Billion-dollar verdicts are a rarity in the corporate world, so it made quite a statement when Appian (APPN 0.19%) was awarded more than $2 billion last week.
A jury in the Circuit Court for Fairfax County, Virginia, found that Pegasystems (PEGA -0.71%), Appian's chief competitor, had stolen trade secrets from Appian during a period of time starting in 2012.
Appian shares jumped 39% last Tuesday after the news came out, while Pegasystems' stock plunged 21%. It's not a surprise that the two stocks would swing that wildly. Pending appeals, Appian stands to win $2.036 billion based on Pegasystems' enrichment from its intellectual property, a large sum for Appian, which currently has a market cap of less than $4 billion and $160 million in cash. An infusion of $2 billion, in other words, would effectively increase the company's value by 50%.
Pegasystems, on the other hand, is valued at $4.2 billion, meaning that a $2 billion loss would put a large dent in its value. Unless Pegasystems wins on appeal, Appian will receive a lump-sum payment of more than $2 billion once all appeal options are exhausted.
Pegasystems noted that "we have full confidence in the strength of our appeal. The appeals process could take years to complete, and no judgment would be payable until this process has ended. Pega has the financial strength to pay a judgment if it ever becomes necessary."
Beyond the headline number, what does the verdict mean? Let's look at the details of the case before discussing the impact.
Image source: Getty Images.
Top executives were called out
The Appian case centers around a government contractor working as an Appian software developer with access to the back-end of the company. According to Appian's case, Pegasystems hired the contractor essentially as a spy to share proprietary information.
Some of the information from the contractor was allegedly used to better train Pegasystems' sales force to compete with Appian's, and Pegasystems' product engineering team also made changes based on what they had seen in Appian's materials.
During the years this took place, Pegasystems reportedly used the information to improve its own product and better compete against Appian.
The Virginia jury found that much of Pegasystems' C-suite was knowingly involved, including CEO Alan Trefler. Appian said in a press release that during court proceedings, Trefler "admitted that it was 'inappropriate'' for Pegasystems employees to have hired the Contractor, and that the Contractor 'apparently did things for which he was not entitled.' " Appian learned of the situation when a whistleblower who was a former Pegasystems employee alerted it, according to court filings.
Several Pegasystems employees, including the CEO, allegedly created fake identities to obtain access to Appian's software platform. That's just a sample of the reported wrongdoing that led to this $2 billion award.
Pegasystems said in an SEC filing that it had "acknowledged a small number of employees accessed public Appian free trials that Appian wanted to keep closed to Pega. We took corrective action and implemented technical blocks to prevent such access to Appian free trials in the future."
What's next
If the jury award, which Appian believes is the biggest in the history of the Virginia court, is upheld, a $2 billion transfer in and of itself would help tip the balance in the low-code sector, giving Appian more money to invest in its growth or make a potential acquisition. But there are also implications beyond the award.
It's likely, for example, that there will be some fallout among Pegasystems' management team. It's hard to imagine Trefler holding on to his job after this verdict. And the same could be said about Pegasystems' other employees who were involved.
The jury's finding also makes a statement about who the technology leader in the industry is, and that statement is likely to be heard by at least some potential customers. If you were a manager choosing between Appian and Pegasystems, you'd probably choose Appian after learning that Pegasystems stole proprietary data from its rival.
There also could be direct implications for Appian's federal government practice, and its CEO, Matt Calkins, said in an interview with The Motley Fool on May 12, two days after the verdict was announced:
I think there's an obvious way that it could impact in public-sector deals. Because I think public-sector organizations may take this especially seriously, and they may have rules that force them to take this very seriously. I think that reputation really could matter.
The reputational damage to Pegasystems could be substantial, especially within the relatively small number of top companies and organizations whose business Appian and Pegasystems compete for. Importantly, the verdict also portrays Appian as the company in the space whose technology is worth stealing.
Pegasystems plans to appeal and says it "strongly disagrees with the claims and the recent verdict, which are not supported by the facts of the case or the law and are the result of significant error."
Still, the evidence we've seen seems to favor Appian, meaning there's a good chance it will eventually be paid the $2 billion. In addition to the verdict, the market's reaction could give Appian a sustainable advantage against its top rival, which it competes against twice as often as any other.
Against that backdrop, it's clear why the cloud stock jumped 39% on the news. The verdict has the power to reshuffle the pecking order in low-code app development in Appian's favor.
