If you can’t innovate, litigate?
In the HBO series Silicon Valley, plucky startup Pied Piper is sued by Google-like giant Hooli for IP theft.
The fictional drama within the comedy is not unlike many tech industry lawsuits in real life, including a 2014 case from the SEO industry that dragged on for more than three years and is still in limbo. This may not be an industry associated with intrigue at first blush, but the BrightEdge Technologies v. Searchmetrics et. al case includes allegations of stolen trade secrets, patent trolling and a smear campaign – not to mention a jilted union and bankruptcy. Throw in a clean resolution in which everyone learns valuable lessons and we might have the makings of a Hollywood blockbuster.
In the meantime, a third party has more or less piggybacked on the fray, announcing it is giving away its patents in response to the battle between its SEO brethren, and, funny enough, all three platforms say their actions demonstrate they are focused on innovation and what’s best for customers.
But as reports say pre-IPO patent litigation is becoming more common, the question remains how brands can effectively compete and serve said customers, and whether patents actually protect valuable brand IP or are subject to abuse in a broken system that favors whatever litigant has more money.
Let’s start with the third party, Conductor.
In a blog post, Conductor chief executive Seth Besmertnik said Conductor decided to make its patents available “to anyone who cares to use them” and he invited interested parties to reach out for free licenses.
“Maybe you can use these licenses to create a better solution for customers,” he wrote, adding it is a “gesture to encourage everyone in our industry to do the same: focus on creating value instead of extracting it. This isn’t just a symbolic gesture; it’s an attempt to help refocus our industry’s attention on innovation and customers and leave the legal wrangling behind us.”
In an interview, Besmertnik said he’s not giving away every line of Conductor code, but hopes the ideas in Conductor’s 20-some-odd patents will spur innovation and more companies in the industry to release their own patents “so everyone can support each other”. In addition, he said he hopes “competitors will stop suing each other so they can focus on competition rather than money”, and innovation will yield new products, as well as attention to the SEO industry.
For now, it raises some interesting questions about said innovation, as well as customer-first philosophies and the nature of competition.
But first we need to take a closer look at that lawsuit and bankruptcy filing.
In this corner, weighing in at…
On May 8, patent lawsuit defendant Searchmetrics Inc. filed a voluntary petition for relief under Chapter 11 of the US Bankruptcy Code with a proposed plan of reorganization and listing assets of $1m to $10m and debts of $10m to $50m.
“The implementation of the company’s strategy will position the company for future growth while supporting its customers and maintaining its business without interruption,” Searchmetrics said in a release, noting the filing only includes Searchmetrics’ US subsidiary. (Searchmetrics was founded in Germany in 2005 and has been operating in the US since 2013.)
Shortly before filing, the US subsidiary received a commitment for new financing from its Berlin-based parent, which will be used to continue operations through the proceedings, which it anticipates will end by early fall.
“We have worked diligently to resolve the litigation against our company and now have a plan in place to quickly and efficiently address what we believe has been an unnecessary financial burden on Searchmetrics Inc.,” said Wayne Weitz, chief restructuring officer of Searchmetrics Inc., in a statement.
A hearing is expected later this month.
That “unnecessary financial burden” is the result of a lawsuit filed by BrightEdge in March 2014.
- 8,577,863: Correlating web page visits and conversions with external references, which was granted in November 2013;
- 8,478,700: Opportunity identification and forecasting for search engine optimization, which was granted in July 2013;
- 8,478,746: Operationalizing search engine optimization, which was granted in July 2013;
- And 8,135,706: Operationalizing search engine optimization, which was granted in March 2012.
(The filing has more detail on the technology itself.)
Searchmetrics declined comment.
However, according to a source close to the matter, Searchmetrics was using this technology for years in Europe, where patent cases are less common, and long before BrightEdge patented it in the US.
What’s more, TechCrunch cites a letter from Weitz that says BrightEdge sought to “acquire or merge with Searchmetrics in or about October of 2013. During acquisition discussions, BrightEdge became privy to Searchmetrics’ confidential, proprietary, competitive information and business practices, including its business model and growth plans. Ultimately, Searchmetrics and BrightEdge could not agree on terms and the acquisition discussions fell apart.”
According to Weitz’s letter in TechCrunch, that’s when “BrightEdge developed a campaign to eliminate [Searchmetrics’s] presence in the US market. BrightEdge started by engaging in a smear campaign designed to lure the debtor’s customers and prospective customers to BrightEdge by making false and disparaging statements about Searchmetrics’s products, and then initiated vexatious, baseless, and prolonged litigation against [Searchmetrics] on two fronts. This Chapter 11 case was initiated to bring [this litigation] to an expeditious and cost-effective end to permit the debtor to reorganize, failing which, [Searchmetrics] will be liquidated.”
The source said Searchmetrics has been trying to go to court “for years, but BrightEdge has dragged its feet”.
For his part, BrightEdge chief executive Jim Yu said, “We do not comment on the substance of pending litigation.”
