Music System Sales Sagging, Sonos Un-Leashes Lawyers to Raise Revenues


Sonos system photo

Strata-gee reported just yesterday that Sonos, Inc. has sued Lenbrook Industries Ltd. & Lenbrook America – the maker & marketer of Bluesound – for patent infringement. Undoubtedly emboldened by their near-complete victory over Denon’s HEOS brand a little over a year ago, Sonos appears to have targeted Lenbrook to be next in line.

However, Strata-gee has learned that Lenbrook is not the only company targeted for such potential actions by Sonos. There are more – perhaps many more – in our industry lined up for this “hit” parade.

See what Strata-gee learned about Sono’s legal strategy…

Last month and right on schedule, Sonos reported their fiscal 2019 second quarter results. In their typical fashion, this was released in letter form to investors that was chatty and friendly. In the letter, the company noted revenues in Q2 were a “record” $210 million (13% over last year)…and that they had booked a narrowed net loss of $23 million versus a net loss last year of $34 million the previous year.

The letter also conveniently provided a table of their sales results by product category. This table showed an ugly truth that first emerged a couple of quarters back – sales of its star wireless speaker products…the products that put the company on the map…are declining. The Q2 results showed sales of wireless speakers were off 16.8% for the quarter, and 17.2% for the half.

Sonos, as stated during their court battle over Denon’s HEOS brand, believes this is due to a loss of market share to similar products from other brands that are infringing on their patents.

A table of Sonos's fiscal 2019 second quarter results showing that sales of wireless speakers are declining
Sonos’s results for the second quarter of fiscal 2019 showed that sales of wireless products – those products that put them on the map – declined 16.8% in the quarter and 17.2% for the first half of the fiscal year. Sonos believes this is due to a loss of market share to other brands who are infringing on their patents [Click to enlarge]

A New Sonos Strategy Emerges

A few months ago, Strata-gee was contacted by a source with knowledge of a new initiative by Sonos, in which its attorney’s were said to be sending letters out to various companies in the consumer electronics industry containing allegations of patent infringement and demanding royalty negotiations. In researching this story, I reached out to several manufacturers in the industry to try and confirm this tip.

Most of the manufacturing executives I reached out either denied they have received any such letter, or they were instantly nervous and declined to speak with me about the matter. This was most likely due to fear that, were they to appear in published story about this, it might serve to draw the attention of Sonos’s attorneys. Or rather, they may have wished to delay being characterized as a potential violator of another company’s intellectual property (IP). Most seemed eager to “fly under the radar” for as long as possible.

But one source did allow me to review some very compelling evidence.

Surprises in Sonos Suit Against Lenbrook

In Strata-gee’s report yesterday on the litigation being filed against Lenbrook by Sonos, I mentioned that there were some surprises within the rather long initial complaint, which ran 90 single-spaced pages and included an additional several hundred pages of “exhibits.” One of those surprises mentioned in yesterday’s article is that Lenbrook had been Sonos’s Canadian distributor for a couple of years in the past. This fact appeared to explain some of Sonos’s pique in this matter.

Another tidbit we learned is that Sonos’s attorneys had sent two letters to Lenbrook informing them of their determination that Bluesound was infringing on several of their patents. The first such letter was dated November 1, 2018 and was addressed to Gordon A. Simmonds, President & Chief Executive Officer of Lenbrook Inc. d/b/a Bluesound International in Toronto, Canada…and Dean Miller, President & Chief Executive Officer of Lenbrook America Corp. d/b/a Bluesound International in Rancho Palos Verdes, CA. The second, and later, letter was to Lenbrook’s attorney.

Demand Letter by Sonos

Bluesound logo and mark

Why was this surprising? Because in February of this year, one of those manufacturers I had reached out to was Lenbrook. And, like so many others, Lenbrook declined to discuss the matter with me – on or off the record. However, Exhibit 28 to this lawsuit contains the letter from Sonos that Lenbrook had received.

This first letter (both letters were sent from attorney George I. Lee of Lee, Sullivan, Shea, & Smith, LLP) says, in part: “Sonos…is now the owner of over 800 patents. Sonos’s patents cover technology that drives consumer demand for its leading multi-room audio products.”

First Chatty, Then Ominous

At first, the letter seems somewhat chatty, like a friend relaying a story. Chatty, that is, if you failed to notice the rather ominous subject line: “Re: Notice of Infringement of Sonos’s Patents.” After a few niceties, the letter takes a bit of a dark turn by mentioning their court win over D&M Holdings Inc.

And then…it gets down to business.

“We believe that your company is infringing one or more claims of at least the Sonos U.S. patents listed below by using, manufacturing, offering for sale, selling and/or importing wireless multi-room audio products in/into the United States that practice the technology covered by these Sonos patents (and/or inducing or contributing to such activity by others), including but not limited to the PULSE FLEX, PLUSE FLEX 2i, PULSE MINI, PULSE MINI 2i, PULSE, PULSE 2, PULSE 2i, PULSE SOUNDBAR, PULSE SOUNDBAR 2i, PULSE SUB, NODE, NODE 2 NODE 2i, POWERNODE, POWERNODE 2, POWERNODE 2i, VAULT, VAULT 2, and VAULT 2i audio devices along with the corresponding Bluesound Controller and BluOS Controller apps.”

Letter from George I. Lee, Partner, Lee Sullivan Shea & Smith LLP [Sonos’s attorney]
Photo of Pulse and Executives
Lenbrook and Bluesound executives Greg Stidsen (l) and John Banks (r) proudly show off Pulse

Claims 70+ Patents Infringed by Bluesound

This is then followed with a long list of patents in multiple categories that the company is claiming have been infringed. I counted a total of 70 patents listed, along with three others mentioned earlier in the letter.

Then, the punchline or “ask”: “In bringing your attention to this matter, we would like to assure you that our current intention is to allow your company to continue its use of Sonos’s patents through a license. Please contact me for licensing terms and rates…”

See Sonos’s Letter

The ask is then followed by the not so thinly veiled threat of what I call the “or else” clause, which suggests without return contact to discuss the licensing arrangement mentioned in the paragraph above, the situation may require “a different course of action.”

You can see the entire letter by clicking this link…

What Other Brands are Targeted?

The second letter, Exhibit #29 of the complaint, was a follow-up letter addressed to Philip C. Swain of Foley Hoag, LLP, whom we’ve confirmed is Lenbrook’s attorney in this matter. This letter is dated June 7, seems hastily assembled, and we now know it was sent just days before the lawsuit was ultimately filed.

Who else is being targeted by Sonos for potential litigation? There is much we don’t know. But one thing we do know for sure…there are others in the queue.

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