A tax accountant has sued Avalara, accusing the Seattle sales tax automation company of misappropriating technology he developed and using it to strengthen its core offerings, after he said he gave an in-depth demonstration of its capabilities at Avalara’s offices seven years ago.
According to the lawsuit, filed Monday in U.S. District Court in Green Bay, Wis., Avalara in 2011 was lacking the technology to automatically calculate sales taxes for a wide variety of municipalities and taxing authorities. Pavlos T. Pavlou, the accountant who built and patented a system he calls Pavlou SalesTaxPro under an organization called PTP OneClick, claimed he traveled to Avalara’s offices after the company expressed interest in his product.
The lawsuit alleges that Avalara wanted to “build its company around” SalesTaxPro, but the two sides never came to an agreement, and Pavlou’s innovations allegedly then began showing up in Avalara products.
Avalara went public earlier this year. It has built its reputation on being able to navigate a complex web of more than 12,000 different sales and use tax jurisdictions across the U.S.
According to court documents, which name PTP OneClick as the plaintiff: “SalesTax Pro uses confidential algorithms and methods to automatically calculate the proper amount of sales and use tax for a variety of taxing authorities with variable tax rates.”
The meeting with Avalara allegedly included co-founder Rory Rawlings, Executive Vice President of Business Development Marshal Kushniruk, and Dave Weber, who was senior vice president of product management before leaving the company in 2012.
Court documents laid out Pavlou’s demo:
Entering only information about the entity, its locations, and a set of sales transactions conducted at each location of operation … Mr. Pavlou demonstrated that Pavlou SalesTaxPro was able to automatically calculate the applicable state and local taxes and generate completed signature ready tax returns for both the state and the self-administered local taxing authorities, with the option to print the tax returns with tax filing instructions or e-file them.
According to the lawsuit, Avalara executives were intrigued by SalesTaxPro and asked for several different demos. Pavlou hesitated to share important details, but because the information was allegedly protected by a confidentiality agreement, he “stood at a white board and explained (his) secret algorithms and methods to Avalara in detail, fielding questions while the assembled group took notes.”
Avalara declined to comment on the pending litigation.
At the conclusion of the meeting Pavlou claims he was told, “Avalara had bought the wrong company, referring to Avalara’s previous purchase of TrustFile, and that Avalara would like to build its company around Mr. Pavlou’s innovative electronic tax system and invention.”
The meeting is said to have occurred Aug. 2, 2011, and the next day, Pavlou claims he sent the product over to Avalara with a key to unlock all the software and features. Pavlou was under the impression that a partnership of some fashion was coming together as Avalara followed up with questions about turning the product into a subscription service and growth projections.
In April 2012, Avalara informed him that it wasn’t interested in a business deal, according to the lawsuit. The documents give no details of what happened between the August 2011 meeting and Avalara’s decision to move on several months later, so it’s unclear why a reported potential deal fell apart.
Pavlou alleges that soon after he showed Avalara his secret sauce, the features started appearing in the company’s products.
Following the meeting with PTP, Avalara released a series of updates to the Avalara Products. These updates included a framework and infrastructure that enabled Avalara to support all of the state and local tax return requirements of its customers, including automatic determination and application of self-administered local taxing authorities. This was the very same functionality that Avalara believed was impossible to develop prior to its meeting with PTP, that Mr. Pavlou disclosed to Avalara during the 2011 meeting, and which was subject to the Confidentiality Agreement. Avalara has further included the technology taught to it by Mr. Pavlou in subsequent Avalara tax software, such as the current line of Avalara Products.
Pavlou first applied for his patent in 2006 and it was eventually issued in 2017. According to court documents, Pavlou didn’t learn of the alleged actions of Avalara until 2017, when an investor informed that a lot of Avalara’s products featured the same capabilities he demonstrated to the company in 2011.
Pavlou alleges that Avalara infringed on his patent, breached a confidentiality agreement and violated laws concerning unfair competition and misappropriated trade secrets. Pavlou is asking a judge for damages from lost income and royalties and to bar Avalara from continuing to make and sell products that infringe on his patent, including AvaTax, Avalara Returns and Avalara TrustFile.
Here’s the full lawsuit: