This week, the beginning of an epic legal battle was set to begin between augmented reality players Magic Leap and Nreal, the small China-based startup accused by the former of stealing trade secrets.

However, a new wrinkle has emerged in the legal skirmish that could change everything.

If you're just getting up to speed on the case, the background is that Nreal co-founder and CEO Chi Xu previously worked at Magic Leap as a software engineer back in 2015. Later, he went on to create Nreal and introduce the world to the Nreal Light. Things were moving along smoothly for Nreal for some time until Magic Leap dropped its legal bombshell in the US courts accusing Xu of trade secrets theft, copying branding, and breach of contract.

Now, a new flurry of legal filings have emerged in the first two weeks of 2020, just days before the initial court meeting between Magic Leap, Nreal, and the court was set to occur on January 15. Those filings have prompted the two companies to jointly agree to delay their initial court meeting until June. In the meantime, the two companies will enter a phase of mediation, which could result in some kind of settlement between the two startups.

The parties have agreed to private mediation and are in the process of discussing the timing of such mediation. — Magic Leap's legal team

"The parties have filed ADR [alternative dispute resolution] Certifications on January 8, 2020 after meeting and conferring on January 3, 2020," reads a January filing entered by Magic Leap and co-signed by Nreal's legal team. "The parties have agreed to private mediation and are in the process of discussing the timing of such mediation."

Alternatively, the behind-the-scenes dealings could also result in a hardening of positions, possibly leading to an even more contentious legal fight. If that happens, the official presiding over the case, Judge Lucy Koh (of Samsung vs. Apple fame) has set a jury trial date of October 2021.

Why is this important? Well, with Apple, Facebook, and Samsung still yet to officially join the race to bring commercial AR hardware to the mainstream, and Microsoft's HoloLens 2 squarely focused on enterprise, the consumer AR hardware space is still wide open. Previously, despite mixed some mixed reviews, it looked like Magic Leap had secured a good deal of mindshare in its efforts to pave a path toward the eventual mainstreaming of AR headsets with the Magic Leap One.

The Nreal Light. Image via Nreal

But as industry observers and consumers alike call for a smaller AR wearable form factor that hews more closely to the look of, say, a pair of shades, the competition has increased as others have sought to sacrifice some of the high-end graphics and interactively of headsets like the Magic Leap One for something a bit lighter, more portable, and cheaper than Magic Leap's $2,295 price tag.

Enter, among others, the Nreal Light, whose developer version looks (mostly) like a pair of shades, costs $1,199 for the developer version, and has a consumer version that connects to Android smartphones on the way for $499.

Adding to the pressure on Magic Leap has been the revelation that the company had to hand over its patents as collateral to JPMorgan Chase as it seeks a new round of funding. With the HoloLens 2 finally shipping to customers and sucking up a lot of the enterprise interest in high-end AR, and future funding for Magic Leap, as of this writing, still in question, the Florida startup's legal move against a former employee is no surprise.

Nevertheless, win, lose, or settlement, at this point, Magic Leap may be fighting a losing battle. Nreal is just one company operating in the growing ranks of AR wearable makers. There are already two more China-based startups — 0glasses (RealX) and Pacific Future (Am Glass) — with products that look and perform as well if not better than the Nreal Light, offered in strikingly similar packages and at affordable prices.

Sure, the aforementioned companies are focused on the Asia market, for now, but some of the Chinese investors behind these startups are no longer content to simply play locally. As exampled by China's ByteDance and its now global app success story in TikTok, Chinese startups are increasingly poised to challenge the West's best tech startups on nearly every front. Currently, AR is one of the most active sectors in China in terms of rapid software and hardware development, iteration, and distribution.

Win, lose, or settlement, at this point, Magic Leap may be fighting a losing battle. Nreal is just 'one' company operating in the growing ranks of AR wearable makers.

The Magic Leap One has been on the market for nearly a year and a half, and there's still not even a hint that a cheaper, smaller version of the device is forthcoming for mainstream users. This is particularly surprising given Magic Leap's focus on entertainment tie-ups with franchises like Star Wars, Game of Thrones, and healthy menu of AR gaming and passive content consumption apps.

Even if Magic Leap can manage to secure new funding, wrest its patents back from the bankers, and produce an affordable, non-developer-focused version of its device in the next 12 to 24 months, it will still have a growing throng of aggressive AR challengers to deal with, including, if the rumors are true, Apple, possibly sometime later this year.

Therefore, while this legal tussle may be important to the Florida-based startup for various reasons, getting some sort of resolution executed sooner rather than later would probably be in its long-term best interest. By the end of 2021, when the jury trial would occur, the AR landscape will probably look completely different, and a lot more competitive. For its part, Nreal has flatly denied Magic Leap's allegations, which makes a settlement seem unlikely unless there's a major shift from at least one of the parties involved.

Judge Koh has given the two companies until June 3 to try to work things out on their own before firing up the legal machine in earnest and setting a potentially costly chain of events in motion that won't likely end until 2022, at the earliest.