Halifax financial-tech startup Groundhog has filed a lawsuit against a Brooklyn blockchain company founded by one of the pioneers of popular cryptocurrency ethereum, alleging it stole trade secrets and developed a crypto-payment product that undercut Groundhog’s own.
Groundhog, legally registered as BlockCrushr Inc., was set to launch a product in August, 2019, that let consumers use cryptocurrencies to make recurring payments. Founders Scott Burke and Andrew Redden believed that making these payments easier bridged an important gap in the crypto world, helping build their company to a valuation between US$6-million and US$8-million.
But in documents filed with the United States District Court in New York, they allege that ConsenSys Inc. and affiliated companies – which hosted Groundhog staff in its accelerator in 2018 and promised a US$100,000 investment – launched an “identical product” the day before Groundhog’s own planned launch.
Groundhog alleges that ConsenSys’s actions sideswiped the Halifax company, creating an “unfair advantage” gained by using Groundhog’s trade secrets. It is seeking damages for “willful and malicious conduct,” among other issues, and asking for any profits gained from ConsenSys’s competing product to be handed over to Groundhog.
In an e-mailed statement, ConsenSys said that it is company policy not to comment on ongoing legal matters, but that “we must deviate from that policy in this case to express our severe disappointment that such baseless claims are even being filed. The facts tell a markedly different story than the falsities put forth by Groundhog and their counsel. We look forward to vigorously defending the reputation of our organization and products.”
“We hope this case protects young startups entering an incubator or accelerator,” said Richard Cipolla of the New York law firm Roche Cyrulnik Freedman LLP, which is representing Groundhog and regularly works on cryptocurrency cases.
“It is already difficult enough for a startup like Groundhog to identify which of the many startup incubators and accelerators out there will add value and which won’t without also having to worry about the theft of its hard-earned trade secrets,” Mr. Cipolla said.
Trade secrets are a key form of intellectual property (IP), which itself is often the backbone of companies that make their name on innovation. Groundhog’s legal action sheds light on the extent to which the use and protection of IP can make or break a company’s fortunes, said Jim Hinton, an IP lawyer and founder of the Waterloo-area IP filing and consulting firm Own Innovation. (Neither Mr. Hinton nor his firm are involved in this case.)
He warned that smaller startups should be vigilant when engaging with anyone who could be a potential competitor. Larger, established companies sometimes want “to squash anyone in the market.”
“Just because they talk to you, doesn’t mean they want to give you any special rights,” Mr. Hinton said. “Investors are competitors; accelerators are competitors.” Such a situation might be avoidable, he added, by sharing the minimum amount of information, having the partner sign a more stringent non-disclosure agreement, and filing patents.
In 2018, after exploring other blockchain business ideas, the filing says, Groundhog’s founders enrolled in a business “bootcamp” for early stage companies run by global tech-accelerator organization TechStars.
Soon after arriving at TechStars, Groundhog wrote in the legal filing, the startup’s staff developed a “smart contract system that would allow merchants to automatically charge” consumers, solving what they said was a frequent pain point for blockchain transactions. At this point, the company wrote, there was no competition for such a product.
That May, Mr. Burke and Mr. Redden met staff from several ConsenSys divisions, the filing says, and, in the ensuing months, “came to an agreement” that ConsenSys would both invest US$100,000 in Groundhog and let it enter its proprietary accelerator program. ConsenSys was founded by Joseph Lubin, who is originally from Toronto and co-founded the ethereum cryptocurrency.
The filing states that in September, 2018, ConsenSys and Groundhog signed an investment agreement that obliged ConsenSys to maintain confidentiality of certain information provided by Groundhog, and to only use that information in its capacity as an investor.
Over the next several months, the filing says, Groundhog staff shared “every aspect of its marketing, financial, technical and regulatory strategy,” as well as code and proprietary technology. “Defendants told [Groundhog] that they would protect [Groundhog]’s trade secrets, and continually promised [Groundhog] more money and a bigger role in the ethereum ecosystem – as long as [Groundhog] kept sharing,” the filing says.
In early February, 2019, an employee from a ConsenSys division, called Token Foundry, copied Groundhog’s publicly available code, the filing says; it also says this employee knew of Groundhog’s trade secrets. Shortly thereafter, ConsenSys “abruptly ceased its due-diligence meetings” with the Halifax company.
Groundhog forged ahead with making its recurring-payment software, with plans to launch on Aug. 23, 2019. The filing states that Groundhog notified ConsenSys of its plan on July 23, 2019. Then, on Aug. 22, ConsenSys launched a platform called Daisy Payments that would help “anyone to accept cryptocurrency for purchases, subscriptions, usages fees and other payments” – which, according to Groundhog, was an “identical” product.
The Halifax startup alleges that “at least six members” of the Daisy Payments team came from Token Foundry, and were employed by ConsenSys before starting Daisy. The platform has since been rebranded as CodeFi Payments. The filing adds that ConsenSys stopped communicating with Mr. Burke and Mr. Redden in October, 2019.
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