ADT vs. Harris Trial Begins, with Ring and Zonoff in the IoT Mix

In ADT Holdings vs. Mike Harris, testimony begins on the acquisition of Zonoff's IoT assets by Bot Home Automation (dba Ring.com). Ring revenues revealed.

Published: September 27, 2017Julie Jacobson

The trial has begun in the case of ADT Holdings, Inc. vs. Mike Harris, former leader of Zonoff, a home-automation platform developer. Bot Home Automation (dba Ring.com), the popular maker of video doorbells, acquired virtually the entire staff of Zonoff when the company shut down in March, 2017.

ADT, which invested more than $36 million on Zonoff, claims Ring acquired Zonoff’s intellectual property unlawfully, in a “clandestine” meeting in the Zonoff headquarters parking lot in Malvern, Pa.

Ring CEO Jamie Siminoff told CE Pro earlier this year, “There was nothing stealthy about what we did.”

In court, Siminoff said Ring paid Zonoff $1.2 million to develop IoT technology. As such, the technogy belongs to Ring.

“We spent a significant amount of money,” he told CE Pro. “It was a common contract. It was the collapse of Zonoff that led us to do this.”

“We cannot permit big established players from using money and power to stifle innovation, which in my opinion is what is happening here. Think about it. Where would air travel be today if Virgin Atlantic hadn’t fought back 25 years ago?”

— Richard Branson
Ring investor

CE Pro contributor Avi Rosenthal, an IoT consultant, attended the first day of testimony on Monday, Sept. 18, in the Delaware Court of Chancery (which, unlike most courts, does not provide legal documents online for easy and inexpensive access).

Rosenthal tells CE Pro the first day seemed to favor ADT … until the 11^th hour, when Vice Chancellor J. Travis Laster questioned why ADT would thwart Ring’s acquisition of the Zonoff IP if ADT reportedly was no longer interested in the platform. ADT became uninterested when it teamed up with Alarm.com for its SHaaS (smart home as a service) platform this year.

Ring had offered $12.5 million to settle with ADT – an offer that was declined.

Ring accuses ADT of thwarting competition. ADT has worked with platform provider Icontrol and now has a five-year agreement to use Alarm.com, the large provider that acquired parts of Icontrol, just as Zonoff was shutting down.

Honeywell, a competitor, had sued Alarm.com and Icontrol on antitrust grounds, but the group settled and the merger was allowed to proceed.

We learned at trial that Virgin Atlantic’s Richard Branson owns more than 5% of Ring. He noted in a blog post earlier this year:

We cannot permit big established players from using money and power to stifle innovation, which in my opinion is what is happening here. Think about it. Where would air travel be today if Virgin Atlantic hadn’t fought back 25 years ago? Where will home security be in 25 years if Ring doesn’t fight back today?

Siminoff himself posted a blog, claiming:

Instead of innovating and developing new products itself, one company is trying to bully and intimidate us. ADT – the largest security company in the world – is suing Ring and one of our team members in a desperate attempt to push us around.

Siminoff had said before that Ring had over 1,000 employees. In court, it was revealed that the company had 2016 revenues of $170 million.

ADT’s $36 million investment in Zonoff

ADT put more than $36 million into Zonoff to develop two SHaaS platforms – one for DIY and one to replace Icontrol as Pulse 2.0. Pulse 1.0 was developed by Icontrol as ADT's SHaaS platform for professional installers and home-technology integrators. More on that below.

The DIY platform would be modeled after the one Zonoff created for Staples Connect, the short-lived IoT hub from the office-supply store.

The end result was a platform for LG’s Smart Security camera system, a DIY product that would be monitored by ADT.

It was revealed in court that LG only sold a few hundred of these cameras and it was shelved.

Rosenthal relays that ADT embedded three employees at Zonoff to guide them in developing a professionally monitored security system.

Allegedly, it was a surprise to ADT that Zonoff was mixing and matching the DIY and Pro technologies into a single platform, called Z1, that included technology contributed by ADT.

“We paid almost $40 million and taught you everything you know about security.”

— former ADT CIO
Kathleen McLean
on why ADT owns Zonoff IP
paraphrased by Avi Rosenthal

ADT reports that Ring received all of the Z1 IP, including the DIY and pro (“Pulse 2”) solutions. Ring is reportedly working on a Z-Wave-based home automation and security system of its own.

Rosenthal paraphrases the testimony of former ADT CIO Kathleen McClean regarding Zonoff: “We paid almost $40 million and taught you everything you know about security.”

There’s another twist: T-Mobile had also contracted with Zonoff to develop a product based on Z1, similar to to LG’s camera. During the trial, a T-Mobile official asked that T-Mobile’s development plans be stricken from court documents, but his request was denied.

Testifying in court, McClean said she was an observer on the Zonoff board. She said, according to Rosenthal, that ADT was shocked to learn Zonoff would be selling Z1 to T-Mobile, without discussing it with ADT.

Ring apparently never came up in board meetings as a potential customer.

ADT kept plowing money into Zonoff – first $30 million in late 2014, and then another $3 million, and then another $3.6 million as Zonoff continued to miss deadlines, according to ADT.

When Zonoff closed shop earlier this year, both Ring and ADT made claims to the intellectual property. Both companies in fact came to own the Z1 technology.

ADT recently put up its copy of Z1 for auction, with a reserve of $2 million. Sources say no one acquired the technology.

ADT says Ring had no rights to it. Ring insists its $1.2 million payment entitled it to the software.

At trial, emails apparently revealed that Siminoff told Ring’s board of directors (paraphrasing), “We just got an incredible asset and amazing team for next to no money.”

