Arnott Drops Patent Suit Against WisdomTree

By
November 08, 2012
Share:

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.   

 

 

ETF.COM CHANNELS

Want to learn more about smart-beta ETFs? Check out our smart-beta guide, essentials library and ETF screener!

ETF DAILY DATA

U.S. and international equity funds led net inflows of $5.15 billion on Thursday, May 28, bringing total U.S.-listed ETF assets to $2.165 trillion.

'SPY,' 'XLF' and 'XLV' paced SSgA's issuer-leading inflows on Thursday, May 28, as total U.S.-listed ETF assets rose to $2.165 trillion.

ETF.COM ANALYST BLOGS

By Olly Ludwig

The ETF world is a hotbed of interesting new ideas, as this week’s launches make clear.

By Olly Ludwig

Yields will one day head higher, so is it time to get bond exposure outside the U.S.?

By Rachael Revesz

Stop dancing around the subject, call women ‘women’ and let’s be a more visible part of this industry.

By Olly Ludwig

It’s no secret that hedge funds love ETFs, but what’s less appreciated is that their love of ETFs will likely spell their demise.

ETF INDUSTRY PERSPECTIVE

By Nasdaq Global Indexes

Bond exposure or bond performance? Only defined maturity indexes provide the latter.

By Invesco PowerShares

Invesco PowerShares and Market Strategies International’s second annual survey provides vital insights about smart beta and ETFs overall.

By Invesco PowerShares

Investors are implementing smart-beta exchange-traded funds (ETFs) in their portfolios in a variety of ways and for different reasons.