringing them in by the full truckload, the demand far outweighed the supply and we couldn't keep the cages in stock for more than a day or two. My entrepreneurial wheels began spinning again when I was named to the board of the Pet Industry Distributors Association. All the big pet-supply distributors from around the country with whom I was networking wanted big birdcages. I approached my existing supplier with an offer to market the line nationally, but that company turned me down. So off I went to the Mexican Trade Commission to find someone who could make birdcages for me in Mexico. In 1996 Avian Adventures, my third company, was born.
Don't Do Anything Without a Contract
I always looked for the best in people, trusted them when they gave me their word and didn't like to rock the boat by being too "hard-nosed." All of that has changed as a result of what happened over the last several years.
Having hired a bird curator with a master's degree in architecture to design a new, high-quality cage, I found a manufacturer in Mexico who had been producing furniture and satellite dishes, and sent him the drawings so that he could make a sample. After flying down to approve the sample, I gave him an order for 150 cages. I wanted to hold off signing a formal contract until I had experienced how well and how quickly he could produce an order.
In a matter of months over 1,000 cages were on backorder and there was no end in sight. The manufacturer and I had developed a very good relationship--I even attended his 25th wedding anniversary party--and I trusted him completely with my designs and my business. I had tried negotiating a contract a few times, but he had acquired some outside partners so that he would have capital to grow the business, and they wanted to play hardball. Since things were going so well I didn't push for the contract, especially since I had been warned that it might not be enforceable in Mexico. This turned out to be a huge mistake.
The manufacturer and his partners wanted payment immediately upon shipping, but my U.S. customers were paying me within 10 days of receipt. Paying the manufacturer when I received payment from customers, usually 10-20 days after shipping, was not good enough for him and he repeatedly asked me to pay sooner and threatened to hold up delivery. I procured a line of credit, but not before damage was already done to our financial relationship.
Patent or Copyright Your Product Immediately
If lesson number two was "Get capital before you need it," lesson number three was "Don't bring contract manufacturers to trade shows." At the pet industry's largest trade show, my manufacturer met many of my customers—and one of my biggest competitors. Within months he was making cages for that competitor that looked exactly like ours, with only one difference: Our playpen top lifted off and theirs didn't. Of course I had never bothered to patent my design—I was too busy running both Avian Kingdom, my wholesale distribution company, and the rapidly expanding Avian Adventures.
Lesson number four: Register everything you can for intellectual property protection, under whatever laws apply. Once something is on the market for more than a year, it can no longer be patented. My only option was to obtain a copyright on my technical drawings, which would have prevented anyone from using them to make my product. However, my lawyer left me with the impression that there was literally nothing I could do at that point against either the manufacturer or the competitor. I was forced to accept the fact that one of the largest pet-supply manufacturing companies in the world was going to have my design.
For two years I took no action against either party until I discovered that my original lawyer was wrong when he informed me there was nothing further I could do. Lesson number five: Consult more than one lawyer on important issues!
Customs, Courts and Insurance
While researching ways to have my cages made elsewhere, I discovered that U.S. Customs has a program to seize shipments at the border that infringe upon copyrights and patents. I immediately registered my copyright with Customs and flew down to Laredo to meet the inspector in charge. Eventually Customs seized a shipment and held it until I approved its release. My manufacturer threatened to stop producing, but this time I stood my ground. The option I offered him was to change the design. Once I had approved the new design, I had the cages sent back to him to execute the change. Lesson number six: Register your copyrights and patents with U.S. Customs and follow up at the border.
Lesson number seven is "Keep all documents." This past January my big competitor sued me for "fraud, deceptive trade practices and tortuous business interference," on the basis of an affidavit from the Mexican manufacturer claiming that he was the original designer of my company's cages and that he had been making birdcages before I met him. Fortunately, I had kept every bit of correspondence I had ever had with him and could easily prove that he was not telling the truth.
Out of four lawyers I consulted to determine my options, one gave me a piece of advice that proved invaluable. He told me to submit the lawsuit to my insurance company and ask to have it covered under my Business Liability policy. Sure enough, the insurance company eventually came back with an agreement to handle the suit, on the understanding that if I was found guilty of the charges, they could come after me for legal fees. Even if I won the case I would not be able to recover my attorney's fees from the competitor, since that company had relied, supposedly in good faith, on the manufacturer's affidavit. So, there's lesson number eight: Your insurance policy may cover more than you think.
Discretion Is the Better Part of Valor
Currently I am looking at my options with respect to countersuits and counterclaims. The insurance company will not pay for any "offensive" legal fees unless the lawyers make it part of my defense. Therefore, to avoid large out-of-pocket costs, I am trying to convince the lawyers that the best defense is a good offense.
Whatever the outcome, it's clear to me that it's never too soon to get legal counsel and take every precaution available to protect your intellectual property. Do your homework. Use patent, copyright and trademark law. Get everything in writing. And above all, don't reveal your trade secrets, because even a $2-million business, like a $2,000 parrot, can end up in an expensive cage.