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A Growing Dispute E-mail
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Monday, 02 July 2007

A Growing Dispute

By Gwendolyn Bounds

The Wall Street Journal

May 22, 2007

A Growing Dispute: Fertilizer Start-Up Uses Web as Defense

On March 7, TerraCycle Inc., a small Trenton, N.J., company that makes all-natural fertilizers from worm droppings, learned it was being sued by industry giant Scotts Miracle-Gro Co.

Small companies live in dread of such lawsuits, which even if they win, can often be their undoing because of legal costs and distraction for management. So instead of just relying on legal counsel, TerraCycle is also trying to harness the power of the Internet to elicit public support, boost sales and raise legal funds. Its core weapon: a blog called

"The Internet is the one place that if we can possibly win this, it will be there," says Tom Szaky, TerraCycle's 25-year-old co-founder and chief executive. He hopes to get enough public opinion on his side that Scotts will drop the suit. But if that doesn't happen and TerraCycle loses everything in the lawsuit, Mr. Szaky says, "We are out of business."

Among other things, Scotts claims that TerraCycle's packaging -- with its yellow-and-green color scheme, brand name in the center and photos of flowers and vegetables at the bottom -- infringes on the trade dress of Scotts's Miracle-Gro brand. Scotts also accuses TerraCycle of falsely advertising that its products are superior to others, including Scotts's. In addition to requesting that TerraCycle destroy existing labels and signage at issue in the suit, Scotts asks that all gains, profits and benefits generated from the alleged infractions be awarded to Scotts -- a move that might wipe out TerraCycle. Last year, the four-year-old TerraCycle had revenue of $1.5 million (it's not yet profitable), while 139-year-old Scotts had $2.7 billion. 

The battle comes at a time when TerraCycle is making significant inroads into mainstream stores -- landing space in Wal-Mart, Home Depot, ShopRite, Target and CVS among others -- as interest in natural gardening products surges. Despite overall slowing sales in the U.S. lawn-and-garden market, the organic niche has risen at rates in the range of 12% to 14% over the last five years, hitting an estimated $360 million last year, according to

In many cases, TerraCycle's fertilizers made from worm feces -- known as vermiculture compost -- sit right next to Scotts Miracle-Gro brands. Miracle-Gro's Organic Choice line is booming too; consumer purchases were up 211% in Scotts's first two fiscal quarters of 2007 versus the same year-earlier period.

On its blog, TerraCycle disputes Scotts's claims and paints itself as an underdog. A comparison chart titled "David vs. Goliath" includes pictures of each firm's headquarters (TerraCycle's modest low-slung building in Trenton vs. Scotts's pillared entrance and manicured grounds in Marysville, Ohio) and notes on executive perks (for Mr. Szaky, "unlimited free worm poop"; for Scotts Chairman and CEO Jim Hagedorn, "personal use of company-owned aircraft.") The site shows pictures of both companies' products, with TerraCycle noting its own are packed in recycled soda bottles.  [TerraCycle CEO Tom Szaky and the plant food at issue in the Scotts suit]

Also posted is TerraCycle's legal response to the lawsuit, accusing Scotts of falsely advertising the quality of its own goods and seeking cancellation of Miracle-Gro's green-and-yellow trademark. To bolster its claims, TerraCycle posts photos of other gardening products that use green-and-yellow packaging. TerraCycle asks for online donations to defray its legal costs and has links to where visitors can buy products.

While TerraCycle's bid for Internet donations hasn't yielded much fruit -- about $515 so far -- overall company sales for the four weeks since the online campaign launched surged 122% from the immediately previous four weeks. Last year, the company's sales increased 31% in the same period. Meantime, TerraCycle's main Web site, which averages about 1,000 visitors a day, has spiked to as high as 13,000, according to the company -- and 2% to 4% of the visitors to click the "purchase online" or "store locator" links.

For its part, Scotts says these efforts are part of TerraCycle's "tactics" and maintains that none of the counterclaims have merit. "We've spent a lot of time building up brands that consumers trust, and we are going to protect those brands," says Su Lok, a Scotts spokeswoman.

She notes that Scotts, founded in 1868, and Miracle-Gro, founded in 1951, were once start-ups, too. They merged in 1995. "When people are referring to the David-and-Goliath aspect of this lawsuit, people lose sight of that fact," she says.

Scotts primarily wants TerraCycle to stop making certain product claims in its marketing, which Scotts says are false and misleading, Ms. Lok adds. Those include: "Unlike synthetic chemical fertilizers that can lead to problems such as plant burn, TerraCycle Plant Food will not burn your plants" and statements that TerraCycle "outperformed the leading synthetic plant food in many aspects of plant growth" during tests.

On its site, TerraCycle lists some 20 other intellectual-property lawsuits filed by Scotts in the past decade. Says Scotts's Ms. Lok, "Scotts is a leading brand and like any other consumer brand, we have to protect our trade dress and brand and products. That is part of smart business."

Small businesses have long used guerilla tactics as an inexpensive way to wage battle against established, deep-pocketed rivals. In the 1980s, the founders of still-fledgling Ben & Jerry's ice cream launched a campaign against Pillsbury Co.'s Häagen-Dazs subsidiary (now owned by General Mills Inc.) when Häagen-Dazs allegedly told some distributors that they couldn't carry both brands. In addition to suing Pillsbury, Jerry Greenfield, one of the Ben & Jerry's founders, picketed Pillsbury's headquarters with a placard reading: "What's the Doughboy afraid of?"

Today the Internet has lowered the cost barrier and drastically sped up the means of such communications. Hundreds of bloggers have written about the TerraCycle lawsuit, as have some mainstream media outlets. Meantime, TerraCycle's Internet parry has helped morale on the packaging floor, where Mr. Szaky says workers were afraid they'd lose their jobs after reading about the litigation. "They've been very smart," says Mike McGrath, host of "You Bet Your Garden," a nationally-syndicated radio show. "Somebody threw eggs at their house, and they've got to respond."

TerraCycle's Web strategy isn't without risks, says Andrew Sherman, an attorney who contributes to, an entrepreneurial Web site sponsored by the Ewing Marion Kauffman Foundation. "What if you are wrong about the court of public opinion and you open yourself up to other claims of defamation?" He says small businesses have other options, such as pooling resources with other entrepreneurs being sued by the same company or finding a venture capitalist to help foot the costs. Some insurance policies might cover certain legal costs too, he adds. Another strategy: asking the larger plaintiff if they'd be willing to help fund changes in packaging or if there's the possibility of a joint venture. "I've seen combatants end up being pretty good friends," Mr. Sherman says.

Changing packaging drastically now would hurt TerraCycle's sales momentum, says the company's general counsel, Richard Ober Jr. "There's the loss of customer recognition," he says, adding that the company still has a large number of the "All Purpose Plant Food" labels specifically mentioned in the Scotts lawsuit and "wants to use them."

Still, no amount of public appeal can help TerraCycle escape the realities of litigation. As part of the discovery process, Scotts has asked for extensive documentation from TerraCycle, including everything relating to any new products in development, contracts with retailers, strategic business plans, as well as details about "composition of the materials consumed by worms." To handle the requests, TerraCycle has hired outside counsel and Mr. Ober estimates legal costs, which so far have been less than $50,000, could run upward of $1 million.

"It's taking time from our scientists, and that will start taking its toll," Mr. Szaky says.

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