When BrightEdge Technologies (BE) and Searchmetrics began due diligence in October 2013 for a possible merger, the two search engine optimization providers became privy to each other’s growth plans, business models and practices. That courtship ended without a marriage and soured even more when BE filed a patent infringement suit against Searchmetrics in March 2014.
Searchmetrics spent some $2 million a year for three years to defend itself in the case handled by the U.S. District Court, Northern District of California, San Jose Division, leading it to file a chapter 11 pleading on May 8, 2017, in the U.S. Bankruptcy Court for the District of Delaware. The company claimed the bankruptcy case was initiated partly to bring the patent litigation to an expeditious and cost-effective end so that Searchmetrics can reorganize or else it would be liquidated, according to an affidavit filed by Chief Restructuring Officer Wayne P. Weitz. The cost of the BE litigation, which Searchmetrics says is baseless, has kept its U.S. subsidiary from investing properly in sales and marketing. The petition listed up to $10 million in assets and $100 million in liabilities.
“This is not the first time bankruptcy has been used as a business strategy,” said Michelle Novick, bankruptcy partner with Arnstein & Lehr in Chicago. “In real estate cases, bankruptcy is often used to stop pending foreclosure proceedings.”
Like Searchmetrics, Avaya Inc. stopped patent litigation when it filed for bankruptcy on Jan. 19, 2017, in the U.S. Bankruptcy Court for the Southern District of New York after Blackberry sued for patent infringement on July 27, 2016. Blackberry has since moved for Avaya’s automatic stay to be lifted so that patent litigation can continue in the U.S. District Court for Northern Texas.
The advantage of bankruptcy for Searchmetrics includes slowing down legal proceedings and providing for a bankruptcy judge to attach a monetary value to the case, but filing to mitigate litigation can be risky, according to experts.
“The problem is you lose control of your business because it is now overseen by a court and a trustee, which could choose to turn down a settlement.”
In its adversary complaint filed on the same day as the bankruptcy pleading, Searchmetrics objects to BE’s claims, requests an estimate of claims and seeks a setoff in which the judge cancels any potential debt or sets a limit to such debt.
Searchmetrics denies its products infringe on any valid patents owned by BE and states on its website, “We have been providing software for search engine optimization and the support of digital marketing since 2005. To date, rather than expend resources on filing costly patent applications, we have focused our resources and energy instead on development of innovative features and our customers’ needs and success.”
At present, however, the bankruptcy filing does not resolve the patent lawsuit that stands between Searchmetrics and BE?
“A body of law exists which indicates that a bankruptcy court or magistrate cannot decide noncore issues without the consent of both parties,” said Colbert, partner with Andrews Kurth Kenyon. A noncore issue typically includes whether or not a patent infringement has occurred.
BE Attorney Matthew B. Harvey filed a petition claiming Searchmetrics’ bankruptcy was filed in bad faith and solely to gain an upper hand in legal proceedings after being ordered to produce a customer database, while Mr. Weitz in his declaration alleges competitor BE is dragging out and submerging Searchmetrics in litigation.
“The challenge for Searchmetrics is case law that upholds patent suits as noncore in bankruptcy filings,” Colbert told PacerMonitor News. “Whether you are bankrupt or not is considered core and in this case it appears that Searchmetric’s bankruptcy was triggered by a noncore matter, which is BE’s patent suit.”
The 2015 Supreme Court case Sharif v Wellness International Network Limited expanded on and held that noncore claims cannot be litigated or decided by a bankruptcy judge appointed by the Courts based upon the fact that magistrates are not Article III judges under the U.S. Constitution but rather they are employees of the court.
“Bankruptcy court has statutory authority but it does not have constitutional authority to enter a binding order on noncore issues and affect private property rights unless a federal court enforces the bankruptcy court’s recommended decision,” Colbert said.
On June 8, 2017, BE filed a motion to dismiss Searchmetric’s chapter 11 case or to lift the automatic stay that prevents patent litigation from resuming in California but the bankruptcy judge assigned to Searchmetrics Christopher S. Sontchi can still make proposed findings of facts.
“Searchmetrics is seeking to protect its business from being driven into involuntary bankruptcy or driven out of business by an adverse judgment in the lower court that is litigating the patent suit,” said Colbert.
That’s because the long gestation period of BE litigation in California, in which no trial dates have been set, poses a serious threat to the firm’s growth and long-term outlook, according to Searchmetrics.
“They are requesting a favorable resolution of the patent case or a valuation of the claim for use in providing for proportionate shares to all creditors,” Colbert said.
On June 29, Judge Sontchi was expected to either approve or dismiss Searchmetric’s restructuring plan, which included a proposed pay out of up to $250,000 to BE if it was determined that a patent infringement occurred. On July 17, the judge ruled the case was not a bankruptcy but a two-party dispute and dismissed the filing. The patent cases have been transferred back to federal and California state court for resolution.
