An Enfield solar supply company that plans a $300 million initial public offering lost an intellectual property case in a Massachusetts court last week, raising new questions about its vulnerability to competitors that seek to use its technology.
A Superior Court jury in Northampton, Mass., rejected claims by STR Holdings that a former employee working for a rival misappropriated trade secrets in developing an encapsulant that shields solar modules from weather damage.
STR Holdings, which employs 1,700 Specialty Technology Resources Inc. employees at facilities in the United States and Spain, said the ruling "will not have a material impact on our business."
But in its registration statement filed with the Securities and Exchange Commission July 31, the company had warned that a negative ruling in the case could expose it to greater competition, saying: "The outcome of this litigation is unknown and, if we are unsuccessful, competitors may be legally entitled to use certain proprietary technologies that have historically given us a competitive advantage in the marketplace."
STR had filed suit against JPS Industries and former STR employee Jim Galica, claiming the South Carolina-based company misappropriated trade secrets in developing its own encapsulants, which were introduced in 2006, a year after Galica left STR to join JPS.
The jury ruled that a misappropriation of trade secrets had not occurred. The verdict not only opens the door for an immediate competitor, but also underscores STR's lack of patent protection and heavy reliance on trade secrets, as cited in its SEC documents.
STR acknowledged in its registration statement any breaches in its trade secrets may "undermine our competitive position," and further legal actions to defend them "may be protracted and expensive."
The legal setback will force STR to answer tough questions from possible investors on the doorstep of its IPO, said Scott Sweet, managing director of IPO Boutique, an investment analyst firm that specializes in companies about to go public.
"The investors are going to ask, now that you've lost this case, what are you going to do to remedy the situation?" Sweet said. "The company's probably going to say that it's not a catastrophic setback and that they've already been planning for a possible loss."
The jury's ruling should not have an immediate effect on the IPO because most investors were probably already aware of the litigation, said Stephen Simko, a Morningstar analyst who tracks the company. For now, STR is still in a good position to dominate the encapsulant market, Simko said. He noted that the company believes it is the primary supplier to its top 10 customers, according to its SEC filing.
That isn't likely to change any time soon, Simko said, but the lawsuit may complicate the company's long-term prospects because they are likely to face more competition, he added.
"You're still looking at some pretty significant short-term growth," he said. "A couple of years down the road, who knows what the competition will be out there."
Encapsulant sales for STR were $78.6 million last year, up from $9.9 million in 2003. The company said it expects production to more than double after it opens a new facility in Malaysia. Due to open in the fourth quarter, the new facility will directly supply First Solar, a major customer and industry leader.
Aside from producing encapsulants, STR also operates a quality assurance business, which accounted for $95.4 million in net sales in 2007, up from $66.5 million in 2003.
The company said the quality assurance segment is also vulnerable to competition because it relies primarily on trade secrets, trademarks, copyrights and other contractual restrictions to protect its intellectual property.
In a statement issued last Thursday, the company said, "It should be noted that the jury ruled that STR has successfully proved that its 'UF Process' for making non-shrinking encapsulants is a valid trade secret according to the stringent requirements of Massachusetts law. As such, STR will continue to enjoy use of its trade secret technology, and there will be no interruption of supply of UF products to its customers.
"We are reviewing our legal options, and look forward to the judge's consideration of our pending claim under the unfair trade practices statute."
Charles R. Tutterow, executive vice president and chief financial officer of JPS and president of Stevens(R) Urethane, the JPS unit that developed the encapsulants in question, said of the jury's ruling, "This clearly vindicates Stevens(R), and most importantly, Jim Galica personally."
STR Holdings was acquired last year by DLJ Merchant Banking Partners IV and other investors, including members of the company's management team. After its IPO, the company expects to trade on the New York Stock Exchange under the symbol PVS.