Hedge fund Elliott Management Corp. is financing a high-stakes patent lawsuit against Quibi, the new streaming service founded by entertainment veteran Jeffrey Katzenberg, according to people familiar with the situation, putting power players of Wall Street and Hollywood on a collision course.
Elliott has agreed to fund a suit brought by interactive-video company Eko, which claims Quibi is violating its patents and has stolen trade secrets, the people said. As part of the financing, Elliott would end up with an equity stake, the people said.
The size of the equity stake couldn't be learned, though it is a substantial investment, the people said.
The litigation concerns a Quibi feature called "Turnstyle," which the company has described as a groundbreaking technology. It plays different videos for users depending on how they are holding their phone, switching in real time between horizontal and vertical versions.
New York-based Eko, whose official corporate name is Interlude US Inc., has demanded that Quibi stop using its technology or license it. It is suing for a preliminary injunction and damages.
In a statement, a Quibi spokeswoman denied that the company infringed on Eko's patent, calling Eko's lawsuit meritless.
In litigation financing, a party typically agrees to fund a lawsuit in exchange for a cut of the proceeds or settlement. Sometimes the funder also secures equity in the plaintiff.
Elliott Management, run by billionaire Paul Singer, has dabbled in litigation financing in the past, but its involvement with a lawsuit against Quibi is still fairly unusual, a person familiar with the matter said.
The fund, which manages more than $40 billion, is best known as one of the largest and most aggressive activist investors. It takes stakes in public companies to push for changes and has clashed with big-name corporations from AT&T Inc. to Twitter Inc. Elliott also has taken on bankruptcy and debt situations, including those involving foreign governments. One of its most well-known fights is its 15-year crusade to get Argentina to make payments on defaulted bonds. The fund in recent years also has invested in multiple private tech companies.
Elliott's connection to Eko comes partly from Mr. Singer's ties to the technology scene in Israel, where Eko was founded, and to some of the interactive-video company's investors, the people familiar with the situation said.
Elliott's agreement with Eko reflects its belief in Eko's legal case and in the company's technology, the people said.
Eko filed its lawsuit in Los Angeles federal court in March. A hearing on its request for a preliminary injunction is expected as soon as this week.
By financing the lawsuit against Quibi, Mr. Singer will be taking on Mr. Katzenberg, one of Hollywood's biggest names and fiercest competitors. Earlier in his career, Mr. Katzenberg ran Walt Disney Co.'s movie business and co-founded DreamWorks SKG as well as the animation spinoff DreamWorks Animation SKG Inc., which he sold to Comcast Corp. in 2016. Quibi is one of the most well-funded startups in the history of Hollywood, having raised about $1.75 billion from an array of entertainment firms and financial institutions.
The suit adds another challenge for Quibi, which specializes in short-form TV and movies for smartphones. Mr. Katzenberg has acknowledged that launching on April 6, in the middle of the coronavirus pandemic, has been a difficult situation. The service, which set ambitious growth targets, was conceived as an entertainment option for people on the go -- commuting or waiting in line -- but now must target consumers who are staying at home during the crisis.
Mr. Katzenberg and Quibi Chief Executive Meg Whitman have pointed to the Turnstyle feature as a major point of differentiation in the streaming world, where Quibi competes for viewers with everyone from Netflix Inc. to Disney+ to YouTube. Creators could use the technology to show multiple perspectives. For example, viewers could see a scene from one angle, such as a character speaking into a phone, and then tilt the device to see the person on the other end of the phone.
Mr. Katzenberg is no stranger to high-stakes litigation. He famously waged a bitter legal battle with Disney over the terms of his contract with the company, seeking a share of profits from hits such as "The Little Mermaid" and "Beauty and the Beast" that he helped shepherd. Mr. Katzenberg settled the dispute in 1999 for about $280 million.
Amol Sharma contributed to this article.