Nobody Beats The Wiz – Above the Law
No, this is not a retrospective on the once-beloved NYC-based electronics chain that somehow once put out a commercial with the New York Knicks starting five playing poker with store currency. As fun as that would be, we are here — as always — to focus on interesting IP situations rather than mid-’90s nostalgia. And we have a doozy to consider with a Wiz of a different stripe, namely the Israeli cybersecurity software firm recently acquired by Google for the astronomical sum of $32 billion. Besides being the largest acquisition in Google’s history, the purchase is seen as critical to Google’s attempts to compete with Microsoft and Amazon for dominance in the cloud computing and AI arenas. That said, there are some concerns about the deal proceeding while Google remains under FTC scrutiny, but for now, the tech and VC worlds are celebrating the transaction. Interestingly, Wiz rejected an offer from Google just last summer at a $23 billion purchase price, but couldn’t resist when Google came back to the table with a sweetened offer that promises to make each of Wiz’s four founders multibillionaires in short order.
As with many innovators on the Israeli tech scene, each of the Wiz founders entered the business world after stints in Israel’s military intelligence Unit 8200, long-known as a breeding ground for successful tech entrepreneurs. And as with many such graduates, Wiz is not the first company they have sold off to a U.S. tech giant, with their first cloud security startup purchased in 2015 by Microsoft for over $300 million. While some may have retired after achieving that success, the partners established Wiz in 2020 to try to solve security problems arising from the massive move to cloud-based computing programs during COVID-19. Just five years later, their security platform was in use by more than 40 Fortune 100 companies and their company’s lure was too attractive for Google to avoid hooking onto. As can be imagined, the acquisition is being hailed in Israel as yet another example of the ability of the “Startup Nation” to develop and sell beneficial technology to the world despite the challenges of operating in a sustained wartime environment. (It has even been suggested that the expected tax revenue if the deal closes in 2026 will amount to over half a percent of Israel’s GDP, a welcome economic boost in light of the war costs Israel has incurred since October 7.)
While the feel-good element is developed in the Wiz story, not everyone believes that Wiz’s gains are self-earned. There is a pending patent infringement case in Delaware, filed in 2023, that was brought against Wiz by a competing Israeli cloud security company, Orca. And just like Free Willy was cute on the surface but deadly below water, so do Orca’s claims that “Wiz has built its business on a simple business plan: copy Orca” threaten the feel-good image engendered by Wiz’s success and innovative reputation. Orca even claims that the whole idea for Wiz came from a presentation that Orca made to Wiz’s founders while they were working for Microsoft in 2019. In Orca’s telling, “the Wiz founders left their lucrative careers at Microsoft to start Wiz, build a clone of Orca’s technology, and compete directly with Orca” almost immediately after hearing Orca’s idea for an agentless cloud security platform, even though Orca had beaten them to the punch to much industry acclaim of its own. In an interesting twist, Orca even accuses Wiz of hiring as patent prosecution counsel the lawyer who had prosecuted Orca’s original patent applications. Likewise, Wiz is accused of bringing in-house Orca’s former outside corporate counsel, in furtherance of the scheme to copy Orca’s products and strategies at every opportunity.
Such explosive allegations aside, the patent aspects of the case are more prosaic. Orca is asserting infringement of six patents — which seem susceptible on a cursory first look to me to Alice challenges –- and Wiz counterclaimed with its assertions that it is Orca that has a “culture of copying Wiz” and is infringing at least five Wiz patents. (Given the similarity in patents between Wiz and Orca, as well as the value of having enforceable patents in their portfolios, it is not surprising that neither side appears to have pressed Alice arguments in light of the potential for mutually assured destruction if those arguments succeed.) In addition, Wiz has filed at least 12 IPRs against Orca patents, leading to favorable institution decisions and a stay of the case entered in January of this year on top of the cancellation of the Markman hearing. While regulatory concerns were top of mind for the resumption of negotiations between Wiz and Google after Trump’s presidential win, it can’t have hurt that this patent lawsuit is stayed indefinitely in terms of removing a potential overhang to Wiz’s continued success going forward. In fact, pending patent cases are often thought of as obstacles to M&A activity, with such activity considered a powerful incentive for the M&A target to settle. Here, Wiz did not pull the trigger on that approach, preferring instead to leverage the very IPR system that Google itself was so instrumental in setting up as a way to address the litigation risk raised by Orca’s lawsuit.
Ultimately, the proposed purchase of Wiz by Google raises the potential value of the patent lawsuit even higher to the parties, making the case even more worthy of our attention going forward. It looks like most of the action of consequence –- assuming the parties can’t find a way to settle in the meantime –- will take place in the PTAB on the instituted IPRs. We would expect as well that Orca will file IPRs against the patents Wiz has asserted as well, raising the prospect of a long-running fight between these two competitors for years to come. While the outcome is still uncertain, for now in the race to cash out via acquisition it looks like Nobody Beats the Wiz.
Please feel free to send comments or questions to me at [email protected] or via Twitter: @gkroub. Any topic suggestions or thoughts are most welcome.
Gaston Kroub lives in Brooklyn and is a founding partner of Kroub, Silbersher & Kolmykov PLLC, an intellectual property litigation boutique, and Markman Advisors LLC, a leading consultancy on patent issues for the investment community. Gaston’s practice focuses on intellectual property litigation and related counseling, with a strong focus on patent matters. You can reach him at [email protected] or follow him on Twitter: @gkroub.
