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Chapter 3
Men Are Cheaper Than Guns

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Intellectual Capital And Bootstrapping

Thinking Like An Entrepreneur

Entrepreneurship &
S Corporation

Entrepreneur Magazine Sues Former Editor Rieva Lesonsky

You just can't make this stuff up folks. After 26 years building Entrepreneur Magazine, former editorial director Rieva Lesonsky is now being sued by the company, which alleges she stole "trade secrets" and is violating Entrepreneur Magazine's "concept" of ranking franchises.

First a bit of history. Back when Entrepreneur Magazine was started, it was probably Lesonsky who invented the magazine's first franchise ranking (it was either Lesonsky or one other early employee she worked with on the first rankings). Alas, as with many inventions, it was soon corrupted. In this case, literally. The second annual franchise ranking rewarded regular advertisers of Entrepreneur Magazine. The ranking wasn't completely based on how valuable the franchise was to potential franchisees, it was at least partially based on how much money the franchise put into the pockets of Entrepreneur Magazine's owner via advertising in Entrepreneur Magazine.

Sometime after the third annual franchise ranking, it appears Lesonsky won control of the rankings and worked to legitimize them. This makes a certain entrepreneurial sense. Sure, fraudulent rankings could put a few bucks into the pockets of greedy and morally-unchallenged executives. But, ultimately, the real value in creating Entrepreneur Magazine's Franchise 500 List is that it encourages the most successful franchises to promote their rankings in the list and, by association, indirectly promote Entrepreneur Magazine. (Entrepreneur Magazine is now trying the same gambit with ranking college entrepreneurship programs.)

For example, the president of the highly-ranked Subway was quoted as saying: "The Franchise 500(R) is the gold standard for consumers and the franchise community, who rely on the rankings when making critical business decisions."

Entrepreneur Magazine feels ranking franchises is somehow a proprietary trade secret. The magazine was a valuable tool to sell franchises and to reach "business opportunity" prospects. In fact, the current owner, Peter Shea, was a franchiser who purchased the magazine in 1987.

The skills in ranking franchises that Lesonsky developed and her journalistic and editorial coverage of topics relevant to starting and running a business cannot, by any stretch of the imagination, be considered off limits for her future endeavors. Entrepreneur Magazine has no right to prevent Lesonsky from practicing in her industry. If Lesonsky wants to write about and rank franchises, she has every right to do so.

Lesonsky's situation offers many interesting observations for top level executives who exit companies. Major issues can arise in conflicts between a past employer and the new entrepreneur who is working in the same industry.

For example, Entrepreneur Magazine apparently feels its contact list of franchises is a proprietary trade secret. Of course, any entrepreneur could get the Franchise 500 magazine issue and contact any or all of these franchisers. Why should Lesonsky be any different? A key aspect of trade secrets is that they should be kept secret (shush!). Distributing 500,000 copies highlighting a major portion of the list is hardly working to keep the contacts a secret. In fact, it is precisely the public promotion of the list that creates value for Entrepreneur Magazine. Entrepreneur Magazine wants to have its cake and eat it too. It wants to profit from the public promotion of the list, but turns around and claims the list is a secret to stifle competition. I think any reasonable court will decide a generalized list of franchiser contacts publicly promoted cannot be classified as a "trade secret."

There are, no doubt, other compilations of franchising companies that are available. This further strengthens Lesonsky's position. If a list can be legitimately compiled from multiple sources, this tends to argue the "list" isn't a proprietary trade secret.

And, the companies on these lists have no special business relationship with Entrepreneur Magazine (although the magazine tries to make the argument that, somehow, they do!). The key issue: who (if anyone) owns the generalized franchiser contacts? Are they a legitimate "trade secret"? Are they proprietary to Entrepreneur Magazine?

It seems reasonable to believe this contact list is in no way proprietary. Certainly, the existence of such a list should not prevent Lesonsky from contacting franchisers she knows or has written about in the past. It's not really even clear if we're actually talking about a "list" or if Entrepreneur Magazine is basically objecting to Lesonsky contacting ANY franchisers from its list. In short, Entrepreneur Magazine might flat out wish to prevent Lesonsky from contacting franchising companies. Subway is on the list, she can't contact Subway! That seems a round-about way to try to prevent Lesonsky from asserting her basic right to rank franchises. (Entrepreneur Magazine's lawsuit demands Lesonsky "…refrain from soliciting, communicating with or otherwise contacting any and all of those franchisors and other business contacts misappropriated from and identified in EMI's Franchise Database.")

