Arnott Drops Patent Suit Against WisdomTree

November 08, 2012

Arnott throws in the towel on its 'fundamental indexing' suit against WisdomTree, but will pay $700,000 to do so.


Research Affiliates, the pioneer of “fundamental indexing” founded by Rob Arnott, dropped the patent infringement lawsuit it filed against the ETF company WisdomTree, with Arnott saying he had become convinced that WisdomTree derived its fundamental indexes independently of Research Affiliates.

WisdomTree reciprocated by dropping all claims against Arnott’s firm, the two firms said Thursday in a press release, noting that the final settlement requires Research Affiliates to make a $700,000 one-time payment to WisdomTree, a publicly traded company that’s likely to record the gain in its next earnings report. WisdomTree's (Nasdaq: WETF) stock jumped almost 9 percent on the news, settling at $6.21 a share.

“Based on information that came to our attention during the lawsuit, Research Affiliates can now acknowledge that WisdomTree's fundamentally weighted indexes and strategies were developed by WisdomTree independently of Research Affiliates," Arnott said in the prepared statement.

The settlement puts the whole matter in the rear-view mirror, as both companies also said they agreed not to challenge the other party’s patents or patent applications.

The tensions between the two firms, which became legal when Arnott filed a suit in December 2011 in federal court in Los Angeles, was seen by some in the investment industry as a battle for the future of indexing. Now, it would appear, the road has been paved for a future that involves a number of players in the growing world of “quasi-active” index investing.

“Steinberg and Arnott believe that each company's product suites represent important advances in the world of indexing,” the companies said in the press release.

Newport Beach, Calif.-based Research Affiliates’ system screens companies for four different qualities before they can be included in a so-called RAFI index. Those parameters are: book value, cash flow, sales and dividends.

Index industry sources say the RAFI methodology is tantamount to a rules-based way of giving portfolios value or small-cap tilts, and Arnott, in a light moment last summer, told IndexUniverse his brainchild is tantamount to “active management in drag.”

Dividend-related indexing screens may have had an outsized importance in the suit, as WisdomTree’s take on fundamental indexing also involves screening companies for their histories of paying dividends. Indexes from New York-based WisdomTree also screen for earnings.


WisdomTree Chief Executive Officer Jonathan Steinberg stressed in the press release that the two parties’ “businesses will continue as usual.”

Company officials at WisdomTree and Research Affiliates said they won’t comment beyond today’s prepared statement.

That said,  it appears likely that the $700,000 paymet Research Affiliates is making to WisdomTree may well be to cover legal expenses WisdomTree incurred when it was sued. Indeed, its earnings reports over the past few quarters have included costs related to the litigation.   




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