Litigation Threat To A Start-Up Business

We all know the story.... A poor, struggling little multi-billion dollar company like Scotts is creating popular consumer products, when all of the suddent an unexpected lawsuit - let's say a customer eats Miracle Gro, gets an upset tummy, and claims there should have been a warning label that it wouldn't make people larger - gets a sixteen trillion dollar jury verdict and puts them out of business. Sure, the story is pure fiction, but that's what the "tort reform" propagandists wish us to believe. But let's interject some reality....

The other day I was browsing through Inc.com's "30 under 30" series, and read a profile of an interesting company - what Inc.com deems The Coolest Little Start-Up in America:

If you've browsed in the garden section of your local Home Depot or Wal-Mart recently, you may have seen a new plant food somewhere north of the begonias and south of the perlite. It comes in a yellow and green shrink-wrapped bottle with a familiar shape and the kind of spray top you might find on, say, Windex. It may well be the world's first commercial product made entirely from garbage. The plant food itself is a so-called vermicompost tea, a brew made from the castings (that is, the poop) of red worms that have feasted on various types of organic waste. The containers are reused soda bottles. The spray tops are the unwanted extras that have been dumped by manufacturers of other spray-on products. Even the boxes that the plant food is shipped in are garbage: They're the misprinted rejects of major companies.

But the most striking fact about TerraCycle is the age of its co-founder and CEO, Tom Szaky (pronounced zack-y). He is now 24. A Hungarian by birth and a Canadian by upbringing, he was 19 years old and in his freshman year at Princeton University when he launched the company with one of his classmates, Jon Beyer. At the time, they were simply trying to win a business plan competition. They came in fourth--out of the money--but they couldn't shake the idea that you could build a business selling garbage. And now, five years later, they have done just that. In 2005, TerraCycle had $461,000 in sales, mostly in Canada, where the product was carried by Home Depot and Wal-Mart as well as other chains. With the decision by both retailers to roll it out in their U.S. stores this year, the company's 2006 sales are expected to top $2.5 million.

So it caught my attention when I spotted a Marketplace story about the same company:

Terracycle claims its organic plant food is "as good or better than the leading chemical fertilizer." Tough talk for a little guy when it's obvious the company means it's better than Miracle Gro.

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[Scotts is] suing to see Terracycle's plant food performance study. But Terracycle's refusing for now.*

Scotts isn't leaving it at that. It's also claiming consumers might confuse Terracycle with Miracle-Gro because of the way it's packaged.

As the story indicates, Scotts appears under the impression that it should have the exclusive right to use green and yellow packaging for gardening products - really, there's no confusing the two products - or perhaps it's just that they know how litigation costs can affect a small business:

Hemphill says big companies often use this kind of lawsuit to protect their brands and market share. That's not just bad news for the up-and-comers, its bad news for consumers too, as it can stifle competition, he says.

CEO Tom Szaky says he had to spend 30 percent of his earnings in legal fees this month — and if he's slapped with another lawsuit, it could drive him out of business

Let's see if tort reform propagandists like ATRA and the U.S. Chamber of Commerce Institute for Legal Reform step in to hold a fund raiser to help with Terracycle's legal fees....

Are you holding your breath?
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* I hope Terracycle is able to substantiate that claim.