Peloton built its faltering exercise-bike empire partly by bullying competitors over technology patents, according to an explosive court filing — and in one case allegedly paid a smaller rival nearly $25 million in a sham agreement designed to burnish its dominant image.
The New York-based fitness brand — which on Tuesday revealed CEO John Foley will step down as it fires 2,800 workers because of plunging post-pandemic sales — amassed its outsize market share through an aggressive, yearslong legal campaign in which it attacked rivals over patents to make bikes and treadmills that enable customers to watch live instructors while working out, according to the filing.
But in one notable case two years ago, Peloton allegedly cut a secret agreement with its smaller, struggling rival FlyWheel Sports in which it paid the now-bankrupt company $24.5 million to falsely claim it had infringed on Peloton’s patents. In reality, Flywheel was in the middle of a patent review with US regulators and challenging Peloton, whose own patents were on shaky ground, according to the filing.
“What Peloton really purchased was FlyWheel’s silence and cooperation,” according to the Dec. 8 filing in federal court in Delaware by Echelon Fitness, a Chattanooga, Tenn.-based bike maker that has been locked in a bike-patent dispute that was initiated by Peloton nearly three years ago.
The alleged sham agreement goes back to February 2020 when Peloton declared a “massive win” in a press release, saying it had defeated New York-based FlyWheel in a patent infringement case. Behind the scenes, however, Peloton had paid FlyWheel “an astonishing $24.5 million to settle a patent infringement suit that it brought as a plaintiff,” according to Echelon’s little-noticed filing.
In exchange, Peloton got 2,500 customers who used FlyWheel’s ‘at home’ bike streaming service. This means that if Peloton did, in fact, pay FlyWheel $24.5 million, this would total about $9,800 per FlyWheel customer. That’s despite the fact that Flywheel’s business was on its knees, having announced plans six months earlier to close a quarter of its studios.
Bike manufacturer Echelon has been locked in patent and trademark litigation with peloton since 2019.AFP via Getty Images
“Peloton knew it wasn’t worth anything close to the price it paid for it,” according to the court filing.
What’s more, Echelon’s filing claims the terms of the settlement in the US Eastern District of Texas “coerced” FlyWheel’s chief financial officer, Jeffrey Naumowitz, to falsely claim that the company had “copied” Peloton’s remote streaming technology for its Fly Anywhere Bike — when in reality it was the other way around, Echelon claims in the filing.
“The declaration is false and was obtained by Peloton’s coercion,” according to the Echelon filing. “It allowed Peloton to use this admission against other competitors in the fitness market or anyone trying to enter it.”
At the time, FlyWheel was on the verge of invalidating at least one of Peloton’s patents with the US Patent & Trademark Office, according to Echelon’s complaint. Peloton didn’t want its “contrived invention story revealed,” the complaint claims, and “sought to purchase Flywheel’s silence and cooperation.”
Indeed, the $24.5 million payment was contingent upon the “dismissal” of patent reviews that would have invalidated Peloton’s patents, the filing claims.
“Peloton was desperate to close the deal [with FlyWheel] before its patents were invalidated,” according to Echelon’s filing, so that it could “keep its weak patents alive and file additional baseless lawsuits against Echelon and other competitors.”
Peloton’s $24.5 million settlement with FlyWheel allegedly bought Peloton some 2,500 FlyWheel customers.SOPA Images/LightRocket via Gett
Owned by private equity firm Kennedy Lewis, FlyWheel declared bankruptcy and liquidated seven months after the February 2020 settlement with Peloton – closing its 42 studios and laying off 1,200 employees.
Kennedy Lewis and Naumowitz didn’t respond to emails and phone calls seeking comment.
Peloton did not return calls and emails for comment. But it filed a motion to dismiss the claims and denied that the declaration by FlyWheel’s CFO was false.
Echelon, for its part, argues that Peloton has a history of attacking its competitors, including SoulCycle, iFIT and Lululemon, and has used its financial muscle to fund “serial baseless litigation against its competitors to bully them out of the market.”
