In looking at ZS’ financial information in the last 10k, I found that Zscaler is defending 2 patent litigation lawsuits. One was filed by Symantec (described somewhere as a “partner” of Zscaler) and one by Finjan. Some of Symantec’s claims were dismissed by the court. Finjan’s claims may have some merit since it appears that Zscaler has engaged in settlement discussions with it (or maybe ZS feels it is cheaper to settle than to fight). This may be similar to the Arista-Cisco disputes but I did not find anything where Zscaler stated it could do workarounds.
Here is the information taken from ZS’ SEC filing:
Legal Matters
Symantec Litigation
We are currently involved in legal proceedings with Symantec. On December 12, 2016, Symantec filed a complaint, which we refer to as Symantec Case 1, in the U.S. District Court for the District of Delaware alleging that “Zscaler’s cloud security platform” infringes U.S. Patent Nos. 6,279,113, 7,203,959 (“’959 patent”), 7,246,227 (“’227 patent”), 7,392,543, 7,735,116, 8,181,036 and 8,661,498. The complaint seeks compensatory damages, an injunction, enhanced damages and attorney fees. On August 2, 2017, the court granted our motion to transfer Symantec Case 1 from the District of Delaware to the Northern District of California. On March 23, 2018, the Northern District of California court granted our motion to dismiss the asserted claims of the ’959 and ’227 patents as invalid based on unpatentable subject matter.
On April 18, 2017, Symantec filed a second complaint, which we refer to as Symantec Case 2, in the U.S. District Court for the District of Delaware alleging that “Zscaler’s cloud security platform” infringes U.S. Patent Nos. 6,285,658, 7,360,249, 7,587,488, 8,316,429, 8,316,446, 8,402,540 and 9,525,696.
The complaint seeks compensatory damages, an injunction, enhanced damages and attorney fees.
On June 22, 2017, Symantec filed a notice of voluntary dismissal of its complaint in Symantec Case 2 along with a new complaint alleging infringement of the same patents and adding Symantec Limited as a plaintiff and alleging willful infringement of the ’429 and ’446 patents. On July 31, 2017, the court granted our motion to transfer Symantec Case 2 from the District of Delaware to the Northern District of California. On May 21, 2018, Symantec filed an amended complaint adding allegations of willful infringement of all of the asserted patents in Symantec Case 2.
We have also received letters from Symantec alleging that our “cloud security platform” infringes U.S. Patent Nos. 7,031,327, 7,496,661, 7,543,036 and 7,624,110.
We believe that our technology does not infringe Symantec’s asserted patents and that these patents are invalid.
Should Symantec prevail with its infringement allegations, we could be required to pay substantial damages for past and future sales and/or licensing of our services, enjoined from making, using, selling or otherwise disposing of our services if a license or other right to continue selling our services is not made available to us, and required to pay substantial ongoing royalties and comply with unfavorable terms if such a license is made available to us. Any of these outcomes could result in a material adverse effect on our business. Even if we were to prevail, this litigation could be costly and time-consuming, divert the attention of our management and key personnel from our business operations, deter distributors from selling or licensing our services, and dissuade potential customers from purchasing our services, which would also materially harm our business. The expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change and could adversely affect our results of operations. In addition, any public announcements of the results of any proceedings in Symantec Case 1 or Case 2 could be negatively perceived by industry or financial analysts and investors, and could cause our stock price to
experience volatility or decline.
We have not recorded a liability with respect to Symantec Case 1 or Case 2 based on our determination that a loss in either case is not probable under the applicable accounting standards.
We are vigorously defending Symantec Case 1 and Case 2. We are unable to predict the likelihood of success of Symantec’s infringement claims.
Finjan Litigation
We are currently involved in legal proceedings with Finjan. On December 5, 2017, Finjan filed a complaint, in the U.S. District Court for the Northern District of California alleging that Zscaler’s “Internet Access Bundles,” “Private Access Bundle,” “Zscaler Enforcement Node,” “Secure Web Gateway,” “Cloud Firewall,” “Cloud Sandbox” and “Cloud Architecture products and services” infringe U.S. Patent Nos. 6,804,780, 7,647,633, 8,677,494 and 7,975,305. The complaint seeks compensatory damages, an injunction, enhanced damages and attorney fees.
We believe our technology does not infringe Finjan’s asserted patents and that Finjan’s patents are invalid.
Should Finjan prevail with its infringement allegations, we could be required to pay substantial damages for past and future sales and/or licensing of our services, enjoined from making, using, selling or otherwise disposing of our services if a license or other right to continue selling our services is not made available to us, and required to pay substantial ongoing royalties and comply with unfavorable terms if such a license is made available to us. Any of these outcomes could result in a material adverse effect on our business. Even if we were to prevail, this litigation could be costly and time-consuming, divert the attention of our management and key personnel from our business operations, deter distributors from selling or licensing our services, and dissuade potential customers from purchasing our services, which would also materially harm our business. The expense of litigation and the timing of this expense from period to period are difficult to estimate, subject to change and could adversely affect our results of operations. In addition, any public announcements of the results of any proceedings in this matter could be negatively perceived by industry or financial analysts and investors, and could cause our stock price to experience
volatility or decline.
While the range of potential loss resulting from the lawsuit cannot be reasonably estimated, we have accrued a total liability of
$3.2 million as of July 31, 2018 related to past negotiations with Finjan of which we recorded $0.7 million in fiscal 2018 and
$2.5 million in fiscal 2017.
We are vigorously defending this lawsuit. Given the early stage in the litigation, we are unable to predict the likelihood of success of Finjan’s
infringement claims.