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Thought Convergence Sues Westerdal

Company sued Name Intelligence founder Westerdal on May 1 over $16M deal gone wrong.

Earlier today we reported about a riff between Thought Convergence and Jay Westerdal, founder of Name Intelligence. I was just tipped off to a lawsuit filed by Thought Convergence against Westerdal earlier this month. Defendants also include Per Westerdal, Ray Bero, and Cameron Jones. The complaint is for alleged breach of securities exchange agreement, breach of employment and non-compete agreements, breach of fiduciary duty, breach of covenant of good faith and fair dealing, and accounting.

I’m going through the lawsuit as I publish this and will fill in more details later.
But the introductory paragraph to the lawsuit gives a jist of what it’s about:

This case concerns a blatant breach of contract by the sellers of an internet business to TCI, the breach of an employment agreement and noncompete agreement by one of the sellers’ principals, Jay Westerdal, and Mr. Westerdal’s breach of fiduciary duties owed to Plaintiffs. Despite Mr. Westerdal’s assurances that his business was set for immediate and explosive growth and that Mr. Westerdal would commit his full business effort to running the business after its acquisition, neither proved to be true. Rather, Mr. Westerdal materially misrepresented and omitted key information about the condition and nature of his business to extract a hyperinflated purchase price. Following the acquisition, Mr. Westerdal failed to assist the business in any meaningful way, used company assets as his own personal bank account, and began developing a competing business in violation of his duties and contractual obligations to plaintiffs…

I’ve read the lawsuit, and here are some of the more interesting items. First, TCI agreed to pay $16M in cash and stock for the companies (NI and Spry web hosting). TCI says that Westerdal told it he had a $60M cash offer on the table. $6M was paid upfront, in addition to 15% of the fully-diluted company. $5M was due this May, and another $5M to be paid in May 2010.

TCI alleges:
-Westerdal said the second and third installment of the purchase price for NI would “easily paid by the net profits”
-“J. Westerdal failed to keep regular business hours, failed to attend strategy and other business meetings and failed to manage employees and clients…”Instead, J. Westerdal would take extended vacations and brag to third parties that he need not attend to his duties as Chief Product Officer of NIL.”
-Westerdal loaned himself money from the company bank account and gave himself raises without authorization
-Name Intelligence failed to disclose potential risks and liabilities concerning the use of third party copyright
-Some of the domains claimed by NI’s owners to have been purchased with their personal funds prior to the transaction may have actually been acquired with company funds
-Westerdal violated his non-compete by creating a company to person the .movie domain
-Westerdal attendied domain conferences on behalf of TCI but promoted his own business
opportunities instead, including DotMovie

You may view the lawsuit here (pdf). Also see exhibits: 1 and 2.

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  1. Bob says

    Karma…..so nice to see the guy that f’d Rick’s old board get a public spanking! I hope it all works out too – for everybody EXCEPT Jay!

  2. Mike says

    It says that TCI is also seeking an injunction preventing Jay from competing against TCI/NIL. In the suit they claim his work with DotMovie (.movie & .film) violates his non-compete agreement. I wonder what will happen if TCI gets the injunction, with Jay being the CEO/Founder of DotMovie.

    In the suit TCI also claims Jay used company money to pay attorney fees related to the acquisition, but also that he used TCI money to pay for attorney fees for litigation with Stephen Douglas. Anybody know what that is about?

    • Andrew Allemann says

      “TCI money to pay for attorney fees for litigation with Stephen Douglas. Anybody know what that is about?”

      Jay had a dispute with Stephen Douglas about Douglas’ involvement with Domain Roundtable. It had to do with pay and the length of a contract for Douglas to organize DRT. The spat was settled after TCI bought Name Intelligence.

  3. Mike says

    Never mind, I found it. Apparently Stephen sued Jay for not being properly compensated after producing a DRT conference in 2007. TCI claims he was using their money to pay attorney fees for that suit which was settled in October of 2008, three months after the NIL acquisition.

  4. Dominik Mueller says

    I’m really not sure what to think of Jay. He seems like an okay guy, he is always busy and has been coming up with great domain services…

    But he has already done a few things very wrong. He was sued by Stephen Douglas because of non-payment, he publicly posted negative (and apparently false) information on Rick Schwartz on his DomainTools blog, he then got into Rick’s board although he was not invited, which caused the board to be closed down for all members, and now he is sued by Thought Convergence. Does he want too much too quickly?

    I hope they will find a solution working out for everyone involved.

  5. Leonard Holmes says

    Great coverage of this story, Andrew. Jay seems to have a black cloud that follows him around, dating back at least to the first Domain Roundtable, despite being a brilliant guy. You’ve done a good job of covering all sides.

