Tracker mak­ers Fit­bit and Jaw­bone may ar­gue them­selves right into obliv­ion

A patent bat­tle be­tween Fit­bit and Jaw­bone could re­sult in U.S. bans “It’s a pretty ag­gres­sively lit­i­gated case”

Bloomberg Businessweek (Asia) - - CON­TENTS - −Selina Wang and Su­san Decker

Last year, Jaw­bone sued Fit­bit, the leader in the fit­ness-tracker mar­ket, over claims that Fit­bit had hired away Jaw­bone em­ploy­ees who took sen­si­tive in­for­ma­tion with them. The law­suit was filed in Cal­i­for­nia state court as Fit­bit was pre­par­ing for its

ini­tial public of­fer­ing, which took place in June. Since then the dis­pute has es­ca­lated into a war over patent claims that’s landed be­fore the U.S. In­ter­na­tional Trade Com­mis­sion, a fed­eral agency that has the power to block both com­pa­nies’ prod­ucts from be­ing im­ported into the U.S. from man­u­fac­tur­ing sites in China. “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,” says Bloomberg In­tel­li­gence an­a­lyst Matt Lar­son. “It’s a pretty ag­gres­sively lit­i­gated case.”

As the Cal­i­for­nia case pro­ceeded, Jaw­bone went to the trade com­mis­sion in July, claim­ing Fit­bit had in­fringed six pa­tents, in­clud­ing ones in­volv­ing power man­age­ment, pro­tec­tive coat­ings, and track­ing users’ sleep or ac­tiv­ity lev­els. In an­tic­i­pa­tion of man­dated March 25 set­tle­ment talks in the patent case and hear­ings be­fore the trade com­mis­sion in May, both sides are heat­ing up their rhetoric.

Pri­vately held Jaw­bone al­leged in a March 14 Cal­i­for­nia court fil­ing that Fit­bit is “sys­tem­at­i­cally plun­der­ing Jaw­bone em­ploy­ees and their com­peti­tor’s critical trade se­crets and in­tel­lec­tual prop­erty.” Jaw­bone claimed Fit­bit re­cruiters con­tacted about 30 per­cent of its em­ploy­ees to try to “dec­i­mate” the com­pany. Sev­eral work­ers who left down­loaded in­for­ma­tion onto thumb drives in their last days of em­ploy­ment, Jaw­bone al­leges.

Fit­bit, in re­sponse, de­scribed Jaw­bone’s al­le­ga­tions as “des­per­a­tion” brought on by its de­clin­ing mar­ket share. Fit­bit has also filed its own trade case against Jaw­bone, claim­ing in­fringe­ment of three pa­tents it says re­late to the mon­i­tor­ing de­vices. That case is sched­uled to be heard by the com­mis­sion in Au­gust.

Fit­bit says Jaw­bone’s pa­tents sim­ply cover the con­cept of things like mon­i­tor­ing sleep or en­ergy us­age, not in­ven­tions wor­thy of le­gal pro­tec­tion. “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 dem-emon­strate the mer­its ofof our le­gal po­si­tion in court.”

Jaw­bone’s ini­tial com­plaint in Cal­i­for­nia named five for­mer work­ersers who, Jaw­bone says, took more than 300,000 in­ter­nal doc­u­ments, in­clud­ing de­signs and mar­ket­ing plans, to Fit­bit. Jaw­bone says it’s since learned of an­other for­mer em­ployee who sent con­fi­den­tial com­pany in­for­ma­tion to her Fit­bit e-mail ac­count. “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 claimed it has no need to steal ideas from Jaw­bone. The com­pany has asked the Cal­i­for­nia judge to throw out the trade-se­crets suit, say­ing it had noth­ing to do with any doc­u­ments re­tained by Jaw­bone work­ers.

In the trade case, Fit­bit has got­ten the com­mis­sion to whit­tle Jaw­bone’s claims down to two pa­tents from six. The com­pany is try­ing to in­val­i­date the re­main­ing two be­fore the claims are heard by the trade com­mis­sion in May. If Fit­bit suc­ceeds in get­ting all the patent claims tossed, that would leave just some trade-se­cret al­le­ga­tions for the com­mis­sion to rule on, in­clud­ing that Fit­bit’s man­u­fac­turer, Flex­tron­ics In­ter­na­tional, used de­sign in­for­ma­tion it learned when it was work­ing for Jaw­bone.

Should the com­mis­sion de­cide against ei­ther Fit­bit or Jaw­bone— or both—and im­pose im­port bans, they can ap­peal to the U.S. Court of Ap­peals for the Fed­eral Cir­cuit in Wash­ing­ton, the na­tion’s top patent court. The com­pa­nies can also try to per­suade the Obama ad­min­is­tra­tion, which au­to­mat­i­cally reviews trade

com­mis­sion rul­ings, to over­turn it on public pol­icy grounds, but such ef­forts rarely suc­ceed.

Jaw­bone is no longer among the top five most pop­u­lar track­ing de­vices.

Ap­ple, Sam­sung Elec­tron­ics, and Xiaomi have in­tro­duced com­pet­ing prod­ucts. That’s also threat­en­ing Fit­bit. “The mar­ket sees Fit­bit in this cat­e­gory go­ing against Ap­ple at the top, Sam­sung in the mid­dle, and Xiaomi in the bot­tom,” says 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 bot­tom line The U.S. In­ter­na­tional Trade Com­mis­sion could stop im­ports of Fit­bits and Jaw­bones amid com­pet­ing patent claims.

Jaw­bone UP2 $99.99

Fit­bit Flex $99.95

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