More Financial Woes for 3D Systems as they Lose $11 Million Arbitration with Print3D

Until recently, 3D Systems has always had a pretty healthy appetite for 3D printing startups and technology and spent a lot of their time and money buying them up. Most of their acquisitions have been great deals for everyone involved, at least publicly, and led to a huge period of growth for the company over the past few years. But after an aggressive, and generally unsuccessful, move into the desktop consumer 3D printer market things have started to go south for 3D Systems. Their stock prices have been dropping dramatically this year and there doesn’t seem to be any indication of that changing any time soon.

3D Systems stock price continues to drop.

Beyond the soft sales of their desktop 3D printers, 3D Systems’ habit of buying other companies rather than drive innovation on their own seems to have been yet another poor decision on their part. Back in 2011 near the beginning of their startup smorgasbord 3DS purchased a small startup called Print3D that had developed a plugin for CAD software that would allow users to calculate real time production cost quotes while the design was being generated.  According to Print3D’s owner Ronald Barranco, the deal that he made with 3D Systems would include hiring him as a co-manager of a new 3D Systems unit that would continue to develop and promote the Print3D plugin. The deal would also share revenues generated by the Print3D tool, throughout an earnout lasting three years from the date of the acquisition of his company.

Instead of a three-year partnership, 3D Systems ended up firing Barranco only twenty months after the deal closed. He says that not only did 3D Systems not pay him anything under the earnout provisions, but they offered him no explanation for ending his employment. After losing his company and his job, Barranco decided to sue 3D Systems in 2013 for lost revenue and for violating the terms of their purchase agreement The court decided to send the suit to arbitration and the hearing was finally held June 22-26, 2015 in Charlotte, North Carolina.The results of that hearing were released yesterday, and 3D Systems lost and was ordered to pay Barranco a total of $11,281,681.46 in damages.

According to the arbitrator, 3D Systems breached their obligation to support Barranco and grow the Print3D plugin, instead focusing on developing another similar company that it had acquired at the same time. Not only did the arbitrator affirm that there was a preponderance of evidence that 3D Systems breached their contractual obligations, but they also breached their obligation to deal with Barranco in good faith. In their ruling, the arbitrator stated that “[t]he list of actions and inactions of Respondents evidencing bad faith relative to Mr. Barranco and Print3D is a long one.”

“3D Systems is a billion dollar behemoth that had gobbled up dozens of small companies in the 3-D printing space. It apparently thought it could do whatever it wanted with those companies, that it could abuse Ron, and that he wouldn’t be able to fight back,” said one of Barranco’s attorneys, Mark Poe from law firm Gaw | Poe LLP.

The arbitrator awarded Barranco all of the requested damages, profit losses, his attorney’s fees and the costs associated with the arbitration process. 3D Systems was ordered to pay $11.3 million which includes total damages of $7.3 million, legal fees and expenses of $2.3 million and $1.7 million in prejudgment interest. However it is worth noting that the arbitrator found that the company did not specifically commit fraud or make any negligent misrepresentations to Barranco.

“It’s not uncommon to hear about entrepreneurs who sold their company in exchange for an earnout or other deferred compensation, and were then cheated out of what they were promised. We’re glad that we were able to get justice for Mr. Barranco,” added Randolph Gaw, Gaw | Poe LLP partner.

In response to the arbitrator’s judgement, 3D Systems said that they disagree with the arbitrator’s findings and that they would be challenging the decision in federal court. 3D Systems believes that the arbitrator’s judgement exceeds his authority and disregards applicable laws.

“We were extremely disappointed with the decision of the arbitrator. We firmly believe the arbitrator’s ruling is not supported by the facts of this case or the agreement between the parties. We are reviewing our options with our legal counsel and fully intend to challenge the ruling in federal court. Notwithstanding our right to appeal, given the arbitrator’s decision, we expect to record an expense provision for this matter in the quarter ending September 30, 2015. The provision is subject to adjustment based on the ultimate outcome of our appeal. However, we do not believe that the award will impact our ability to realize our existing business plans in the short or long term,” said 3D Systems Executive Vice President and Chief Legal Officer Andrew Johnson.

While the case now needs to make its way through the appeal process, where it is not guaranteed to even get a new hearing, it is worth noting that in their official statement 3D Systems has already made plans for paying off the award. Whether that is because they expect to lose any appeal attempts, or to try and prevent this judgement from further driving their stock prices down is unclear, but they have set aside cash on hand to pay off the judgment if needed.  Let’s hear your opinion on this case in the 3D Systems Arbitration forum thread on 3DPB.com.

[3D gavel model courtesy Thingiverse user Print_Advocate.]