Joe Kiani, the founder and CEO of Masimo, has spent $60 million fighting the nearly $3 trillion company in court over the Apple Watch, but he’s also facing a boardroom battle over his own consumer tech push.
In May 2013, Joe Kiani, the founder and CEO of medical technology company Masimo, went to a meeting at Apple’s headquarters in Cupertino to discuss a potential collaboration. The consumer technology giant was in the process of developing the Apple Watch and exploring ways to incorporate different health sensors. Founded in 1989, Masimo is best known for its pulse oximeters – fingertip devices used by hospitals to measure the level of oxygen in patients’ blood. “I didn’t want to be in the consumer space ourselves,” says Kiani. “I thought Apple would be a great partner to take our technology and make it available to the masses.”
Masimo was one of 28 companies that Apple met with related to the Apple Watch project. Internally, Apple executives were weighing a potential Masimo acquisition, but ultimately decided against it because Masimo’s hospital-focused products were outside of Apple’s core consumer focus. “Acquisitions of this size aren’t our style,” Adrian Perica, Apple’s vice president of corporate development wrote in an email update to CEO Tim Cook.
Ten years later, Apple and the company it rejected are embroiled in a multi-front legal battle over the Apple Watch. Apple commands over 56% of the global smartwatch market, which is expected to hit $33 billion in 2023, according to research firm IDC. The firm forecasts the larger global wearables market will hit nearly $63 billion.
These legal fights are coming as Kiani, who Forbes estimates is worth $1.2 billion, is starting to enter the consumer space with a $499 “health watch” released last August and a $999 smartwatch expected to come out this fall, as well as a range of other wearables. The 58-year-old billionaire has alleged that Apple poached his employees, stole trade secrets and infringed on Masimo’s patents related to pulse oximetry and noninvasive measurements. Apple has denied the charges and the trade secrets case ended in a mistrial in May, though Kiani has vowed a retrial.
Of more immediate concern for Apple and Masimo is a decision expected in mid-July from the International Trade Commission that could be a key turning point in the fight. The commission is reviewing an earlier decision from a judge that found the tech giant infringed on two of Masimo’s patent claims. If the agency sides with Masimo, it could potentially result in an import ban of certain Apple Watches. Apple’s lawyers argued in a filing that Masimo is trying to “exert business and litigation pressure” to get the Apple Watch off the U.S. market and that such a ban would harm consumers and possibly impede medical research.
After more than three decades selling to hospitals, Kiani is taking a huge gamble on the future of Masimo’s business. Wall Street isn’t necessarily keen on the idea: his decision to buy audio and speaker manufacturer Sound United for $1 billion last year in order to gain its consumer distribution channels wiped out $5 billion in market value overnight as the share price fell on the news. (Masimo’s current market cap is $8.7 billion.) The move attracted activist investor Politan Capital Management, led by Quentin Koffey, to take a 9% stake in Masimo worth around $800 million. In a letter to shareholders, Koffey claimed the current board had failed to rein in Kiani, who serves as CEO and chairman, and allowed him to pursue an “unfocused strategy” away from Masimo’s core business.
It appears a majority of Masimo shareholders share this concern, as this week they voted to add Koffey and another Politan nominee, former Johnson & Johnson executive Michelle Brennan, to the board, following a heated proxy battle in which Koffey described Masimo’s consumer strategy as “everything everywhere all at once” in the shareholder letter.
“We have a great track record of getting a great return on our litigation expenditure.”
That said, the new board members and Kiani do appear aligned with the Apple litigation. In a May investor presentation, Politan said the value of the litigation was unknown but had an “expectation of Masimo prevailing.” Koffey declined to comment. Kiani acknowledged the future of Masimo’s consumer tech business was riding on the ultimate outcome of the Apple litigation in a recent interview with Forbes. “I have to stop [Apple] from using my technology to have a seat at the table until I can get big enough, have time enough, to build a commercial engine, a brand.”
For its part, Apple argues Masimo is actually copying its technology as it attempts to clear a path for its own ambitions. “At Apple, our teams work tirelessly to create products and services that empower users with industry-leading health, wellness and safety features,” Apple spokesperson Fred Sainz said in a statement. “Masimo is attempting to take advantage of these many innovations by introducing a device that copies Apple Watch and infringes on our intellectual property, while also trying to eliminate competition from the market.”
‘A Multifront War’
The patent fight between Apple and Masimo began in January 2020, when Masimo and its spinoff company Cercacor Laboratories filed a trade secrets misappropriation and patent infringement lawsuit against Apple in federal district court in California. That has since led to a sprawling battle across multiple courts and federal agencies. “I truly believe we have an opportunity to win,” Kiani says. “I don’t think it’s a pipe dream.”
Part of his confidence stems from Masimo’s previous success in the courtroom battling larger companies over patent infringement. In 2006, Masimo reached a financial settlement with Nellcor (a division of Medtronic) that has since totaled around $800 million including damages and royalties and also removed the infringing product from the market. In 2016, Masimo settled with Philips for $300 million. Kiani says those lawsuits cost Masimo $43 million in legal fees – and netted the company over $1.1 billion dollars. “It’s not like we wasted money on litigation,” he says. “We have a great track record of getting a great return on our litigation expenditure.”
