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PowerAgent Files RICO Suit for $3.5 Billion Against ED

Failed Internet startup PowerAgent Inc., which had elaborate plans for targeted advertising, filed a federal civil complaint seeking damages in excess of $3.5 billion against Electronic Data Systems Corp.

The suit, filed in federal district court in San Francisco, alleges fraud, breach of fiduciary duty, and violation of the RICO (Racketeer-Influenced and Corrupt Organizations Act) law by Plano, TX-based EDS in its role as a director, shareholder, and business partner of PowerAgent.

The full complaint can be viewed on the Web.

According to Dale Sundby, San Diego-based PowerAgent's chief executive, the events giving rise to the litigation include "a series of actions taken by a large corporation, EDS, in a power play to gain control of the innovative technology being developed by PowerAgent, a small, promising startup company that had become an EDS client. PowerAgent refused to give EDS control over its technology and has been driven to the brink."

Founded in 1994, PowerAgent said it developed a "highly regarded business plan and technology" to provide true "1-to-1" Internet-based marketing.

Introducing new classes of "infomediary" and identity-protected services, PowerAgent was to bring together buyers and sellers of products and services through multiple channels. But just weeks before its scheduled product launch last October, the company indefinitely postponed launch and laid off almost all its staff.

The suit claims that EDS engaged in a pattern of fraudulent and extortionate conduct "with the intended purpose and effect of forcing PowerAgent to give control of the company and its promising technology to EDS or go into bankruptcy, where EDS could acquire its assets at a discount" and use them in the booming Internet market.

EDS itself projected that PowerAgent would earn $28 million in its first full year of operations on revenue of $110 million--an extraordinary performance for any new company, and even more exceptional compared to other Internet and new media companies, according to the suit.

"EDS acted as a fiduciary of PowerAgent and gained its trust and confidence through a series of operational, financial, and technical agreements," said Sundby. "It turns out EDS used its leverage over the company to make a grab for PowerAgent's technology."

The complaint alleges that in July 1997, EDS committed to PowerAgent that it would go forward with an equity investment in the company of between $10 million and $20 million within a month. Instead, just days before finalizing the investment, EDS postponed its commitment. After weeks of what the complaint describes as EDS's extortionate bait-and-switch tactics designed to give EDS control over the company's technology and operations, PowerAgent's board rejected EDS's demands. PowerAgent said it had no alternative but to suspend its launch and lay off virtually all of its staff.

The complaint also alleges that EDS interfered with the company's efforts to obtain financing from new investors in late 1997. "Now PowerAgent is fighting back," said Sundby. Under the RICO statute, PowerAgent is seeking recovery of treble damages, attorneys' fees, and punitive damages.

There was no immediate response from EDS.