The U.S. subsidiary of a venture-backed Berlin-based search optimization company called Searchmetrics just filed for Chapter 11 bankruptcy protection in Delaware. Sources close to Searchmetrics say the company was forced to file to escape a longstanding battle with venture-backed competitor BrightEdge: Searchmetrics alleges that BrightEdge stole its intellectual property, then filed for patents around it. Searchmetrics says it had patents on its technology in Europe but failed to secure similar patents in the U.S., which created an opening for BrightEdge to exploit.
The move is far from certain to work. Richard Kanowitz, a New York attorney who specializes in bankruptcies on behalf of Cooley, notes that, “With bankruptcy, there’s an automatic stay, but whether that stay holds is another story.” (We should add we merely asked Kanowitz whether he thought it was unusual for a venture-backed company to file for bankruptcy protection to spare itself from a patent lawsuit. He wasn’t aware of the companies involved at the time.)
But also speaking generally and not specifically about these two companies, Lubben says that bankruptcy filings solely to address a single piece of litigation are “dicey. The court might dismiss the filing as being in bad faith. The company will have to show some other reason for needing to reorganize, and that it’s not just trying to stiff a single creditor.”
Asked for a comment about its Chapter 11 strategy, a Searchmetrics spokesman wrote in an email to us that the “U.S. subsidiary cannot invest properly in growing its business despite longstanding customer approval of our Searchmetrics products, a deep pipeline that brings new innovations in online content marketing, and a great relationship with our parent company,” while trying to fend off BrightEdge.