In Weird Twist, Russians Sue American Firms For IP Theft
At first blush, it looks very much like the usual tech and intellectual property fight. The Russians are involved. But this time it is a Russian-owned firm that says it has been done wrong by Silicon Valley.
Moscow-developed software was supposedly acquired in a $670 million U.S. acquisition last year. Lawsuits are flying in California. Digging deeper, it pits Russians against Russians, with the $8.4 billion publicly traded F5 Networks FFIV (FFIV) stuck in the middle. Outlook: bearish.
A Cyprus-based company called Lynwood Investments CY Ltd, linked to Russian billionaire Alexander Mamut, is suing F5 Networks, Inc in the U.S. District Court for Northern California along with some former employees of Russia-based Rambler Internet Holding (a search engine company) and Silicon Valley venture capital firms – Runa Capital (Russian owned) and EVenture Capital Partners over their NGINX web server software for businesses. The software was created by Igor Sysoev when he was a top engineer for Rambler. It was released as open source code in 2004. Sysoev developed it while working for Rambler, and that is basically the source of the problem. Mamut is on the board of directors and owns nearly 45% of Rambler.
They got nothing for the sale of the product developed on Rambler’s watch and are seeking a judge and jury to go over this.
Rambler delegated its IP rights to Lynwood. The lawsuit alleges that Lynwood is a rightful owner of the NGINX enterprise, including the NGINX software and related commercial software offerings known as NGINX Plus.
The California lawsuit alleges that the NGINX software and anything related to it – including extensions — are essentially derivatives of the same NGINX created for Rambler by staff employees of Rambler.
Lawyers from Burke, Williams & Sorsensen in Palo Alto and Meister Seelig & Fein in New York wrote in the Lynwood complaint filed in early June that Runa, EVentures and F5 Networks all knew the tech IP did not belong to the two Russians, who were trying to spin-off the tech for at least 8 years.
To localize this story, NGINX’s sale would be like the developers of AWS at Amazon AMZN creating proprietary extensions to their cloud servers for business, making their own company out of it called AWS Plus, and then, sell the company to Microsoft MSFT , people connected to Lynwood told me.
NGINX is one of the most popular webservers in the world. It is estimated to power 40% of all internet sites, including Facebook, Instagram and Netflix NFLX . It is also one of the more popular webservers among internet developers.
F5 Networks’ May 2019 purchase of it was quite the catch. They bought the NGINX-based enterprise software from NGINX, Inc., a company formed in 2011 by Sysoev and Rambler’s ex-CTO Maxim Konovalov – who was actually in charge of NGINX development in Rambler – before they left the company.
I reached out to F5 a couple of times but while they responded to inquiries, they never responded to the allegations. Runa and EV have not returned to requests to rebut Lynwood. Runa, EV and other VC firms were being courted by the Rambler staffers as far back as 2011. Investors are concerned that F5 did not perform the needed due diligence by ignoring Rambler’s rights. Greycroft, bowing out on concerns related to intellectual property rights, according to the complaint.
Lynwood’s lawyers also filed six trademark cancellation petitions, and the three notices of opposition to trademark registration, with the U.S. Trademark Trial and Appeal Board. The registrant applicant in these proceedings is F5 Networks. That was filed on July 24.
The story came to light after a whistleblower – former Rambler IT-director Alex Korotkov – said Sysoev and Konovalov were shopping the NGINX.
Lynwood says it conducted its own due diligence to verify the whistleblower’s claims before filing suit. The investigation revealed evidence that the former Rambler employees had gone to great lengths to conceal their plans and efforts to take the NGINX software, its goodwill and related enterprise, and monetize it for their own benefit, without Rambler’s knowledge, consent or participation, the complaint states.
The conflict first became public in Russia last December. The company’s Moscow office was raided by police as a part of an investigation into a criminal case of “intellectual property theft” initiated by a Lynwood complaint there. At the time, Russian state-owned bank, Sberbank, was a large shareholder in Rambler.
Elena Pavlova, head of the IP practice at the Russian Private Law Research Center, said the employment contract between Rambler and the developers should have provided ownership of copyrighted materials and intellectual property developed by the employees. This is a common feature in the U.S., of course, but is also the same under Russian law. “They worked on the software during their working hours, involved other Rambler employees, used the employer’s hardware and software for this purpose and were paid for it,” she says.
Since 2004, when NGINX was released as an open source software, Sysoev and Konovalov said in emails that are now held as court evidence, that they developed it to solve Rambler’s in-house server problems, and that the software was actively used by the employer. In one of his letters to potential investors Konovalov calls Rambler “an alma mater” of NGINX. Another Rambler defendant, Gleb Smirnoff, in his letter dated August 2012 directly wrote that “web server NGINX was created at Rambler.”
The raids of NGINX Inc’s office in Moscow in December 2019 were presented in the media as Rambler’s attempt to put pressure on NGINX through law enforcement intervention, a move typical of the Russians and one used in the case against Baring Vostok Capital investor Michael Calvey, an American citizen.
Negative public opinion led Rambler to drop criminal charges against NGINX. Sberbank agreed. Criminal cases were dropped this past April. Shortly after, Lynwood became the sole owner of the claim to IP rights and filed its own lawsuit here where IP laws are more stringent than the Russians, and legal matters are more transparent.
And here sits F5, accused of actual Russian collusion.
“It’s a fact that Lynwood Investments and Rambler Group unsuccessfully pursued a criminal case in Russia against the co-founders of NGINX based on meritless copyright claims. Prosecutors terminated the investigation, having found no evidence against the NGINX co-founders,” F5 said in a statement dated July 11.
A former Russian high-ranking security official and now a vice president at one of Russia’s banks who wished to stay anonymous, stated that “You can influence and stop a criminal investigation in Russia — given it’s not politically motivated — by simply bribing the prosecution, especially when you have hundreds of millions of dollars at stake.”
The legal dispute and its outcome could significantly impact F5 Networks business, the company said. According to F5’s Q2 2020 earnings report, revenue growth was fueled mostly by the acquisitions of NGINX and Shape. F5 stocks fell off a cliff on July 27 and have gone in the opposite direction of the Nasdaq ever since.
Now the future of the company’s biggest acquisition may be in the hands of the California jury and the judge.