In its campaign against Apple, Kiani is fighting on several different battlefields. After the filing in district court, Apple moved for a review of some of Masimo’s patents before the Patent Trial and Appeal Board, part of the U.S. Patent and Trademark Office that assesses whether a patent is valid. Next Masimo moved for a hearing before the International Trade Commission, which has the power to ban imports of infringing products. Apple then launched a counteroffensive, filing two lawsuits in federal court in Delaware accusing Masimo of infringing on Apple’s patents. Masimo filed counterclaims alleging antitrust and patent infringement.
“There’s a sort of a multifront war that they have going on,” says John Presper, counsel at Foster, Murphy, Altman & Nickel, who isn’t involved in the litigation. He says this is not at all unusual, since both sides are using different venues to try and increase their leverage. The benefit of going through the government agencies is that they tend to move much faster than the district court proceedings. It’s not cheap, though. Kiani estimates Masimo has spent $60 million on the Apple litigation so far and expects it could cost over $100 million. There’s a reason patent litigation is often referred to as “the sport of kings,” Presper says. “It takes a lot of time and a lot of money.”
So far, there have been wins and losses on both sides. In May, the California trade secrets misappropriation case ended in a mistrial with the jury swinging 6-1 in favor of Apple. Apple says it will ask the court to dismiss the remaining claims. Kiani has vowed a retrial, attributing the mistrial to “unusual jury dynamics” – and next time around he’s hoping the judge will agree to exclude Apple customers from the jury box.
Next up is the International Trade Commission decision on whether to ban certain Apple Watch imports, which is expected by July 17. The Commission is reviewing a January 2023 decision by an administrative law judge that found Apple violated two of Masimo’s patent claims and did not violate seven other claims. It’s difficult to predict which way the Commission will rule, but Presper says the Commission tends to agree with the administrative law judge fully or partially “more often than not.” That bodes well for Masimo, though if the Commission does recommend an import ban, the effect wouldn’t be immediate. The next step would be a 60-day period where President Joe Biden could decide to intervene.
In December, the Commission issued an import ban on certain Apple Watches found to be infringing patents held by AliveCor related to heart rate monitoring. That ban has yet to be implemented because Apple had challenged the patents before the Patent Trial and Appeal Board, which ruled them invalid. AliveCor has appealed that ruling in district court, while Apple is separately appealing the Commission’s ruling in district court.
If an import ban goes into effect, there are many different scenarios that could unfold, says Presper. The parties could ultimately reach a settlement, licensing agreement or partnership, though, in some cases, a patent infringer can institute a redesign or disable the infringing feature. “Maybe they’ll find world peace,” Presper says of the Apple and Masimo fight. “A lot of it depends on the personalities involved.”
Battle For The Boardroom
Kiani’s gamble for the consumer tech market, he says, is based on his vision for bridging the hospital and the home with technology. Masimo’s devices accurately measure vital signs for hospital patients and he wants people living with chronic diseases to get similarly precise measurements from a smartwatch. Masimo has cornered the market in the neonatal intensive care unit for being able to get these readings off squirming newborns, and Kiani wants to help parents get similar measurements for babies in their cribs at home via a tiny boot. He wants to use fingertip sensors to monitor patients taking opioids to alert them of overdoses and electrodes attached to the patient’s ear to help opioid withdrawal symptoms. The opioid devices have been cleared by the FDA, and Masimo is aiming to also get FDA clearance for the baby monitor and watches. The end goal, Kiani says, is to “close the circle from hospital to home to hospital.”
Masimo is currently trying to bring all of these different products to the market at the same time. And while Kiani is enthusiastic about Masimo’s consumer push, Wall Street remains cautious. That’s in part because the consumer wearable market has a lower margin than Masimo’s existing business.
Skepticism about this multi-pronged approach is likely what enabled the activist investor Politan to win two board seats. In his letter to shareholders, Politan’s Koffey wrote he believes there are certain “adjacent markets” where Masimo can be successful, including moving patient care into the home, but launching so many different products at the same time was “increasing the likelihood that [Masimo] fails at all of them.”
Prior to the proxy vote, Kiani had told Forbes he was contemplating leaving the company if Koffey won. On Tuesday morning, the day after the vote, Kiani said he plans to stay. “I’m not going to do anything different,” he says. “I’m going to continue to run Masimo the way we have.”
The new board composition means Politan still only has two out of the five board seats. “They really can’t force us to make any changes that we don’t want to make,” says Kiani. “We’ll be open-minded and listen to their thoughts and advice. And if it’s good, we’ll take it. If it’s not, we won’t.”
During the proxy battle, Kiani had accused Politan of secretly being aligned with Apple. Kiani says he wasn’t aware that Politan was actually predicting that Masimo would prevail in its fight against Apple – giving the two sides a common adversary.
Kiani says he’s not afraid to lose any of the fights he’s in. “I have enough money, where I don’t have to do this anymore. I could just spend my time with my family, do the things I enjoy,” he says. ‘But as long as I’m here, I’m going to do what I think is right.”
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