  6. Stephen Douglas says

    Hi Dub-A!

    I was just passing by… and heard my name! I read some comments here, but I am NOT making any statements about the subject of this article or any of the people involved.

    But if you let me, Dub-A, I will tell your readers on my blog at http://www.successclick.com a general philosophical statement about life.


    • Andrew Allemann says

      @ Stephen – “I read some comments here, but I am NOT making any statements about the subject of this article or any of the people involved.”

      Someone rush Stephen to the hospital. He’s obviously sick, because he’s never passed up an opportunity to comment 🙂

    • Andrew Allemann says

      “Andrew, why would you pay to place this as a sponsored headline?”

      I didn’t. Francois sometimes adds particular articles to that section. That’s usually a good thing, but I can see how it would look bad in this situation.

  7. Bill says

    Can AA or Ron J get the complete court doc. The “exhibits” are not included. Would love to see the domain list and the rest of the “details”. Then I can take an objective look. Anyone have Jay’s lawsuit docs?

  8. Stuart says

    Yes, perhaps Francois should change it from “Sponsored” to “Selected.” It does come off as if those bloggers are paying for that spot.

    I think this story screams, “lets not trust anyone in this industry.” We need more Grassroots.org or other philanthropic headlines.

  9. Francois says

    The only one who taken the decision to feature this post in the domaining.com site and newsletter it’s me.

    As allways I found that Andrew did a great journalist job covering this event.

    It’s my role to inform as better is possible the thousands domainers that read each day our domaining newsletter.

  10. Mark says

    very interesting stuff.

    The company saying that Jay saying “profits should easily pay for the payments to me” were misleading probably should have done a lot more due dilligence.

    Basically it seems like they overpaid, jay was aloof about everything, and now they are trying to not pay everything they owed.

  11. Kevin Ohashi says

    -Name Intelligence failed to disclose potential risks and liabilities concerning the use of third party copyright

    Think this means our whois information and mining it against the rules?

    Anyone else find TC’s claims quite believable?

  12. Mike says

    “The compilation, repackaging, dissemination or other use of this Data is expressly prohibited without the prior written consent of VeriSign.”

    Does he have express written consent? Who knows… but it seems unlikely.

    • Andrew Allemann says

      ““The compilation, repackaging, dissemination or other use of this Data is expressly prohibited without the prior written consent of VeriSign.”

      This is a question a lot of people have asked. I don’t know the answer. Keep in mind that the actual registrant information isn’t owned by VeriSign for .com and .net. The registrars maintain that data through the “thin whois” protocol. However, I suspect they all have rules against using this data.

      However, data can’t always be copyrighted. It would be more of a security TOS violation than a copyright issue, wouldn’t it?

  13. Mike says

    “However, data can’t always be copyrighted. It would be more of a security TOS violation than a copyright issue, wouldn’t it?”

    I’m not a lawyer but that is my take on it too. That would be like copyrighting your name and address and suing the White Pages, wouldn’t make sense.

    However, if Verisign prevents NIL from accessing the thin WHOIS, they have no way of finding out who the registrar is to query their database to get the contact info. No contact info, and their product is completely ruined.

    Also, this is against the TOS of most registrars, some even go as far as banning you by IP if you make too many requests in a day. For Godaddy and NSI, that number is very, very low (double digits).

    It’ll be really interesting to see how this plays out.

  14. Sevan says

    I don’t think any of us are big enough to take Stephen anywhere.

    I do agree that Jay is a very smart guy. I think TCI and Jay will find a way to work this out and keep the black cloud off all of us.

  15. jp says

    Interesting situation indeed. First I wanted to throw out there something I’ve always heard, but never had validated: “There is no such thing as a non-compete in California”. Isn’t TCI in California, or maybe its a Delaware corp. Also, I’m no lawyer, so I don’t know if that statement is true, but doing business here in california it is something you here alot. Apparently a non-compete doesn’t hold up in court here.

    Secondly it is a bit strange that Jay said the 2nd and 3rd installments would pay for themselves buy NI’s revenue. If that is the case then Jay only sold the company for the initial deposit. If that statement is true, he is basically saying that had he not sold it he would have basically made that exact same amount of money, if not more over the next 2 years either way. So I dont’ get it. Actually upon further inspection perhaps he gave away NI for free, if the initial payment was <= the 1st years’s revenue. Strange right?

    And thirdly, here’s the elephant in the room. If you’ve ever registered a domain you shouldn’t have than guess who has the dirt on you. That’s right, its Jay, and he doesn’t have to pay DomainTools for the report. Just thought I’d throw that out there.

