(Bloomberg) -- A business-model patent that sent SmileDirectClub Inc. shares surging when it was issued earlier this year was invalidated by a U.S. judge, who dismissed a lawsuit the company brought against rival Candid Care Co.
The two companies compete in the expanding market for teeth-straightening products sold direct to consumers. Nashville-based SmileDirectClub makes 3D-printed aligners based on teeth impressions made in its shops or at home with a kit, with more than a million people using its products since its founding in 2014. It said the market may grow to 100 million.
On April 28, the U.S. Patent and Trademark Office awarded SmileDirectClub a patent on its retail concept and the process through which it develops plastic aligners for customers. The company also announced plans to slowly reopen its SmileShops from Covid-19-related restrictions beginning in May. The shares soared as much as 26%. SmileDirectClub sued Candid Care the next day, calling the New York-based company's Candid Studios “a copycat model.”
But the SmileDirectClub patent is for the “abstract idea of having patients arrange for and receive dental aligners without ever seeing a dentist or orthodontist in person,” U.S. District Judge Colm Connolly in Wilmington, Delaware, ruled on Monday. The concept lacks the inventive steps that would make it eligible for legal protection, Connolly said.
Shares of SmileDirectClub plunged by as much as 7.22% in after-hours trading before recovering, and were trading at $10.72 as of 7:21 p.m. in New York.
“SmileDirectClub disagrees with the court's reasoning,” company spokeswoman Kim Atkinson said. “The USPTO has validated SmileDirectClub's SmileShop and telehealth customer journey, and we stand behind the strength of our intellectual property. We are preparing our appeal and believe the facts and law are on our side.”
Lawyers representing Candid Care didn't immediately respond to a request for comment.
“Numerous cases have established that patents that simply take a standard business practice and describe how to conduct it over the internet or with modern information technology are directed to abstract ideas,” Connolly ruled. “Having the patient never physically see their dentist or orthodontist is simply part of the abstract idea.”
SmileDirectClub in January said it would start selling its aligners to dentists and orthodontists, putting it in direct competition with one-time partner Align Technology Inc.'s Invisalign. A supply pact with Align that limited SmileDirectClub to selling its products only online and in retail shops expired at the end of 2019. The SmileShop platform as of 2019 accounted for 85-90% of the company's scans of patients' teeth, the company said in court filings.
SmileDirectClub's investment in brand awareness is gradually resonating with consumers, Bloomberg Intelligence analyst Fallon Stephan wrote in a Dec. 2 note, “but it remains to be seen if the company has enough brand awareness to generate demand at this level.”
The case is SmileDirectClub LLC v. Candid Care Co., 20-cv-583, U.S. District Court, District of Delaware (Wilmington).
©2020 Bloomberg L.P.
Essential Business Intelligence, Continuous LIVE TV, Sharp Market Insights, Practical Personal Finance Advice and Latest Stories — On NDTV Profit.
