Markman Note: Jawbone Goes After Fitbit In Pre-IPO Attack
June 24, 2015 (Mimesis Law) — One of the most dangerous times for a technology company in terms of patent litigation risk is the time period between the filing of an S-1 (announcement of intention to go public) and the IPO itself. Particularly when there are motivated competitors, with IP of their own in hand, who are concerned about the company going public blowing past them — fueled by the IPO proceeds at minimum. We recently saw a high-profile example of this phenomenon in the developing legal situation between Fitbit and Jawbone. Of course, patent assertion entities also target companies pre-IPO, in a variation of M&A-related patent assertion game — based on the hope that the companies in an M&A deal or IPO situation will be more likely to settle quickly to avoid the nuisance of a patent case diverting resources from a more valuable business transaction.
But our focus here is on the interesting Fitbit and Jawbone situation. As an initial matter, Jawbone’s filing of both a trade secret-based (alleging that Fitbit poached both employees and secrets) and patent-based set of cases has done nothing to deter investors interested in Fitbit’s IPO. The post-IPO chart for FIT proves it. At the same time, it is worthwhile to consider Jawbone’s allegations, and attempt to handicap whether their legal strategy presents a risk to Fitbit (and its swooning investors during this honeymoon period) over time. First, the trade secret case may end up being more valuable for Jawbone, and thereby damaging to Fitbit relative to the patent lawsuit. Not necessarily financially, but at least reputationally. Trade secret cases, however, are difficult to win on the merits. But if Jawbone succeeds in doing so, the damage to Fitbit could be significant. Because trade secret cases are by their nature fact-intensive, they can be more difficult to handicap from the “outside,” and any forecasts are subject to change over time as additional factual details come out.
In contrast, handicapping a patent case is easier, and something we are very comfortable doing. For one, there is a lot to be gleaned –including an assessment of the strength of the case itself — from an early review of the asserted patents. Second, it is easier in a patent case to evaluate the litigation strategy adopted by both sides, and also to handicap the potential financial exposure and risk of an injunction or ITC exclusion order. In Fitbit’s case, it is telling that the company admits that Jawbone’s allegations include a charge of infringement against “a substantial majority” of Fitbit’s historical and current products. And that Jawbone has asserted three patents (more targets for Fitbit to IPR at least), along with public statements that it intends to raise the infringement issues in the ITC as well as in the District Court case already filed. These facts suggest that this case is being positioned for the long haul, and that Jawbone is trying to inflict maximum damage on Fitbit. After the hubbub around the IPO settles, savvy investors in Fitbit will need to prepare for a sober assessment of the risks created by Jawbone’s filings, while understanding that the risk profile will change as the cases develop over a period that could stretch years. In the meantime, we can all do our best to stay in shape.
Recent Patent Litigation-Influenced Moves
When you are a small plaintiff litigating against a well-capitalized defendant like Qualcomm (QCOM) it is no surprise that conserving resources is a must. Parkervision and its investors learned that lesson over the past few years, and in the absence of their patent case generating revenue for the company, it is not a surprise that Parkervision was forced to renegotiate its existing fee arrangement with its outside counsel. Going to a contingency-only arrangement does reduce the ongoing out of pocket spend for the company, while also likely reducing any future payout if the litigation efforts become successful. Considering Parkervision’s financial situation, the luxury of avoiding this step seems to be one they can no longer afford.
Our general position is that investors ALWAYS need to evaluate the fee arrangements between the patent holder and their outside counsel in patent litigation situations of interest to investors. For more on that issue, we commend to you our prior Seeking Alpha article on the topic (link above). At bottom, especially for patent assertion entities, there are usually two overriding costs (or potential company-sinkers if not managed properly) faced by those operating such a business: 1) paying the right price for the right patent assets and 2) managing legal fees and costs. Getting it right on both fronts is critical, and investors will always prefer that the company does so at the beginning of the litigation process, not after a series of setbacks.
Marathon Patent Group (MARA)
The 1 month chart says it all, particularly with respect to investor disappointment in the negative trial finding in a case that MARA partnered with Bridgestone to bring to trial. Of course there will be an appeal, preceded by a request to the trial judge to overturn the jury verdict. But for MARA investors this verdict will be seen as a missed opportunity to demonstrate the continued viability of big-ticket patent litigation – at least in the US.
Of course, MARA rightly points out that this trial decision is appealable, and that the company needs to be considered in light of all its assets. At the same time, investors have proven likely to be swayed by “headline news” in the patent litigation space, and jury verdicts have a perennial spot at the top of the list of trade drivers for investors. So while patent assertion entities have had a rough go of things lately, there is always the next trial to look forward to.
The Week(s) Ahead — Expected Events
Parkervision, ROVI, and Marvell patent decisions – TBD
And that is what we got. Hopefully you have had a chance to catch our “Markman Minute” videos (available at www.mimesiswebtv.com/intellectual-property) for a deeper look at some of the biggest current patent stories of interest to investors. Finally, we want your feedback and suggestions, so feel free to send it along to firstname.lastname@example.org or to @markmanadvisors on Twitter. You can also visit our website at www.markmanadvisors.com. Questions from the readership are always welcome as well; we will try to get you answers in future issues of the Markman Note.
Disclosures and Disclaimers:
Nothing in this material is intended to constitute legal or investment advice of any kind, nor is any of this material based on any non-public information of any kind. In addition to my work at Markman Advisors, I am also a name partner at a NYC-based intellectual property litigation boutique firm, Kroub Silbersher & Kolmykov PLLC (www.kskiplaw.com). Markman Advisors is affiliated with a Houston-based investment management firm, Perdix Capital Management, which may have existing or potential positions relating to situations discussed in this material. Markman Advisors also provides consulting services to buy-side investors, including hedge funds and family offices, that may also have or enter into positions relating to situations discussed in this material.