Zillow (Z) shareholders should be keeping a close eye on the ongoing legal drama with real-estate database rival Move, especially as litigation costs mount and up to $2 billion in damages could hang in the balance in a trial slated for June 6.
The Seattle-based company booked $15.7 million in legal expenses tied to the Move suit -- or 71% of its total general and administrative expenses for the quarter -- after reporting $27 million in similar charges last year, according to the company's filings with the SEC. And the combined charges represent about a quarter of the company's total cash balance.
"The plaintiffs recently indicated that they are seeking damages which, if actually awarded, would have a material adverse effect on our business," Zillow said in its quarterly SEC filing. "We believe the plaintiffs' allegations are without merit and their calculations of damages are baseless. We deny the allegations of any wrongdoing and intend to vigorously defend the claims in the lawsuit."
The lawsuit by Move and the National Association of Realtors is based on allegations that Errol Samuelson -- who was appointed Zillow's chief industry development officer in March 2014, departing from Move as chief strategy officer -- knowingly brought Zillow "trade secrets" from Move and destroyed evidence and information at his former company to provide Zillow with unfair competitive footing. And Curt Beardsley, who moved from vice president of industry development at Move to a similar position at Zillow in the same period, has also been accused of similar misconduct.
But the market may be undervaluing the impact that the trial can have on Move's shares, especially given the inordinate scope of the legal fees already accumulated in Zillow's defense, says Thomas Claps, a litigation analyst on the special situation desk of Susquehanna.
"Theres been a general lack of attention or awareness to it," Claps said in a phone interview with Real Money.
Such charges of so-called "tipping" center around Zillow's February 2015 acquisition of Trulia for $2.5 billion, which Move says was prompted after Zillow was "tipped" that it was considering its own tie-up with Trulia.
"Samuelson left Move to start working at Zillow and allegedly tipped off [Zillow CEO Spencer] Rascoff prior to coming over about the potential merger between Move and Trulia," Claps said, noting that tipping is just one of a variety of charges in the case, which also includes tampering with evidence such as the deletion of subpoenad emails and text messages.
The model behind the $2 billion in damages sought from Zillow has yet to be laid out, and is likely to be an inflated number on the outward bound of an actual ruling, but is likely to be calculated as some form of compensation requested for lost synergies, unjust enrichment, and related damage to Move's business model that came as a result of Zilliow obtaining proprietary information tied to Samuelson and Beardsley's move, Claps said.
"Based on information from a recent Court filing by Zillow, plaintiffs are seeking $2 billion in damages in connection with 46 different trade secrets (and 1,000+ documents) allegedly stolen by Zillow and the former employees," Susquehanna said in a recent report. "It is not clear from the publicly filed documents how plaintiffs are calculating these damages [and] ... we believe this is an inflated demand, and the negotiations/settlement discussions could change dramatically over the next few months. Nevertheless, we believe the threat of material damages is significant."
The near-term market catalysts in the case include a pending decision in a six-day hearing in Kings County Superior Court in Seattle, in which King County Superior Court Judge Sean O'Donnell will rule "any day now" on whether to charge Zillow with sanctions related to the destruction of evidence, in which he could rule a so-called "adverese inference," in which the deletion of data indicates in and of itself the commitment of wrongdoing.
And the second catalyst is likely to be the trial itself, according to Claps, in which a jury will be tasked to weigh the impact that strategic information from Move played in Zillow's business decisions.
Zillow shares are up 17% on the year, as of midday trading Tuesday.
