First mover advantage (FMA) is the market advantage that a firm
gains for being first with a product. In LightLab Imaging Inc.
v. Axsun Technologies Inc. & Another, SJC-11374, July 28,
2014, the Supreme Judicial Court affirmed a decision to deny lost
profits claimed, in part, based upon the plaintiff's assertion of
FMA. The trial court had not rejected the FMA concept per se, but
found no evidence of loss and the methodology deficient
"particularly as to quantification."
Since LightLab, FMA has been argued by a pharmaceutical
development company seeking a preliminary injunction in
Theravectys SA v. Immune Design Corp., C.A. No. 9950-VCN,
Court of Chancery of Delaware, March 9, 2015. The court, in finding
failure to establish irreparable harm, observed that the
"first-mover advantage argument … fails to establish a
non-speculative harm." It will be interesting to see whether the
argument will be resuscitated at trial and, if so, with what
Other unsuccessful appearances of FMA include a trade secrets
case in which the plaintiff argued potential loss of FMA in a
failed attempt to obtain an injunction. See Aetna, Inc. v.
Bradley M. Fluegel et al, CV0740333455, Sup. Ct., Conn., July
7, 2008. Also, in a case that did not go to trial, in which the
author was an expert for the defense, the plaintiff's expert
described the advantage of being the first mover but was unable to
point to any specific lost profits. The case settled with no money
More promising for the first mover concept was a favorable
mention at the U.S. Supreme Court: "Firms that innovate often
capture long-term benefits from doing so, thanks to various first
mover advantages, including lockins, branding, and networking
effects." See Bernard L. Bilskey et al v. David J. Kappos,
130 S.Ct. 3218, June 28, 2010. The same Court of Chancery of
Delaware that rejected first mover advantage in
Theravectys subsequently accepted the theory as the basis
for the choice of a growth rate above the rate of inflation, a
small part of a much larger company valuation analysis. See
Leilani Zutrau v. John C. Jansing et al, C.A. No.
7457-VCP, Court of Chancery of Delaware, July 31, 2014.
There is an extensive literature on FMA. The prevailing view is
that being the first mover confers an advantage. Some studies have
focused not on FMA per se but on explaining market share. Eleven
such studies have found market share and order of entry to be
correlated: The earlier a product was in the market, the larger its
market share was likely to be.
However, there is general agreement in the literature that the
magnitude and durability of the advantage may vary substantially
depending upon a variety of factors, some of which are discussed
The extent of FMA is different in different product categories.
The advantage generally dissipates over time. The size and
durability of FMA is affected by advertising (the first mover's and
the competition's), pricing and relative quality (or at least
customer perception of relative quality) of later-entering
products. Sometimes being first mover is more important than being
better; followers with superior products don't always succeed in
overtaking the first mover.
FMA can be enhanced by having a technology not readily
replicated by a competitor, for legal or other reasons; control of
scarce resources, which the first mover may own, collect or create
(e.g., raw material, IP, location, key employees, key suppliers,
customer first impressions, know-how); customer switching costs
(i.e., monetary or simply intangible costs of changing habits or
organizational practices or of learning new methods); and network
effects, which can create a kind of switching cost in situations
where customers seek a common standard or the ability to interact
with other users.
Market factors are important as well. New product categories
seem to attract more followers than old categories. For a brand
extension, being first mover can count for more than for a new
brand. Rapid market expansion can be a blessing, if the first mover
has the resources to keep up, but a curse, if the first mover does
not and a follower does. If a technology is disruptive (e.g., the
PC), rather than incremental (e.g., new kinds of mainframes), it is
harder to predict what will become of the FMA.
In short, whether the first mover can establish and maintain
market leadership seems to be highly case specific, depending upon
a variety of factors which may or may not be relevant to a
particular industry, market or company.
There are definitional issues that would need to be addressed in
any successful claim based on FMA.
Is the first mover the inventor or holder of the patent, the
first to develop a prototype, the first to market or the first to
develop a significant market share? Obviously, the further along
the plaintiff is, the stronger the case.
What is the market? A new pharmaceutical effectively treating a
disease, with no previous effective treatment, defines the market
and is the first mover. If the pharmaceutical treats a disease that
has existing remedies, the new product may be the first mover in
only a market segment.
What is the time horizon? Plaintiffs like to assume their
products will triumph in perpetuity. However, courts are reluctant
to award damages based upon projections into a distant future,
particularly, as in LightLab, when the projections go
beyond some identifiable date certain (e.g., expiration of a lease,
contract or patent). It may be enough to demonstrate that, but for
the breach or tort, the plaintiff would likely have enjoyed a few
years of profitability.
What is the basis for damages? The common claim, as in
LightLab, is for lost profits. However, a common end for
successful startups is to be bought out, as happened to
LightLab, which never made money but sold for $92.8
million. The grounds for damages may need to be reframed from lost
profits to something else - say, loss of capital or destruction of
value. Doing so would raise legal and economic issues beyond the
scope of this brief paper, but to deny the possibility would be to
deny a remedy for loss of potential with real economic value.
Netscape can be an example, with 20-20 hindsight, of how these
definitional issues might have been addressed had Netscape been in
litigation. Netscape did not develop and was not the first to
market a browser, but it was arguably the first to develop and
dominate a significant browser market (first mover definition). The
market was fairly clearly defined: a means of finding stuff on the
internet (market definition). The company existed independently for
only five years (time horizon). Cumulatively, profits were
negative, but AOL purchased Netscape in a deal valued at the time
at about $4.2 billion (basis for damages).
The brief history of the FMA concept in litigation makes it
clear that merely asserting FMA as the basis for a lost profits
claim accomplishes little. However, the extensive work that has
been done on FMA outside the courts makes it clear that the
advantage is real. FMA may best be thought of not as a sole basis
for a damage claim but as a useful framework within which to
perform a traditional lost profits analysis. FMA could be a lens
through which to examine the facts of a case to assess the
magnitude of a FMA and help quantify the damages. With a proper
analysis of the relevant factors, FMA may yet play a meaningful
role in the courtroom.
This article appeared in the Summer 2015 edition of the
ComCom Quarterly, the newsletter of the Complex Commercial
Litigation Section. For more articles like these on business
litigation, bankruptcy and intellectual property topics, check out
the Quarterly at http://is.gd/lFJCJw.