May 4, 2020 - Economy

Activist investor Elliott Management funds patent lawsuit against Quibi

Photo: Igor Golovniov/SOPA Images/LightRocket via Getty Images

Elliott Management, one of the most feared activist investors, is financing a patent lawsuit on behalf of a small interactive video company against the splashy new mobile streaming company Quibi, a person familiar with the lawsuit tells Axios.

Why it matters: Elliott Management's involvement escalates the months-long battle over who owns the video technology that powers Quibi's entire business. Quibi just launched in April, and has struggled to stick to its ambitious growth plan amid the coronavirus pandemic.

Details: The lawsuit alleges that Quibi's flagship technology, which allows users to seamlessly switch mobile displays between horizontal and vertical, is stolen from Eko.

  • Eko cites two primary pieces of evidence: (1) It held repeated talks with Snap, from which Quibi poached numerous employees. (2) Eko's CEO and Katzenberg discussed Eko's technology prior to Quibi's big unveil.
  • Quibi unambiguously denies Eko's claims, and also has countersued Eko.
  • The Wall Street Journal was the first to report on the lawsuit.

Terms of the arrangement are unknown, but a source says that Elliott will receive a "significant" equity stake in Eko, which raised over $35 million in VC funding between 2011 and 2016 from firms like Sequoia Capital Israel, Sony Pictures Entertainment, Samsung, and Warner Music Group.

  • Quibi, which launched its short-form original video service last month, has raised around $1.75 billion and is led by Meg Whitman (ex-HP and eBay CEO) and Jeffrey Katzenberg (ex-CEO of DreamWorks, ex-chairman of Walt Disney Pictures).
  • It's struggled to meet aggressive expectations, in part due to the dearth of commuters.

The backdrop: Eko first accused Quibi of patent infringement in March. At that time, Quibi filed its own complaint accusing Eko of spreading false accusations in an attempt to tarnish Quibi's reputation.

  • This isn't the first time Elliott has been involved in high-stakes litigation (just ask the governments of Argentina or South Korea) or litigation finance (it controls litigation finance firm Innsworth), but it is unusual to see it take sides in a skirmish between privately held tech companies.

What's next: Eko has requested an immediate injunction against Quibi, with a ruling possible this week. But that's only on the trade-secret piece, not the patents, with a broader case management conference scheduled for July. Overall, the entire case could take upwards of three years.

  • A loss may devastate Quibi, given that it's pitched the display tech to Hollywood content creators as an exciting new way to film. It's unclear if Eko would be willing to license out the tech to Quibi and, even if so, at what price.
  • It's unclear what Elliott gets out of this if Eko doesn't win the lawsuit. According to a source familiar with the matter, the Eko team feels confident that its case will go to trial, and that Eko has enough evidence that Quibi executives were aware of Eko's ideas prior to launching their own product.

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