Why ADT Sought its Own Platform

ADT was a long-time partner of SHaaS provider Icontrol. As told in court, Icontrol issued a software update in 2014 that “decimated Pulse,” ADT’s professionally monitored security and home automation system. (In fact, Rosenthal remembers that occasion.)

At that point, according to Rosenthal’s telling of the trial, word came from on high to replace Icontrol so ADT could “control its own destiny.”

Ultimately, ADT selected Zonoff for the job, signing a master service agreement (MSA) with two statements of work: a DIY platform and a pro platform (“Pulse 2”) with monitored security.

Zonoff had a valuation of $135 million at the time, according to ADT.

For the most part, Zonoff already had a DIY platform, code-named Osprey, that was implemented in the Staples Connect system. ADT felt Osprey was close to what they needed, but not quite, so it would be revamped for ADT’s needs, including the ability for it to be professionally monitored.

In 2015, Zonoff merged its DIY and pro platforms into one, surprising ADT and making things hairy for their investment, according to the security provider.

Ultimately, ADT just decided to go with Alarm.com.

Ring Enters the Picture

Ring is a major success story. Siminoff says the company had $170 million in revenues for 2016, expanding its line from the original Ring video doorbell to different doorbell models plus standalone cameras. The company is only four years old.

The next product extension would be a home-automation hub, and Siminoff reached out to Harris at CES 2017 in January.

He learned at the time that Honeywell was interested in buying Zonoff. According to Siminoff, he broached the subject of Ring buying Zonoff instead.

They established a purchase price of $40 million, but ultimately decided instead to do a $1.2 million development deal with Zonoff. After all, Honeywell would be buying Zonoff, so they would be viable in the future, right?

Well, Honeywell did not acquire Zonoff, ADT was no longer interested, Zonoff closed shop, and apparently Siminoff blew a gasket at the loss of his investment.

According to his testimony, he immediately flew to Malvern, Pa., to hash out a deal with Harris and the Zonoff staff, offering Harris a $250,000 bonus to sign on.

Almost the whole crew joined Ring (Honeywell and ADT were also trying to pick up some staff), and here we are.

Still the Pesky Picture of Patent Infringement

There's one thing that won't go away: the patents owned jointly and separately by Icontrol and Alarm.com (related story links below). Comcast/Xfinity acquired part of Icontrol with Alarm.com, so now both companies own some or all of it.

They have a pretty tight lock on IP for integrating home automation and professional monitored security in the cloud.

Together, they have gone after most of the large SHaaS providers — or at least the potentially strong competitors. The deal might have made sense for Honeywell, either to minimize competition or because Honeywell has IP of its own to use as a bargaining chip, but with the Zonoff patent-infringement case still pending, it could get sticky.

ADT did not feel threatened at the time because Icontrol only got litigious when Zonoff sealed the deal with ADT in 2014.

Before that, Staples Connect launched with Zonoff, but professional monitoring was not part of the package.

Do the patent infringement suits worry Siminoff? Not really. The patents in question are primarily focused on cloud-based integration of professionally monitored security systems and home automation.

“We don’t fall into that category,” he told us earlier this year.

Even so, he explains, “I don’t back out of a market because of a fight. I’m a fighter. I never liked bullies.”

Stay tuned … the decision is expected to be delivered in a few weeks.

The Case in Brief

Since the Delaware Chancery Court does not make it easy to obtain legal documents — and because most of the documents in this case are sealed — we have summarize the lawsuit here, based on an artical in Law360 in August of this year.

Some documents unsealed in a lawsuit by ADT Holdings against Zonoff and Ring.com, read something like a spy novel – an alleged “clandestine” meeting in a parking lot, a “fraudulent transfer” of home-automation technology, and a “brazen theft” of intellectual property orchestrated by former Zonoff CEO Mike Harris.

Law360 reported on the recently unsealed document in August, which CE Pro was unable to obtain.

In May, the giant security and home-automation provider ADT Holdings sued Harris and Ring after Zonoff, a promising IoT platform provider, shut its doors.

ADT says it was Zonoff’s largest secured creditor at the time, holding first-lien security interests in Zonoff, including tangible and intangible property. As ADT alleges in court documents, Zonoff was in default on the secured loans and therefore owed ADT the security and interests in the Z1 platform.

“We're more harmed in this than anyone. We spent money in advance, and shortly thereafter they stopped funding it.”

— Ring CEO Jamie Siminoff

ADT accuses Harris of surreptitiously handing the Z1 files on a disc to someone from Ring – in a “clandestine parking lot handover” – after Zonoff was in default, and without permission from the Zonoff board.

“Ring acquired for $0 the Z1 platform with the goal of developing competing products,” claims ADT.

In return, Harris got a “lucrative” job as president of the new “Ring Solutions” group.

Ring CEO Jamie Siminoff told CE Pro in May there was nothing clandestine about the transfer of Z1-related computer code. Ring was simply collecting the goods it had already purchased from Zonoff.

“There was nothing stealthy about what we did,” he said at the time. “We had a contract with Zonoff. … The money we put up was very large for our sized company. The contract was done as 'normally' as you would do with any company.”

Siminoff says he and Harris began work on a Z1-based Ring application in January of this year, telling CE Pro, “We're more harmed in this than anyone. We spent money in advance, and shortly thereafter they stopped funding it.”

ADT moved in May for an injunction against Ring’s use of Z1-related technology. Ring countered with a request for a full and speedy trial instead.

Law360 quotes from Ring’s filing: “Ring is expressly entitled to possession and use of the complete source code and related documentation and materials as necessary to support the development and use of the Ring App and related services, specifically including the Z1 Platform.”

Ring decried ADT’s request as an effort to “simply disrupt Ring’s business with a temporary injunction in an effort to keep an up and coming competitor out of the market, without regard to final resolution of their own claims.”