Research Affiliates Withdraws WisdomTree Patent Suit

ETF Trends

WisdomTree Investments (WETF) and Research Affiliates on Thursday said Research Affiliates will withdraw its patent infringement lawsuit related to so-called fundamentally-weighted indices.

“The settlement agreement resolves all matters pertaining to the lawsuit,” the firms said in a press release.

“Research Affiliates has agreed to a one-time payment of $700,000 to WisdomTree. WisdomTree and the other defendants are not required to make any current or future payments to Research Affiliates,” according to the release.

WisdomTree shares were up more than 10% on Thursday morning. The ETF manager’s stock was upgraded to buy from underperform at Bank of America, Benzinga reports.

In late 2011, index provider Research Affiliates filed a suit alleging WisdomTree financial products based on fundamental factors infringed three Research Affiliates patents.

Robert Arnott is the chairman and founder of Research Affiliates. He is a respected market commentator and previously served as editor of the Financial Analysts Journal. In the ETF business, Arnott is best known for developing benchmarks that weight stocks by fundamental factors rather than by market cap.

“Based on information that came to our attention during the lawsuit, Research Affiliates can now acknowledge that WisdomTree’s fundamentally-weighted indexes and strategies were developed by WisdomTree independently of Research Affiliates,” Arnott said in the press release.

Invesco PowerShares manages several ETFs hitched to FTSE RAFI benchmarks, such as PowerShares FTSE RAFI US 1000 Portfolio (PRF). RAFI stands for Research Affiliates Fundamental Index. ProShares sponsors ProShares RAFI Long/Short (RALS).

“Historically, RAFI indices have generated significant outperformance over time by using measures of a company’s economic footprint and through its rebalancing process that shifts assets into the least-favored securities and out of the most-favored—and thus most expensive—securities,” Research Affiliates said in a 2011 press release announcing the patent infringement lawsuit against WisdomTree.

Both parties agree to respect each other’s intellectual property and patents, according to the joint statement released Thursday. WisdomTree said the settlement will not affect the current methodologies and fee schedules for its ETFs.

During a recent conference call, WisdomTree said it incurred net legal expenses of $219,000 in the third quarter related to patent litigation with Research Affiliates.

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