Field Reports1 Mar, 2004 By: Thomas Haire Response
HSN Files Multimillion Dollar Suit Against Kirby, E-Brands, United Fitness of America
Kirby, Attorney Levitt Call Charges "Unsubstantiated" and "Baseless"
TAMPA, Fla., and SANTA MONICA, Calif. - Citing a "lengthy and repeated pattern of fraud and breach of fiduciary duty," home-shopping giant HSN has filed suit in federal court against Electronic Retailing Association (ERA) Chairman and former HSNi President Jack Kirby, Bradley Galinson, Sue Schwartz, George Sylva, Kirby's former company, E-Brands and United Fitness of America, maker of FastAbs. The suit alleges the defendants, most notably Kirby, "committed numerous violations of federal and state law, including violations of the Racketeer Influenced and Corrupt Organizations Act (RICO)," as well as citing civil conspiracy, fraudulent representation, interference with contractual relations, breach of contract and unjust enrichment.
In the 11-count suit filed with the U.S. District Court for the Middle District of Florida (Tampa Division), HSN seeks "in excess of $35 million" in each of the first seven counts - four of which have to do with what the network considers direct violations of sections of RICO - while also seeking a total of more than $17.5 million in the final four counts. HSN is also requesting punitive damages in the suit, which was filed for a jury trial on Dec. 23, 2003.
The next steps for the case, at press time, are scheduled for Feb. 23, when the defendants are to file their response to the allegations made in the initial complaint by HSN, and April 5, when HSN will respond to the defendants' statements.
"These are baseless allegations," Kirby tells Response. "The unfortunate reality in business today, most people who run companies know, is that you get involved in civil litigation between two companies. This is another piece of litigation and it's unfortunate. The reality is, in the end, the facts are on our side."
Dana Levitt, an attorney representing the defendants contends the allegations in the suit are "unsubstantiated and untrue." When contacted by Response, spokespersons Darris Gringeri of HSN and Deborah Ross of InterActive Corp. (IAC), HSN's parent company, contend the companies do not comment on pending litigation.
Kirby joined HSN as president of its new HSNi (interactive) division in May 2000, after four months of contract negotiations, according to the suit. His contract with HSN allowed him, with restrictions, to maintain a controlling interest in his own company, E-Brands. HSN's suit alleges that Kirby misrepresented his own business and its products during this process. Further, the suit alleges, Kirby then convinced HSN to hire Galinson and Schwartz as key members of the new division's executive team.
The suit alleges the three "misused their positions and authority at HSN to feather their own nests at the expense of their employer" by carrying out "dishonest schemes," which included "procuring employment at HSN through false pretenses," "keeping HSN in the dark about valuable corporate opportunities that they then exploited to their own advantage and profit, and secretly setting up a rival business while employed by HSN." The suit contends Kirby and his partners took part in a "high-handed kickback scheme" that "effectively drove business away from HSN" by "accost[ing] vendors seeking to air products on HSN with the proposition that they would get the products on the air as long as the vendors used E-Brands as a middleman and gave it half the profits."
HSN also contends in the suit that Kirby and Schwartz were to develop and produce a number of HSN-branded infomercials, but produced just three and all were failures. At the same time, the two were working, in concert with Galinson to "take the best opportunities for themselves." The suit alleges the trio gained independent financial backing for the infomercial, produced with Sylva, for the FastAbs electronic muscle stimulator. According to the suit, that infomercial "is believed to have grossed about $100 million in sales and made a profit of about $35 million, half of which went to these three executives."
Members of the ERA Board of Directors, which has been chaired by Kirby since September 2003 (and whose term will expire this September), are steadfast in their public support for Kirby's chairmanship. "It's a personal matter," says Dan Danielson, CEO of Mercury Media in Santa Monica, Calif., who will become the chair of the ERA board upon the expiration of Kirby's term. "There are a lot of people who sue people in this business. It's a civil claim. If it was a criminal claim, it might be different. This is a very litigious business, and we're not the judge and jury."
Board member Steve Pittendrigh, founder, president and CEO of Phoenix-based InPulse Response Group, echoes those sentiments. "It's a civil issue, and there are lawsuits going back and forth with members and board members on a constant basis," he says. "I don't know the facts, but I haven't seen thus far that it would affect Jack's ability to govern the ERA."
Kirby was also recently named as part of a $5 million settlement with the Federal Trade Commission (FTC) regarding false and unsubstantiated claims made in the infomercial for the product. Levitt notes, "The FTC issue was settled with no finding of wrongdoing by Kirby or the other defendants, and no admission of guilt."