However, echoing a familiar sentiment, he added, "At BrightEdge, customer success is our number one priority. As part of this, protecting the intellectual property that we have worked hard to develop and the innovations that we build with our partners and customers is essential. Being a part of the SEO community has been one of the most rewarding parts of my time at BrightEdge, and we love our customers and the community we support."
BrightEdge also has an outstanding trade secrets lawsuit against Searchmetrics.
That giant and that little guy
Without making a direct David/Goliath comparison, suffice it to say BrightEdge is a bigger company with deeper pockets. In 2013, it closed a $42.8m Series D round from Insight Venture Partners, Intel Capital, Battery Ventures, Altos Ventures and Illuminate Ventures. It has raised $62m to date and has over 300 employees.
Searchmetrics, on the other hand, has raised more than $31m in five rounds, as well as about $8m in debt financing in 2016. Investors include Iris Capital, Verdane Capital and Holtzbrink Digital. It has about 250 employees, including 45 in the US.
In addition, the source noted neither company has received venture funding since the lawsuit was filed, but BrightEdge is in a better financial position because it closed that hefty Series D round in 2013.
“[BrightEdge has] been using patents as a bludgeon,” the source said. “With startups in particular, no one wants to fund you while you’re in a patent lawsuit. An investor doesn’t want to spend money on defending patents – they want to spend on innovation.”
Both sides “have spent a huge amount of money on the legal process without going to trial,” the source added. And, in short, the bankruptcy filing seeks to settle the matter once and for all.
‘War by other means’
In the story cited above, TechCrunch also spoke to a number of lawyers about venture-backed companies filing for bankruptcy in the wake of patent lawsuits, and they more or less agreed the move is risky. One of these lawyers told TechCrunch, “The court might dismiss the filing as being in bad faith. The company will have to show some other reason for needing to reorganize, and that it’s not just trying to stiff a single creditor.”
But Forbes noted pre-IPO patent litigation is becoming increasingly common, along with patent purchases by pre-IPO companies. In fact, Forbes cited data showing six out of the 10 largest IPOs of all time – including Alibaba, Facebook, Snap, Google, Twitter and LinkedIn — “have all been preceded by these startups’ purchases of patents from the intellectual property behemoth IBM.”
And, Forbes concluded, “success or failure in business competition is now often ‘war by other means’ — eg, by patent or trade secret lawsuit.”
Or, as some say, “If you can’t innovate, litigate.”
‘Intellectual property landmines’
This certainly isn’t an issue specific to the SEO industry.
In 2014, Elon Musk, chief executive of electric car and sustainable energy company Tesla, wrote a blog post that said Tesla removed its wall of patents in the lobby of its headquarters “in the spirit of the open source movement, for the advancement of electric vehicle technology”.
Musk said patents were perhaps good long ago “but too often these days they serve merely to stifle progress, entrench the positions of giant corporations and enrich those in the legal profession, rather than the actual inventors”.
“If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal,” Musk wrote. “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”
Sounds familiar, right?
Like Conductor, Tesla hasn’t given away all its secrets. But is this collaborative spirit better aligned with a customer-first philosophy that drives innovation? Or is it simply a response to a broken system?
Besmertnik said patent documents are “long, nuanced and specific” and the US Patent and Trademark Office, which approves patents, includes people who “know very little about what is out there”.
“So it’s very easy to get a patent for something that has been around for a long time because the companies that have been around a long time are not actively monitoring and people in the office don’t know – it’s a system that is pretty broken,” Besmertnik said.
That means it’s not hard for trolls to get patents and bully competitors out of the market.
And that’s in part why Besmertnik said companies with lots of patents like Facebook and Salesforce have called to eliminate the existing system. (Salesforce declined comment. Facebook did not respond.)
“We believe patents are not good for customers – it blocks innovation,” Besmertnik said. “It’s a way for companies to spend money instead of helping customers. It’s kind of a good thing our competitors are suing each other, but a bad thing because we need the industry to be successful…we’re only as good as the category we’re in…if everyone is competing, it’s better for the customer.”
And focus is indeed increasingly on consumers. They’ve wrested control of the path to purchase from brands and reshaped the traditional funnel, forcing brands to adopt customer-first mentalities. But even as brands engage more with consumers and let them call the shots, it’s not entirely clear where brands should stand with their competitors.
“Companies are realizing that if you want to be successful, you really need to put the customer first in everything – that should be the driving force of the company…and I think that’s this change that’s happening across a lot of industries. All this stuff is better for customers -- innovation is better for customers and competition is better for customers. Being open about your competition and talking about competitors is better for customers,” Besmertnik said. “That’s a big trend – focus on customers and things like patents are not for customers…think about the essence of a patent – I make something great [and] patent [it], so no one else can make it and I can charge out the wazoo for it. I pillage my customers because they have no alternatives. When you have no competition…the customer gets screwed. There’s less pressure to innovate because no one is competing with you. If I had no competition, I wouldn’t need to invest in making my products better. All these things are tied back together – the customer wins and I think businesses are just generally realizing they have to do the right thing for customers.”