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Peloton’s ‘Moat’ Depends on Patent Challenges It May Not Win

Oct. 23, 2019, 8:46 AM

Peloton Interactive Inc.’s lawsuit against a competing exercise bike is the latest in a growing list of intellectual property battles that will help shape whether the newly-public company can profit from its $2,245 bikes and $39 monthly subscriptions.

Peloton relies heavily on its patents, trademarked brand, and use of copyrighted material to justify its lofty prices and distinguish its fusion of bikes and interactive live and recorded workouts. Looking to defend that turf, the company sued Echelon Fitness LLC this month for allegedly ripping off its patents and trade dress, after suing Flywheel Sports Inc. for patent infringement last year.

But investment analysts say Peloton’s IP may not be strong enough to stop competitors looking to undercut it. The company is fending off patent validity challenges at the Patent and Trademark Office and a lawsuit from the music industry, which says the company is using copyrighted music without permission.

Peloton, in its registration statement for its initial public offering, said it “depends in large part” on its intellectual property. If challenges invalidate the company’s patents and cheaper options become available, “Peloton doesn’t really have a moat around their business, and it would get commoditized very quickly,” Bloomberg Intelligence analyst Mandeep Singh said.

The company’s IPO document told investors that challenges could invalidate or narrow some of its rights, which “could reduce the value of our products, services, and brand.” Peloton said it tries to comply with copyright law, but “cannot guarantee” it holds rights to every piece of music on its service, adding potential liability.

“It’s really everything that new companies face, but all at once,” intellectual property attorney William Stroever of Cole Schotz PC said.

A Peloton representative said securities regulations prevent the company from commenting on litigation or anything forward-looking as it transitions to being a public company. Its stock price has trended downward since its initial public offering on Sept. 26.

Invention or Idea?

Peloton didn’t invent computerized exercise equipment that could let users compete remotely with other users. Nor did it invent the touchscreen, the exercise bike, spin classes or on-demand programming.

But according to its patent infringement complaints against Flywheel and Echelon, Peloton did invent a system for live and archived cycling classes that can track users’ performances against past efforts. It fused this with a high-end exercise bike and 22-inch touchscreen to recreate “the energetic and competitive in-studio cycling experience at home and on their own schedule.”

Flywheel struck back against Peloton’s 2018 lawsuit, filed in the U.S. District Court for the Eastern District of Texas, by challenging Peloton’s patents. The Patent Trial and Appeal Board found reason to institute a trial on three Peloton patents, and another challenge of a newer patent is pending. Flywheel said existing innovations made Peloton’s claimed invention obvious.

Intellectual property attorneys differ on how sturdy Peloton’s footing is.

“It seems Peloton created a new way to gamify exercise, and make it more interactive and engaging,” Ali Razai of Knobbe Martens said, crediting Peloton for launching an industry. “If it was so easy, people would have done it.”

Razai said Peloton is at some risk of the board finding its claimed inventions obvious. But “secondary considerations,” such as a long-sought unmet need or commercial success, can help fight an assertion of obviousness, he said.

Others said Peloton’s success doesn’t necessarily stem from a patentable invention, but from shrewd identification of what people want. Peloton’s consumer insight may not have been obvious, but that doesn’t mean it invented something that patent law can protect and shield Peloton from imitators, Bryan Wheelock of Harness Dickey & Pierce PLC said.

“Once you knew what people wanted, providing it was simple. It wasn’t that technically difficult a problem,” Wheelock said. “I think they have some trouble on obviousness grounds. I don’t think their tremendous success is attributable to inventing, but the marketing.”

Robert J. Kenney of Birch Stewart & Birch LLP also said Peloton’s patents could be at risk, and the company will have to show it added something new to what already exists. Losing claims could leave them vulnerable to competitors, he said.

Tamlin Boson, a legal analyst for Bloomberg Intelligence, agreed.

“I think the question is whether patents are a good moat for them to keep out competitors. I’m not sure it’s going to be a silver bullet for them,” Boson said. “I think brand awareness is where they have a competitive edge.”

‘Ride Coattails’

Peloton’s lawsuit against Echelon also attacks the “pervasive” and “blatant imitation” of the look and feel of its product—known as trade dress—that it said took substantial financial and creative resources to create. Peloton wants to block the competitor from mimicking its formula that it said helped sell 400,000 Peloton bikes to users who completed more than 58 million workouts in the last year.

Peloton argued Echelon attempted to emulate it at every turn. Echelon’s similarly-designed exercise bike is black with red trim like Peloton’s and has a similar name font and logo placement, according to the complaint. The touchscreen display mimics the layout, font and coloring of Peloton’s, and its website design apes Peloton’s, including a “Never Ride Alone” tagline.

A false advertising claim alleging that Echelon made apples-to-oranges price comparisons further highlights the imitation effort, Peloton said in its complaint filed in the U.S. District Court for the District of Delaware.

Peloton’s multi-prong approach to its lawsuit against Echelon put it in a “strong position,” Razai said, given that Peloton launched the in-home live spin class industry. That position spawns imitators, he said.

“People recognize the look of a Peloton bike. You’re trying to ride coattails, to use its market goodwill,” Razai said. “You don’t have to look like Peloton.”

Other attorneys criticized weak elements of Peloton’s trade dress claim, citing dissimilarities between the companies’ logos, name, and bike design. Some aspects inherent to an exercise bike with a display screen are unprotectable, the way certain aspects of a setting could be endemic to a genre in a copyright case, Stroever said. A black stationary bike would hardly stand out in the marketplace, Wheelock added.

But even if some elements of Echelon’s product only vaguely evoke Peloton and can’t be protected by themselves, the question is whether the complete picture incorporates all of them, Kenney said.

“When you put them all together, at every opportunity the party could have done something different but chose to do the same,” Kenney said. “It defies logic that all those would have come together without some intent to say ‘look like this.’”

But successful trade dress claims won’t necessarily block rivals if the patents fall, leaving the door open to competition even if Peloton prevails over Echelon. In the end, the intellectual property that Peloton may have to rely on is its name as the company that originally set the pace.

“Frankly, in the long run, it may be the case that their brand is the most valuable asset that they have,” Kenney said.

To contact the reporter on this story: Kyle Jahner in Washington at kjahner@bloomberglaw.com

To contact the editors responsible for this story: Bernard Kohn at bkohn@bloomberglaw.com; Rebecca Baker at rbaker@bloomberglaw.com; Keith Perine at kperine@bloomberglaw.com