Lesonsky has the right to create her own list and, undoubtedly, Lesonsky's list and Entrepreneur Magazine's list must overlap significantly, because they both will contain contact information for many of America's best-known franchisers. It seems Entrepreneur Magazine wishes to bully Lesonsky and prevent her from creating her own listing of franchisers.

Of course, some contact lists clearly are proprietary. The magazine's subscriber list would be proprietary. These clients have a special relationship with the company. In some cases the boundaries of proprietary contacts are easy to see. In others, they are murky. In others, a company with a propensity to bully will try to silence potential competition by claiming proprietary ownership of the right to do a given thing, like creating a basic list of franchisers.

Entrepreneur Magazine objects to the application form Lesonsky uses for franchisers who wish to apply for Lesonsky's ranking. Entrepreneur Magazine feels her form too closely mirrors its form. Don't survey forms often overlap due to the nature of asking pertinent questions?

Imagine one company trying to have proprietary control of a presidential survey form, demanding other surveyors not ask such proprietary questions as "What Presidential Candidate do you intend to vote for?" That idea is ludicrous. Obviously, forms could be similar without being copied. And, distributing the forms to any would-be franchiser weakens the argument that the application form is a "trade secret" at all. Again, something widely distributed seldom is a "secret."

It would be surprising if the franchise question forms weren't somewhat similar. Did Rieva dare to ask such proprietary questions as "How many franchisees does your company have?" or "What is the average revenue of your franchisees?" (just two questions I made up) Again, it appears Entrepreneur Magazine is trying to prevent Lesonsky from daring to contact franchise companies and ask them basic questions about their business. Hardly a proprietary right. Knowing what kind of questions to ask flows from Lesonsky's business and journalistic experience. That isn't something Entrepreneur Magazine has a right to silence.

Entrepreneur Magazine also objects to Lesonsky's "formula" for her rankings, claiming it too is proprietary. Yet, it appears Lesonsky hasn't even created her first ranking for her new list. So, we can't know what formula or criteria she will even use. If nothing else, Entrepreneur Magazine's lawsuit seems premature. However, it seems reasonable that Entrepreneur Magazine's formula has been modified over the years due to experience. Are they seriously claiming proprietary ownership of all formula variations and potential future formulas, even if independently developed? Is Entrepreneur Magazine trying to claim nobody, but itself, can create any formula at all to rank franchisers? Lesonsky should be able to use her experience to create her own formula or criteria, which she'll have every right to modify and evolve over the years.

As with the lists, if both "formulas" are worth their salt, we'd expect significant overlap between the ranking results. If two independent experts each ranked the best 200 franchisers in America, it would be surprising if the rankings didn't overlap significantly. That doesn't mean they are using the same "formula," but just that they are paying attention to the same important criteria. Again, it appears Entrepreneur Magazine wishes to prevent Lesonsky from drawing on her own personal experience to create her own ranking system. Perhaps, Entrepreneur Magazine fears Lesonsky's rankings will quickly become more trusted than its own.

Finally, Entrepreneur Magazine objects to Lesonsky's naming of her list. Her application form apparently refers to Lesonsky's new listing as an "Annual Franchise 300 Ranking." Entrepreneur Magazine feels this is too close to its own use of "Franchise 500" a trademarked expression.

Using his Chase Revel alias, the owner of Entrepreneur Magazine originally trademarked the expression "Franchise 500" on the Supplemental Trademark Register in 1980 (Trademark Serial Number 73245191). Under Serial Number 73533433, the trademark moved to the Principal Trademark Register in 1986. In 1988, Entrepreneur Media applied for and then abandoned another registration in 1990 (Trademark Serial Number 73748412). Today, the trademark of "Franchise 500" is registered under Serial Number 73533433 and others.

I guess the question for the courts is: Does owning a trademark to a "Franchise 500" ranking prevent others from creating their own rankings including language such as "… Franchise NUMBER…" where NUMBER is not 500? Because Lesonsky's first ranking has not been published, it seems unclear what her ranking will actually be named. It's possible she was using the term "…Franchise 300…" descriptively and not as a trademark. (In their complaint against Lesonsky, EMI's attorney writes: "The Franchise 500 marks are inherently distinctive." That seems to contradict the obviously descriptive nature of the mark and is inconsistent with its original registration on the Supplemental TM Register. A descriptive trademark is not inherently distinctive. And a list of 500 franchisers called the "Franchise 500" is at best descriptive.)

While the trade secret questions are amusing, perhaps the best lesson for entrepreneurs to take away from Entrepreneur Magazine's suing of Rieva Lesonsky is being your own boss really is best. You can diligently work for 26 years building up somebody else's company, only to be shabbily treated in the end by a corporation that only cares about its own profits.

Entrepreneur Trademark Update 10-15-08