Yesterday afternoon, just before 5 pm, traffic enforcement company Acusensus (ASX: ACE) announced that a competitor in Australia, Redflex Pty Ltd, had commenced legal proceedings against both Acusensus and its founder, CEO Alexander Jannink.
Acusensus makes money by deploying mobile units that can detect mobile phone usage and speeding by drivers. Similarly, competitor Redflex deploys mobile units to detect speeding, and sometimes competes directly with Acusensus, for example in NSW.
Before founding Acusensus, Alexander Jannink started his professional career at Redflex straight out of university, and quickly rose through the ranks. In an interview with Alan Kohler, he claimed he was “basically head of research and development for Redflex from 2015 to the end of 2017 when I left.”
On top of that, Acusensus CTO Chris Kells worked at Redflex in various senior positions up until 2018, before jumping ship to Acusensus in 2019.
The Acusensus ASX announcement states that “the proceedings make claims relating to matters first arising from approximately eight years ago in relation to intellectual property rights”, and that “Redflex alleges ownership of intellectual property owned by the relevant Acusensus party, including patents.”
If Redflex’s complaint relates to matters arising around eight years ago, I believe this probably means that it is accusing Acusensus of wrongfully using intellectual property developed initially when Alexander Jannink and Chris Kells were working at Redflex.
I sent an email to Acusensus to enquire if this statement means that Redflex is accusing Alexander Jannink of infringing copyright regulations and/or breaching his duty not to use Redflex’s confidential information.
The company replied:
“We refer to our ASX announcement from yesterday, which also references the IPO Prospectus from December 2022.
As stated in our ASX announcement, the Acusensus parties intend to vigorously challenge and defend the claims made in the proceedings.
As the matter is before the court, we will otherwise not be commenting at this time.”
This is ironic given that Acusensus provided an extremely lengthy laundry list of minor gripes about our last article about Acusensus stock. Shareholders might reasonably question why it is refusing to clarify its ambiguous corporate-speak on this occasion. I have further downgraded my valuation of this stock given my practice of putting a high weighting on management transparency with shareholders.
Are IP Disputes A Red Flag For ASX Small-Cap Stocks?
In my time as a small-cap investor I can’t recall too many examples of disputes like this. One that does come to mind was when the founders of Atomos (ASX: AMS), Ian Overliese and Jeromy Young, faced allegations of infringing copyright regulations and breaching their fiduciary and employment obligations to their prior employer, Blackmagic.
In that case, the court found that Overliese was in breach of the Act for improper use of confidential information, while Young, who merely accessed the information and did not act on it, was not. However, Atomos was restrained from using that confidential information in the future.
Importantly, I am not for a moment suggesting that Redflex will succeed in its action against Alexander Jannink or Acusensus.
While I do think it would be a negative for Acusensus if Reflex were to be successful against Alexander Jannink personally, or the company itself, it is also important to note that ultimately, Atomos had much bigger problems than this intellectual property dispute. In fact, the Atomos stock has faltered badly due to a combination of bad financial results and credible critics highlighting numerous unrelated governance concerns.
It’s not entirely clear to me whether this kind of intellectual property dispute is a red flag or not, and to be blunt, I probably don’t have enough data to judge. Nonetheless, I think it is fair to say that all else being equal, I’d prefer to invest alongside founders who are not facing this kind of allegation than those who face the potential distraction of legal action from their former employers.
Disclosure: The author of this article does not own ACE shares and will not trade ACE shares for at least 48 hours following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).