In its December filing, Echelon accused Peloton – which controls 75% of the connected fitness industry – of violating antitrust laws with its pattern of squashing competitors, a strategy that Foley has called a “winner take all” approach, according to the complaint.
Peloton founder, John Foley, is accused of trying to eliminate Peloton’s competition with a “winner takes all” approach, according to a lawsuit.Bloomberg via Getty Images
Echelon, which filed a countersuit after being sued by Peloton in 2019, won an appeal last week with the USPTO, which invalidated two of Peloton’s patents that have been a key focus of the companies’ dispute, relating to the streaming functions on its digital screens or leaderboards. Regulators ruled that they were not patentable in the first place because they were too “obvious.”
After years of hostility, Peloton last week reached out to Echelon as part of their “ongoing negotiations” over the litigation, Echelon CEO Lou Lentine told . “Peloton has a lot to do on their side of the business and they don’t have time for this litigation,” he said, declining to comment on whether the companies were initiating settlement talks.
Lentine said Peloton had “fought” Echelon to have revelations about its 2020 settlement with Flywheel redacted from court papers. “Who declares victory in a patent lawsuit and pays the violator millions of dollars?” Lentine said.
Lentine claims that Echelon — whose bikes are sold at retailers like Walmart, Dick’s Sporting Goods and Costco for $500 and up — has seen sales growth of more than 40% year to date. The company landed in an embarrassing flap in 2020 over a supposed deal with Amazon to develop a $500 “Prime” bike, which Echelon announced in a press release. Amazon denied having anything to do with the bike — which Lentine in turn disputed during TV interviews at the time.
Michael Milken bike ‘espionage’
Echelon’s latest allegations are looking to recast the odd saga between Peloton — now reportedly circled by potential acquirers including Amazon following a slew of disasters including a “Sex And the City” episode that tanked its stock — and FlyWheel, a pioneer of in-studio spinning classes that was Peloton’s earliest competitor.
Peloton’s Foley has said that his inspiration for at-home, web-enabled bikes occurred while he was taking a FlyWheel class, according to media reports. He further developed the idea after becoming friendly with FlyWheel co-founder Jay Galluzzo, whom he initially approached about investing in Peloton, according media reports.
Peloton accused FlyWheel Sports of ripping off its technology. Getty Images
The friendship went south when the pair became fierce competitors, with each claiming to have first come up with the idea for an at-home bike that offers live-streaming classes. Peloton was first to market with its connected bike, but FlyWheel claimed Foley “gained access to FlyWheel’s confidential information and misappropriated it as his own,” to introduce Peloton’s bike, according to Echelon’s recent filing.
FlyWheel claimed that it had a 30-page document from July 2011 – six months before Peloton was founded – that outlined all the elements necessary to develop an at-home bike that could stream videos and live classes, according to the Echelon filing and media reports at the time.
Michael Milken even made an appearance in the back-and-forth between the companies. In court papers, Peloton alleged that after investing in Flywheel, the legendary “junk bond king” approached Foley about becoming an investor in Peloton without disclosing his ties to FlyWheel — and plied him for confidential information that Milken then shared with FlyWheel, according to the Peloton complaint. Milken and Flywheel denied the allegations.
“This is like a soap opera,” said Brad Rose, a patent and trademark attorney at Pryor Cashman. “They are claiming that Peloton conspired with FlyWheel to concoct a story of validity to these patents, which is counter to what FlyWheel had been saying for years. That doesn’t happen every day.”
The allegations could also pose a risk for Peloton as it looks to wrap up any other patent litigation with competitors, Rose added.
“Peloton would lose its patent by the USPTO if someone else with a legal interest in the case could prove that it was fraudulently obtained,” Rose said. “If someone believes that patent was obtained by fraud the patent could be invalidated.”
Echelon also counts Galluzzo among its investors via private equity firm, North Castle Partners. Galluzzo, who left FlyWheel in 2014 before the Peloton litigation, declined to comment.
Peloton built empire by bullying competitors in court: suit appeared first on maserietv.com.