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LightLab and First Mover Avantage*



by Philip Saunders, Jr., Ph.D.


First mover advantage is the market advantage that a firm gains for being first with a product. In LightLab Imaging, Inc. v. Axsun Technologies, Inc. & Another, SJC-11374, July 28, 2014, the SJC affirmed a decision to deny lost profits claimed, in part, based upon the plaintiff's assertion of first mover advantage. The trial court had not rejected the first mover advantage concept per se but found no evidence of loss and the methodology deficient "particularly as to quantification."


Since LightLab, first mover advantage has been argued by a pharmaceutical development company seeking a preliminary injunction in Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN, Court of Chancery of Delaware, Mar. 9, 2015. The court, in finding failure to establish irreparable harm, observed that the "first-mover advantage argument ... fails to establish a non-speculative harm.” It will be interesting to see whether the argument will be resuscitated at trial and, if so, with what result.


Other unsuccessful appearances of first mover advantage include a trade secrets case in which the plaintiff argued potential loss of first mover advantage in a failed attempt to obtain an injunction. See Aetna, Inc. v. Bradley M. Fluegel et alCV0740333455, Sup. Ct., Conn., July 7, 2008. Also, in a case that did not go to trial, in which the author was an expert for the defense, plaintiff's expert described the advantage of being the first mover but was unable to point to any specific lost profits. The case settled with no money changing hands.


More promising for the first mover concept was a favorable mention at the U.S. Supreme Court:  "[F]irms that innovate often capture long-term benefits from doing so, thanks to various first mover advantages, including lockins, branding, and networking effects."See Bernard L. Bilskey et al v. David J. Kappos, 130 S.Ct. 3218, June 28, 2010. The same Court of Chancery of Delaware, that rejected first mover advantage in Theravectys, subsequently accepted the theory as the basis for the choice of a growth rate above the rate of inflation, a small part of a much larger company valuation analysis. See Leilani Zutrau v. John C. Jansing et al, C.A. No. 7457-VCP, Court of Chancery of Delaware, July 31, 2014.


There is an extensive literature on first mover advantage. The prevailing view is that being the first mover confers an advantage. Some studies have focused not on first

mover advantage per se but on explaining market share. Eleven such studies have found market share and order of entry to be correlated: the earlier a product was in the market, the larger its market share was likely to be.


However, there is general agreement in the literature that the magnitude and durability of the advantage may vary substantially depending upon a variety of factors, some of which are discussed below. The extent of first mover advantage is different in different product categories. The advantage generally dissipates over time.  


The size and durability of first mover advantage is affected by advertising (the first mover's and the competition's), pricing, and relative quality, or at least customer perception of relative quality, of later entering products. Sometimes being first mover is more important than being better; followers with superior products don't always succeed in overtaking the first mover.


First mover advantage can be enhanced by having a technology not readily replicated by a competitor, for legal or other reasons; control of scarce resources, which the first mover may own, collect, or create (e.g., raw material, IP, location, key employees, key suppliers, customer first impressions, know-how); customer switching costs (i.e., monetary or simply intangible costs of changing habits or organizational practices or of learning new methods); and network effects which can create a kind of switching cost in situations where customers seek a common standard or the ability to interact with other users.


Market factors are important as well. New product categories seem to attract more followers than old categories. For a brand extension, being first mover can count for more than for a new brand. Rapid market expansion can be a blessing, if the first mover has the resources to keep up, but a curse, if the first mover does not and a follower does. If a technology is disruptive (e.g., the PC), rather than incremental (e.g., new kinds of main frames), it is harder to predict the effect of the first mover advantage.


In short, whether the first mover can establish and maintain market leadership seems to be highly case specific, depending upon a variety of factors which may or may not be relevant to a particular industry, market, or company.


There are definitional issues that would need to be addressed in any successful claim based on first mover advantage.


Is the first mover, the inventor or holder of the patent, the first to develop a prototype, the first to market, or the first to develop a significant market share Obviously, the further along the plaintiff is the stronger the case.


What is the market? A new pharmaceutical effectively treating a disease, with no previous effective treatment, defines the market and is the first mover. If the

pharmaceutical treats a disease that has existing remedies, the new product may be the first mover in only a market segment.


What is the time horizon? Plaintiffs like to assume their products will triumph in perpetuity. However, courts are reluctant to award damages based upon projections into a distant future, particularly, as in LightLab, when the projections go beyond some identifiable date certain (e.g., expiration of a lease, contract, or patent). It may be enough to demonstrate that, but for the breach or tort, the plaintiff would likely have enjoyed a few years of profitability.


What is the basis for damages? The common claim, as in Lightlab, is for lost profits. However, a common end for successful startups is to be bought out, as happened to LightLab, which never made money but sold for $92.8 million. The grounds for damages may need to be reframed from lost profits to something else, say, loss of

capital or destruction of value. Doing so would raise legal and economic issues beyond the scope of this brief paper, but to deny the possibility would be to deny a remedy for loss of potential with real economic value.


Netscape can be an example, with 20-20 hindsight, of how these definitional issues might have been addressed if Netscape were in litigation. Netscape did not develop and was not the first to market a browser, but it was arguably the first to develop and dominate a significant browser market (first mover definition). The market was fairly clearly defined: a means of finding stuff on the internet (market definition). The company existed independently for only five years (time horizon). Cumulatively, profits were negative, but AOL purchased Netscape in a deal valued at the time at about $4.2 billion (basis for damages).


The brief history of the first mover advantage concept in litigation makes it clear that merely asserting first mover advantage as the basis for a lost profits claim accomplishes little. However, the extensive work that has been done on first mover advantage outside the courts makes it clear that the advantage is real. First mover advantage may best be thought of not as a sole basis for a damage claim but as a useful framework within which to perform a traditional lost profits analysis. First mover advantage could be a lens through which to examine the facts of a case, assess the magnitude of a first mover advantage, and quantify the damages. With a proper analysis of the relevant factors, first mover advantage may yet play a meaningful role

in litigation.


*Published in Massachusetts Lawyers Journal, vol. 23, no. 3 (Nov. 2015).



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