In what could be a setback for software-as-a-services (SaaS) unicorn Freshworks, fellow Chennai-based SaaS company Zoho Corp has filed a lawsuit alleging that Freshworks stole confidential information and built a business out of it.
According to the lawsuit accessed by Inc42, Zoho has alleged that Freshworks, since its inception, build its business upon theft and misuse of Zoho’s confidential business information.
Freshworks was founded by two former Zoho employees, Girish Mathrubootham, who was formerly a vice president of product management at Zoho and Shan Krishnasamy, who was formerly a Zoho technical architect working under Mathrubootham. Both of them had worked in Zoho from 2001 to 2010 before founding Freshworks.
Zoho has also accused Freshworks of misusing Zoho’s confidential financial information to get the first round of funding. The lawsuit cited that Freshworks used Zoho’s non-public financial information to gain investors’ confidence.
It has alleged that Mathrubootham used these numbers to pitch investors that he’ll build a similar business like Zoho. “After leaving to start Freshworks, Mathrubootham improperly included Zoho confidential revenue figures in early Freshworks investor pitch materials to secure initial investments, leveraging his work at Zoho and suggesting his new startup would perform like Zoho,” the lawsuit read.
In response to Inc42’s email, Zoho said, “Recently, compelling evidence has emerged that Freshworks has stolen customer data from Zoho and attempted to contact those customers. We are investigating the extent of the data theft. In order to protect customer data, we were compelled to immediately sue Freshworks to stop their illegal and immoral behaviour. We cannot discuss this further, as it is now a legal matter.”
Building Freshdesk From Zoho Desk
In the lawsuit, Zoho explained how many of its product offerings originated as tools developed for the company’s own internal use. For that, the company had to undergo a lot of processes to complete the development of the product. Zoho said that with nine years of knowledge of the internal products, Mathrubootham and Krishnasamy left Zoho to start Freshworks.
Zoho also said that it was building a customer support tracking and management software for its internal use at that time which was headed by Mathrubootham who then left the company to build Freshdesk, the flagship product of Freshworks.
“They began this work in October 2010, just as Zoho announced the release of Zoho Support (now Zoho Desk), Zoho’s own customer support software tool under development while Mathrubootham was still at Zoho heading up customer support for ManageEngine,” Zoho alleged in the lawsuit.
Zoho alleged that the two Freshworks founders continued to develop other products which were in line for launch at Zoho. They also cited the example of Freshworks’ second product, the IT Service Management (ITSM) tool, Freshservice, which launched as competition to Zoho’s ManageEngine ServiceDesk Plus software.
Zoho further accused Freshworks of launching Freshsales in competition with Zoho CRM, Freshteam in competition with Zoho Recruit, and Freshchat in competition with Zoho Chat.
In the financial year 2019, Freshworks had managed to increase its net profit to INR 30 Cr on a standalone basis from INR 17 Cr in the financial year 2018. Moreover, in FY2019, Freshworks registered INR 404.7Cr in revenue, noting a 59% hike from the INR254 Cr noted the previous year. During this year, the company spent INR 364 Cr on employee benefits expenses, almost 61% higher than the INR 226 Cr spent in FY18.
Moreover, in July last year, Freshworks was reported to be planning an initial public offering (IPO) by 2021. The listing is expected to be on New York-headquartered stock exchange, NASDAQ. However, after this case, the road to a successful IPO is looking to have more disruptions than before.
Poaching Employees & Customers
In the lawsuit, Zoho has pointed out that Freshworks has also been engaged in poaching its employees. It has also alleged that Freshworks recruited over a hundred employees from Zoho to gain access company’s confidential customer and competitive marketing information. Zoho said that, in the first two months of 2020 alone, another seven Zoho technical and sales employees have been recruited by Freshworks.
The company has also accused Freshworks of improperly accessing Zoho’s customer data. Zoho said that as of February 24, 2020, Freshworks has been systematically contacting Zoho’s customers using Zoho confidential information.
Zoho said that the only way it would have knowledge of the email addresses it used to contact Zoho’s customers is through unauthorised direct access of Zoho’s confidential CRM database, which houses Zoho’s confidential customer lists and leads, as well as pricing and customer requirements data.
“As part of this sales and marketing practice, Freshworks is pressuring Zoho’s partners to switch all their Zoho-based sales contracts, clients, and projects to Freshworks,” Zoho alleged.
In the lawsuit, Zoho also shared screenshots of emails where Freshworks have tried to contact Zoho’s customers. Zoho also said that the Freshworks was even sending marketing emails to Zoho’s test emails which were not used anywhere else.
To know how Freshworks got the details from, Zoho replied to these emails. In response, a Freshworks employee said that that he received it from a channel partner who also sells Zoho products, despite the fact that Zoho has never shared this test email account with anyone, Zoho alleged in the lawsuit.
Citing these complaints, Zoho said that it has suffered and will continue to suffer if Freshworks is allowed to continue its illegal tactics to access and use Zoho trade secrets and other confidential information.
Zoho said that Freshworks has violated the Defence of Trade Secrets Act; the California Uniform Trade Secrets Act; the Intentional Interference with Prospective Economic Relations; and Conversion Law. The case has been filed in the US District Court Northern District of California.
Zoho Vs HubSpot
In addition to taking Freshworks to the courts, Zoho is already involved in a similar tussle with US-based sales and marketing platform HubSpot. In this case, HubSpot had issued a ‘cease and desist’ order against Zoho for using the term ‘Marketing Hub’ for one of its suite tools last month.
Notably, this order serves as a warning to the recipient to discontinue specified conduct. If the party fails to do so within the set deadline then the sender can sue the recipient. However, in this case, instead of HubSpot, Zoho has now sought a jury trial, deciding to not settle out of court.
Both the company offers marketing and sales services under the Marketing Hub banner. HubSpot had launched its Marketing Hub product in July 2018, meanwhile, Zoho Corp launched Zoho Marketing Hub in April 2019.
HubSpot had first sent a notice to Zoho Corp in January 2019, saying that the product name could easily confuse audiences and “erodes the distinctiveness and goodwill associated with HubSpot trademarks.” Zoho had rejected HubSpot’s claims, highlighting that HubSpot’s trademark application for the term ‘Marketing Hub’ was rejected by the US Patent and Trademark office.