Dog fight: Intra-company legal spat erupts at Golden toymaker Kong

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A dog plays with a Kong Co. product in this promotional image. (Photos courtesy of Volkswagen)

In 1970, a 25-year-old auto repair shop owner in downtown Denver was fed up with being burglarized. Cash-strapped police had a dismissive piece of advice: Get a guard dog.

Enter Fritz, a German Shepherd pup and police academy flunky with a propensity for excess chewing. Fritz gnawed on everything but was partial to dental-damaging rocks, until the day he sunk his teeth into the rubber axle stop of a disassembled Volkswagen bus.

As this oft-told origin story goes, Joe Markham, the auto repair shop owner, then spent the next six years designing a dog toy. The result was Kong, a bouncy, bulbous hunk of thick rubber that resembles a partly melted snowman or the Michelin Man’s biceps.

The Kong Co. is now a pet powerhouse with offices on three continents and sales in 80 countries. It remains headquartered in Golden, where it was founded in 1976.

But Markham says he is no longer in control of the company he built or even the toy he invented. In a lawsuit Aug. 2, he claimed two usurpers are pushing him out of The Kong Co., sending him cease and desist letters and pocketing money that is his.

“This lawsuit seeks to remedy their wrongdoing before it is too late,” it states.

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The Denver auto shop where Joe Markham, with an assist from his dog Fritz, came up with the Kong.

Seventeen hours later, The Kong Co. sued Markham, accusing him of selling a minority stake to a longtime Kong rival — “this disclosure sent shockwaves through the company” — and thus allowing the adversary to steal trade secrets and attend classified meetings.

The company’s lawsuit describes Markham as a spy inside his own company, who has “disclosed confidential and proprietary information” to a scheming competitor “for the purpose of obtaining deep pocket financing” and to “ultimately undermine Kong itself.”

The intra-company conflict could determine the future of a nearly 50-year-old Colorado corporation that has risen to become a top dog in the pet toy industry. It has its origins in a turn-of-the-century decision to bring in an investor and a researcher.

“An attractive target”

According to The Kong Co.’s lawsuit, it was having “modest success” by 1999, with annual sales of $7.7 million, but operating at a loss and unable to pay its rubber supplier. So Markham brought in John Nelson, who invested $5 million in exchange for a 50 percent stake.

The arrangement was simple: each man owned half the company and held the title of general manager. All decisions would be made jointly. This would prove to be a flawed idea.

Meanwhile, Kathy Decker Frueh was rising in the company from a research analyst in 1998 to president in 2003. The company’s website credits Nelson and Frueh with gains in the 2000s. Its lawsuit bluntly calls them “the key management responsible for the company’s success.”

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Kong products at a PetSmart store at 5285 Wadsworth Bypass in Arvada. (Justin Wingerter photos)

This much is not in dispute: Markham and Nelson agreed to tie Frueh’s salary to The Kong Co.’s profits, first at 10 percent in 2008, then 20 percent in 2019, then 25 percent in 2021.

This is in dispute: whether that allows her to make decisions without Markham’s consent.

In Markham’s telling, Nelson and Frueh have ignored the company’s two-manager structure and made a number of self-serving decisions in recent years without his input: paying Frueh $4 million from a $43 million property sale in California, not paying Markham from that sale, moving the company’s Ohio operations, leasing a new plant in Boulder, and more.

“Mr. Nelson denies the allegations made by Mr. Markham, and will substantively address them at the appropriate time in the lawsuit,” Nelson’s attorney, Nadia Malik, said in an email.

“Ms. Frueh denies the allegations made by Mr. Marham,” her attorney, Kim Ritter, said in an identical email, “and will substantively address them at the appropriate time in the lawsuit.”

Meanwhile, Markham can’t get his hands on the company’s financial statements — the company says that is because he won’t sign a non-disclosure agreement — and was ordered by the company’s lawyer on March 10 to cease and desist using Kong’s intellectual property. Markham has been working on Kong toys for zoo animals and horses.

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The Kong Co. world headquarters at 16191 Table Mountain Parkway in Golden.

“Given its tremendous growth and success during the past 10 years, Kong has become an attractive target to outside buyers and the subject of considerable competitive interest,” the company states in its lawsuit, explaining why its founder can’t see its finances. “Kong had legitimate concerns that its confidential financial information (wouldn’t) remain protected.”

Lawyers, toys and money

Unless resolved quickly, the dueling litigation in Denver District Court is sure to create a mound of attorney fees. The Kong Co. is represented by a trio of lawyers from Sherman & Howard, a well-heeled white collar firm, and Markham by a trio from the similarly prominent Moye White..

Markham is asking a judge to make a series of legal declarations: that he is a 50 percent owner of the company with the right to comanage it accordingly, that he can make Kong products, that he can see the company’s financial reports, that Nelson can no longer act as the sole operating manager, and that Frueh cannot make major decisions without his consent.

“It has become clear that Nelson and Frueh have been managing Kong without regard to Markham’s right, through his company, of 50/50 voting control,” Markham’s lawsuit states. “Certain of these transactions have benefitted Nelson and Frueh to the detriment of Markham.”

The Kong Co., meanwhile, wants a judge to declare that Markham violated the company’s operating agreement when he sold 10 percent of his stake to Central Garden & Pet without consent from Nelson and Frueh, and therefore the sale is null and void.

Both sides also seek undetermined amounts in damages and attorney fees.

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A dog plays with a Kong Co. product in this promotional image. (Photos courtesy of Volkswagen)

The manufacturer is suing, and being sued by, its founder — who it described as a spy inside his own company.

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