What are the responsibilities of legal counsel for early stage startups in preventing fraud? What role should legal counsel play in safeguarding consumers, investors, and the public from deceitful business practices?
These are questions we ask TI:GER students to consider throughout the semester as they work with their innovation partners. By analyzing real-life examples through case studies, we are able to further explore the role of the law as it applies to the intersection of business and technology.
This semester, TI:GER students are studying the Theranos hoax where they will carefully examine the unethical, and illegal, business practices employed to defraud investors and place lives at risk.
About The Theranos Hoax
Like many entrepreneurs, Elizabeth Holmes, was inspired to satisfy an unmet need – provide consumers a simple method to draw blood. In 2003, she dropped out of her engineering program at Stanford and founded Theranos on the premise it would disrupt the business of blood testing, replacing the services provided by giants like Laboratory Corp. of America and Quest Diagnostics.
Theranos promised that using a tiny vial of blood obtained from a pinprick of the fingertip, it could offer hundreds of blood diagnostic tests, considerably reducing the cost of phlebotomy and enabling customers to gain greater control of their health.
At its peak, the Theranos had 500 employees and a state of the art research center in Palo Alto. The company developed a corporate partnership with Walgreens, which built a series of “wellness” centers in its stores where customers could order blood tests without a prescription for a fraction of the cost of a regular blood test. However, the Theranos “Edison” device was merely a prototype when Walgreens signed the deal. Three hospital groups were also working closely with Theranos with the aim of deploying its lab services, including UCSF Medical Center in San Francisco, Dignity Health’s 21-state hospital group, and Intermountain Healthcare’s 22-hospital system in Utah and Idaho.
In addition to major cost savings, Theranos promised that the results generated by the Edison device would be available within hours–often matching the speed of emergency “stat” labs today. However, the blood test results proved to be inaccurate, and the Edison device failed to deliver on Theranos’s claims of reliable blood testing.
For example, Theranos used microscopic amounts of blood with the goal of using “reflex” tests. With reflex testing, a physician specifies that if a certain blood test produces abnormal results, the lab should immediately perform follow-up tests on the same sample to pinpoint the cause of the abnormality. This form of testing saves patients the time, inconvenience, cost, and pain of return doctor visits and additional blood draws, however, it does not provide a full and accurate blood panel. In addition, stat labs, which are used in emergency situations, are highly inefficient, can usually perform only a limited menu of 40 tests.
As new deals were penned, the Edison device continued to malfunction. Moreover, Theranos was using it’s faulty technology to perform tests that are relied on for life-and-death decisions without having first published any validation studies in peer-review journals.
The TI:GER Theranos Case Study
So how did Theranos continue to create new deals, solicit venture capital, and continue its rise despite it’s major shortcomings? This is the subject TI:GER students were asked to grapple with this fall. From deploying clever IP strategies to keeping investors in the dark, and from using non-disclosure agreements to creating a culture of secrecy, Theranos was able to build a business with a multi-billion dollar valuation even though its underlying technology and processes did not function as described by its charismatic founder.
In this course, students examine the role that patents and trade secrets played in the rise and fall of Theranos. In addition, students consider the role of legal counsel and examine whether or not legal counsel had a duty, or at least a responsibility, to avoid the Theranos hoax. Lastly, students are asked to look at how the use of confidentiality agreements perpetuated the aura of secrecy that helped conceal the fraudulent behavior.
After reviewing this case, students are asked to consider what they would have done differently if they had been in a position to provide counsel to Theranos leadership. What recommendations would they have provided. What actions would they have taken? What can we learn from Theranos that can be applied to other early stage companies?
If you are interested in learning more about the TI:GER program and what topics will be covered through coursework, please contact us today.