Battle of the Bands Gets Nasty as Jawbone Ups Fight With Fitbitby and
Companies are embroiled in battles over patents, trade secrets
Both face possible trade agency order banning products in U.S.
What started as a routine patent dispute between the two makers of wearable fitness trackers has escalated in the past two weeks with allegations that Fitbit employees stole trade secrets and counter claims that Jawbone never should have gotten patents in the first place.
As fitness bands grow more popular, Fitbit remains in the lead but is losing market share to the likes of Apple Inc., Samsung Electronics Co., and Xiaomi Corp. Fitbit’s stock has lost half of its value this year, as analysts and investors worry the company may be a one-trick pony as wearables, regardless of brand, become more and more interchangeable. Meanwhile, Jawbone has been edged out of the top five most popular devices by incoming players.
"The market sees Fitbit in this category going against Apple at the top, Samsung in the middle, and Xiaomi in the bottom," said Steven Wardell, an analyst at Leerink Partners, who has a hold rating on the company. "There’s investor anxiety about the long-term future."
The stakes in the dispute are high: Fitbit and Jawbone could both face a possible trade agency order that would ban their products from being sold in the U.S. as a result of patent claims. Meanwhile, Jawbone says that more than 300,000 internal documents were pilfered by former employees who went to work at Fitbit. If Fitbit can’t fend off the trade secrets claim, it could face monetary penalties that would give critics further ammunition.
130 Percent Growth
The market for wearable devices that includes trackers for measuring steps, monitoring heart rate and sleep among other features, grew rapidly last year. Vendors shipped 27.4 million devices in the fourth quarter of 2015, a 127 percent growth from a year before, according to International Data Corp. For the full year, vendors shipped a total of 78.1 million units, up a strong 171.6% over 2014.
But the competition has gotten fierce as more players enter the market. In the first quarter last year, Jawbone was the fifth-leading wearables device maker with 4 percent of the global market, while Fitbit was No. 1 with 34 percent, according to IDC. Jawbone has since fallen out of the top five, while Fitbit remains in the lead with 30 percent of market share.
Jawbone struck first with its trade-secret claims in May 2015, just as Fitbit was on the verge of becoming a public company. The legal dispute rapidly escalated with each trading patent-infringement claims before the U.S. International Trade Commission, an agency that can block the import of products found to violate another company’s patents.
"Any litigation from the International Trade Commission is high stakes because the only remedy the ITC offers is banning products from the U.S. market which can be devastating," said Matt Larson, a Bloomberg Intelligence litigation analyst. "It’s a pretty aggressively litigated case. The wearables space is pretty crowded. You have companies jockeying and vying for market advantage."
In anticipation of mandated settlement talks on March 25, and a likely trial in May on Jawbone’s patent claims, both sides are heating up the rhetoric in court papers again.
Closely-held Jawbone says Fitbit is "systematically plundering Jawbone employees and their competitor’s critical trade secrets and intellectual property.”
Fitbit is calling Jawbone’s allegations “desperation due to its inability to compete in the marketplace," and asking a state judge to toss the suit, saying it had nothing to do with any documents retained by Jawbone workers.
Last November, Jawbone cut about 15 percent of its global workforce and closed its New York offices as part of a larger reorganization to pare expenses.
Jawbone claimed in a March 14 court filing that Fitbit recruiters contacted about 30 percent of its employees to try and “decimate” the company. Several workers who left downloaded information onto thumb drives in the last days of employment, Jawbone alleges.
The complaint originally named five former workers who Jawbone says took key information, including designs and marketing plans, to Fitbit. It said it has since learned of another former employee, who sent confidential Jawbone information to her Fitbit e-mail account.
“Throughout this litigation, Jawbone has engaged in a pattern of making sensational and baseless claims and actively generating publicity in an effort to deflect attention away from its inability to succeed in the market," Fitbit said in an e-mail. "We prefer to continue to demonstrate the merits of our legal position in court."
Fitbit fired back in January with claims that it has no need to steal ideas from Jawbone. In other filings, it said one of Jawbone’s creditors took part in mandatory settlement talks; Jawbone said the man is just an outside consultant. Larson said some of the filings in the case hint that Jawbone is looking for a large settlement to pay off some of its debt.
“Fitbit can characterize our respective legal actions as it so chooses," Jawbone said in an e-mail. "But the real issue at hand is that the defendants were improperly in possession of more than 300,000 documents that are the property of Jawbone."
Fitbit has been steadily whittling down a case Jawbone filed with the trade commission from six patents to two, and is trying to get those two patents ruled invalid before a May trial. It says Jawbone’s patents simply cover the concept of things like monitoring sleep or energy usage, not an actual invention worthy of a patent.
If Fitbit succeeds in getting all the patents tossed, that would leave just some trade secret allegations, including ones that Fitbit’s manufacturer, Flextronics International Inc., used design information it learned when it was working for Jawbone.
For its part, Fitbit has filed its own trade case against Jawbone, claiming infringement of three patents it says relate to the actual monitoring devices. Jawbone can ask the judge to toss those patents, otherwise the case is scheduled for trial in August in Washington.
The trade commission can’t order one side to pay the other patent royalties; it’s sole power lies in ordering customs officials to stop products at the border. Should it decide against either Fitbit or Jawbone --- or both -- and impose an import ban, their only recourse other than an appeal would be to get President Barack Obama’s administration to overturn it on public policy grounds, a boon rarely granted.
If Fitbit loses the cases, it will likely try and cut a deal, rather than face its products from being blocked in the U.S., Larson said. Fitbit could implement design workarounds or pay a royalty fee to Jawbone that would have a significant affect on Fitbit’s financials, according to Larson. On the flip side, if Jawbone’s strategy backfires and Fitbit prevails, Jawbone may have to pay Fitbit or dismiss all of its claims against Fitbit.