    I don’t really know him well enought to say anything about the guy either way. I’ve talked to him a few times and he seemed like a decent guy. I’m sure that TCI are no angels either, let’s be realistic here. It doesn’t necessarily mean either party is a bad guy. Its all part of the game.

    • Andrew Allemann says

      @ jp – yes, non-competes in California aren’t worth much. But I think this is a different type of issue. He was working for the company when he was violating his agreement to work their 100% and not pursue competing businesses.

  16. jp says

    Alot of things don’t make sense here in california. From a moral standpoint you are definitely right. But does the employer (TCI in this case) have any rights other than to fire him? Not sure, honestly I hope so if the allegations are true. I have a business in california and employees and I’d hate to have something like that happen to me.

  17. Stephen Douglas says

    Hello folks…

    I was forced to pass by here again because of a plethora of text messages, phone calls, and emails from many associates and pals, all confidential, of course. Heck, I usually come here anyway doing my nightly duty stealing great domain story ideas from Dub-A, and I saw my name appear again!

    @Mike: I learned how to achieve a certain modicum of “restraint” from my guru, (initials “D.B.”). I’m always trying to change my middle name, tho. lol

    @Dub-A, no worries broey. I’m not sick. I don’t get sick (for more than a day or two once every five years). I can’t talk about some things in too much detail, because some agreements require this. But, I ALWAYS take honor, loyalty and agreements VERY seriously.

    Let me switch it up a bit — how many of you have thought what is going through Ricky The King’s mind right now? Will all this commotion cause a giggle from the guy who paved the way for all of us? Maybe a guffaw? A Veuve Clicquot toast? I’m interested in his opinion.

    @Sevan, my brother, you’re one of the few who knows how to get me from Point A to Point B, and keep me mellow. Thanks for not revealing the secrets of the Berzerkers. 😉

    Seriously, I agree with Sevan here, that frontline domain industry conflicts should work out satisfactory solutions soon. This will let our best industry news sites quickly and prominently focus on the evolution, education, and profits for all the domainers and end users who invest in the appreciable marketing assets of domains.

    DOUGLAS TIP: Domains are on the verge of exploding into mainstream marketing/advertising, and we need to have our shoes shiny and our hats on straight. (Oh yes, and bathed well to get any of the dirt off)

  18. You are being watched says

    A complaint was filed with Google asking them to remove their ads in connection with indexed Whois information being presented on their search results.

    Data Mining Whois information is expressly against the TOS from ICANN. Domain tools serves no additional content other than ads with the Whois.

    Complaints will be filed with ICANN should Google continue to participate in financial gain.

    Google can also have criminal charges against it in various countries under data protection acts.

  19. Andrew Allemann says

    “Domain tools serves no additional content other than ads with the Whois.”

    Am I the only one who disagrees with this statement? DT shows lots of information, such as search rankings, directory, traffic, similar domains, domains for sale, etc. with every whois record. That’s why so many of us use it.

  20. Andrew Allemann says

    @ WannaDevelop – I don’t think anything negative is happening to DomainTools. More of a dispute about what people did and said in regards to the transaction.

  21. Enrico Schaefer says

    There is little chance this lawsuit is going very far and really about leverage. TC has an obligation to do due diligence before it purchases and much of what is alleged could have been uncovered pre-purchase or would otherwise be seen as pure puffery. Jay’s side is that the made some warranties which you would never want to agree to (hopefully, someone was negotiating on his behalf) which could cause some problems. But both end up with lots of public egg on their faces if this plays out in court. I predict settlement within 6 months (which is a very short period of time in lawyer years).

    • Andrew Allemann says

      Enrico, I am kind of surprised by some of the warranties Jay made too. I would think the biggest thing they have him on is pursuing other business ventures while still working at TC.

  22. Enrico Schaefer says

    Andrew: These cases are always toughest on the issue of damages. Even if a technical breach, the most likely thing they can accomplish is slow jay down from continuing to pursue those opportunities.

    “Domain tools serves no additional content other than ads with the Whois.”

    Actually, we use DT more than any other single site for background information on domains and whois. For typos, which includes registrant info, there is nothing better. Often, their archival info on web sites is better than archive.com. Their registrant report, while controversial, is a key tool combating cybersquatting, which is in everyone’s interest. The reports are pricey, but the only way to discover if a cybersquatter has 1 (white hat on grey area domain)or 50 variations (black hat who is hurting himself, the trademark holder and the industry) of your domain name. The single most important factor in determining whether a registrant is legitimate or a black hat is whether their portfolio is chalked full of typos of famous trademarks.

    The non-compete in California will stand up without any issues since it involved the sale of a business. http://tinyurl.com/owvdqq Is working on a tld project competing with the business of DT? Probably not.

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