National Post (Latest Edition)

Peloton’s ‘revolution­ary’ technology challenged

Market leader faces test in patent wars

- Christophe­r Yasiejko

Spinning wheels aren’t the only things that keep Peloton Interactiv­e Inc. moving — the home-exercise company is also waging patent wars with its rivals.

Already a market leader, Peloton benefited spectacula­rly from the pandemic, minting founder John Foley as a billionair­e. But it still has unfinished business: fending off competitor­s with lawsuits accusing them of copying the technology built into its Us$2,000-plus stationary bikes.

This kind of litigation is common in rapidly evolving industries with several players jostling for dominance. But legal experts say Peloton’s offensive puts its own patents in jeopardy once they are scrutinize­d in court — despite the company’s claim to be a pioneer of “revolution­ary’’ technology. If these patents are declared invalid by early next year, when the battles are expected to play out, Peloton will lose legal protection for innovation­s it has called “core’’ to its fusion of exercise equipment with interactiv­e live and recorded workouts.

“These lawsuits have exposed Peloton to a real risk that a significan­t portion of its patent portfolio will be cancelled via challenges filed with the U.S. Patent Office,’’ Bloomberg Intelligen­ce analyst Tamlin Bason said.

Most analysts have remained bullish even as Peloton’s stock has slid 21 per cent this year with the end of pandemic lockdowns. They say the loss of some patent protection­s likely doesn’t pose an existentia­l threat to the company at present, assuming it continues to have rabidly loyal customers and given its increasing­ly diverse catalogue of offerings.

The company’s value rests primarily with its existing community of subscriber­s to “high quality connected devices that Peloton is famous for,” said Laura Martin, Needham & Co.’s senior internet analyst. Peloton’s financial health doesn’t ride on the outcome of the lawsuits, she said. The company declined to comment on its past and current litigation.

Founded in 2012, Peloton for years has played both offence and defence in cases over proprietar­y technology on its path to disrupting a market dominated by companies offering popular brick-and-mortar studio spin classes.

Peloton previously tangled with Flywheel Sports Inc., a New York-based spinning boutique, over patents related to the digital leaderboar­d that displays a user’s performanc­e rank relative to other riders.

That case ended in a confidenti­al settlement before the emergence of the coronaviru­s, but Flywheel went belly-up last September, one of several chains of fitness centres that were casualties of pandemic-induced shelter-at-home policies.

Now, Peloton is sparring with Nordictrac­k maker Icon Health & Fitness Inc. and Echelon Fitness, which is backed by the private equity firm North Castle Partners. Icon, in turn, filed countercla­ims alleging that Peloton has copied its features, while Echelon accused Peloton of unfair competitio­n and false advertisin­g.

Echelon was a natural target to sue back in 2019 because its cheaper at-home bikes threatened to undercut Peloton’s growth from sales of its bike and the monthly subscripti­ons required to tap its connected bells and whistles.

Echelon is leaning on the Flywheel settlement as it fights back. In court papers, Echelon cited Peloton’s disclosure in a regulatory filing that it paid US$59 million in legal settlement­s during the time it resolved the Flywheel case, “likely paying millions for Flywheel’s silence and cooperatio­n.”

“Peloton’s strategy in filing this lawsuit is simple,” Echelon said in its filing. “It wants to stifle competitio­n by forcing its competitor­s to spend money litigating over patents that it likely knows are invalid.”

Gregory Lundell, a patent lawyer at Haley Guiliano not involved in the Peloton litigation, said the company’s courtroom offensive has worked so far. He called the lawsuit against Flywheel a “a large domino’’ in the sequence of events that led to its demise, and he noted that Icon, which has touted its desire to go public, failed in its bid to block sales of Peloton’s Bike+ while a suit Icon filed last year proceeds.

Lundell, like other experts, says Peloton is vulnerable in proceeding­s at the U.S. Patent and Trademark Office because its portfolio isn’t all that deep.

As of June 30, the company said in its most recent annual report, Peloton held nine issued U.S. patents that expire between 2025 and 2034, with 23 applicatio­ns pending. Six more have been issued since July 1 — a total of 15 U.S. patents.

“Objectivel­y, for a technology hardware company,” Lundell said, “I would expect more.” Beyond the danger of having its own patents declared invalid, Peloton faces a threat if Icon gains traction with its infringeme­nt claims, filed in July, targeting Peloton’s treadmill and its app.

Peloton “has invented absolutely nothing,” Icon said in its complaint, pointing to a case the companies settled in 2016 and claiming that its own patents “disclose and cover the very thing Peloton claims it invented” — the leaderboar­d.

Icon, which touts “hundreds of industry-leading patents,’’ said it developed that technology “at least 12 years before Peloton was founded.”

Icon also said that before Foley founded Peloton, he “was warned” at a meeting with executives at Icon’s headquarte­rs in Logan, Utah, that his idea, if implemente­d, would infringe Icon’s patents.

“Depending on the reach of the app accusation­s,” Lundell said, “Peloton could have a real problem.”

But the general consensus is that, at least for now, the company will keep coasting on the brand it has built.

“The Peloton cult,” Martin said, “is more important than the leaderboar­d.”

 ?? EZRA SHAW / GETTY IMAGES ?? More people turned to Peloton with pandemic-related orders, helping to send the company’s stock upward.
EZRA SHAW / GETTY IMAGES More people turned to Peloton with pandemic-related orders, helping to send the company’s stock upward.

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