After intimating that it would seek legal action in its third quarter earnings statement, Alarm.com (NASDAQ:ALRM) has followed through by formally filing a patent infringement lawsuit against Vivint (NYSE:VVNT) last week.
In a civil action (Case No. 2:23-cv-00004) filed on Wednesday, Jan. 4, 2023, in the U.S. District Court for the Eastern District of Texas, Marshall Division, Alarm.com Inc. (ADC), and ICN Acquisition LLC filed 15 different patent infringement claims, alleging that Vivint knowingly employed patented ADC back-end software to sell and market its own security and sensor devices to its customers. ADC and ICN, the patent holders, are demanding a jury trial.
"I assumed this was the next logical step," says Brian Ruttenbur, Managing Director of Imperial Capital. "And I doubt this will be resolved in the near term."
The Background
Vivint became an Alarm.com dealer in 2007, selling smart home and security packages that sit on the ADC back-end platform. Until 2014, Vivint used third-party platforms to support its smart home and security packages, including the ADC back-end.
This suit seeks to hold Vivint accountable for its use of ADC and ICN patents without license, to provide redress to ADC and ICN for the damage Vivint has caused, and to end Vivint’s infringement. The civil claim contends that given ADC’s long history of innovation and its long list of patented software technologies that are licensed by its dealer partners, Vivint is in violation of those patents having continued to copy ADC’s innovations and incorporating them into their own back-end platforms.
“With access to ADC’s technology, Vivint began secretly developing a competing back-end,” the claim states. “To do so, Vivint copied functionality from the ADC back-end, using ADC’s trade secrets and patented technology in breach of its confidentiality and non-use obligations.”
Industry analyst Brad Russell of Interpret Research says that “in many instances in the security industry, there have been partnerships, but then iteration happens on top of that, and it becomes a grey area, where it is not certain what was original or what was an iteration or adaptation that feels more proprietary. Thus, this will be very complex for lawyers to figure out.”
According to the filing, the 15 patents cover “a platform through which home automation and security service providers may offer their services to customers…commonly referred to as a ‘backend’ system [that] hosts cloud-based solutions that provide functionality to home security and automation systems, including such features as interactive security, video monitoring, intelligent automation, energy management and wellness monitoring.”
It adds that Vivint’s infringing functionality includes, but is not limited to: “Using sensors, such as cameras, to detect environmental conditions, communicate those conditions to Vivint mobile app users and act in accordance with user-defined instructions; allowing touchscreen control of Vivint panels and networked monitoring components; using GPS technology to provide location-based alerts, including through its ‘Car Guard’ products; and other home automation and security system functionality.”
Licensing Dispute
Because Vivint developed its back-end by allegedly using ADC’s technology, Vivint understood that if it wished to enter the market with its copy of ADC’s protected back-end technology, it would need to obtain both a license to ADC patents and a covenant that ADC would not sue for Vivint’s misappropriation of ADC’s intellectual property. The parties entered into a patent cross-licensing agreement in late 2013, which gave Vivint a license to ADC’s existing patents and certain later-issued patents.
It is Q3 earnings call on Nov. 8, 2022, Alarm.com President and CEO Steve Trundle announced that “Vivint recently notified us that it will stop paying Alarm.com the royalty fees associated with the patent license agreement that we reached with Vivint in 2013. We have filed for arbitration under our agreement. We expect the arbitration process, which is confidential and not open to the public like traditional litigation, to take about 12 to 16 months.
“We intend to continue aggressively defending the investments we have made in our technology over the course of 20 years, including our global patent portfolio of over 600 issued patents and additional patents pending,” Trundle added, noting the company had “budgeted for potential significant additional legal expenses related to Vivint in the range of $16 to $20 million in 2023.”
“If its patents were infringed and its intellectual property was used without a license, Alarm.com is entitled to seek a variety of remedies, including an ongoing royalty and the possible disgorgement of revenues derived by Vivint from the commercial use of the technology,” explains legal expert Timothy Pastore, Esq., a partner and Vice-Chair of Litigation for Montgomery McCracken Walker & Rhoads LLP. “At this stage, these are only allegations. Vivint is entitled to its defense – which I expect will be robust. However, if the court finds there was an infringement and finds further that the infringement deprived Alarm.com of the economic benefit of its inventions, then the damages could be substantial.”
Potential Impact on NRG Energy Acquisition?
All three experts agree that NRG Energy, which announced its intention to acquire Vivint on Dec. 6 for $2.8 billion, anticipated this action from Alarm.com before entering into the transaction.
“Any sophisticated party contemplating an acquisition of this size is likely to have conducted due diligence on any threatened or pending litigation against the target of the acquisition,” Pastore says.
Adds Russell: “With the acquisition Vivint is undergoing, Alarm.com wants to make sure any value due them is part of that conversation.”
That said, Alarm.com is seeking “adequate damages” from Vivint to compensate ADC for its infringement, together with interest and costs, arising out of Vivint’s past infringement of the patents-in-suit.
Vivint Legal Woes Continue
Vivint’s legal team has been busy in the past few years; in fact, just last week, the company reached an undisclosed settlement in a would-be class action lawsuit in Florida alleging that the company violated state and federal telemarketing laws (first reported by http://ipvm.com).
The company also began the trial phase of a deceptive sales lawsuit brought in North Carolina by CPI Security last week.
Vivint is also in the midst of a separate patent infringement battle with ADT, and the company was ordered to pay a $20 million fine in April 2021 stemming from a Federal Trade Commission lawsuit over the misuse of credit reports.
Paul Rothman is Editor in Chief of Security Business magazine.
