Seeking Alpha
Long/short equity, deep value, special situations, growth
Profile| Send Message|
( followers)  

Back in June of 2011, I wrote an article called "Potential Problems With Pandora Media's IPO". While Pandora Media (NYSE:P) has certainly had its ups and downs over the last 18 months, it recently hit an all time low just prior to releasing last weeks quarterly numbers. While the quarter's numbers were good in themselves, the guidance going forward was low and quickly sent the stock back downward.

From the original article there were several items of particular interest. The most relevant may be a patent infringement lawsuit over foundational technology apparently critical to Pandora's business model that was filed by Augme Technologies (AUGT.OB) against Pandora Media on April 29th, 2011. It appears so material in fact that Pandora itself chose to disclose it in their original S-1 filing prior to going public. What makes this relevant is that the original Markman hearing took place roughly nine months ago on February 27th, 2012 and just last week, the judge issued the long awaited ruling possibly sealing Pandora's fate.

Markman rulings determine what claim language the jury will hear when determining infringement. Patents often contain very technical language that the common layman would not know how to interpret. Both sides provide definitions of terms that are under contention, but try to put it in terms that the jury would understand. Which side the judge chooses is very critical as the plaintiffs are trying to get as broad a definition as possible to maximize damages and the defendant is trying to narrow the definitions to either eliminate the infringement or minimize potential damages. Markman results can and often do foretell the likely victor should the case proceed to trial.

In this case there were nine terms being decided upon. Here is a brief summary of the results directly from the ruling found here in its entirety.

The first term under dispute was "media appliance metaphor".

A. "media appliance metaphor" (claims 1-6)

Plaintiffs Proposed Construction: "a software device that exists in the realm of electronic communication and has a counterpart in the real world"

Defendant's Proposed Construction: "a software device that exists in the realm of electronic communication and has a physical counterpart object in the real world that can be manipulated on the display screen in the same manner that the physical object is manipulated in the real world"

Court's Construction: "a software device that exists in the realm of electronic communication and has a counterpart in the real world"

Judge's comment. This additional limitation is not warranted.

Augme 1 Pandora 0

The second term under dispute was "web page".

B. "Web page" (claims 1-6)

Plaintiffs Proposed Construction: This term does not require construction beyond its plain and ordinary meaning. Alternatively, "a document or information resource associated with a URL that may be downloaded or accessed from the World Wide Web"

Defendant's Proposed Construction: '~a document generated in Hypertext Markup

Language (HTML) that is accessed through a web browser and displayed by a web browser"

Court's Construction: "a document or information resource associated with a URL that may be downloaded or accessed from the World Wide Web"

Judge's comment. Pandora has not offered persuasive support for its criticism of Augme's proposal as overbroad. By contrast, Pandora's proposed construction is too narrow, limiting "Web page" to a document generated in HTML, even though the patent describes HTML as merely a preferred embodiment of the invention.

Augme 2 Pandora 0

The third term under dispute was "adding a media function to a webpage"

C. "adding a media function to a Web page" (claims 1-6)

Plaintiffs Proposed Construction: "providing audio, video, and/or graphic content (i.e. a media function) to a Web page. Examples of 'media function' include, but are not limited to, audio sounds, video images, graphic images, banner ads and/or informational feeds"

Defendant's Proposed Construction: "adding a software program to a Web page that adds media content to the Web page"

Court's Construction: "adding a software program to a Web page that adds media content to the Web page"

Judge's comment. The specification indicates that the claimed "media function" includes the content itself.

(See '690 patent col.5 11.41-44 ("Web page display process 110 is performed ... to add function, such as streaming media or other media services to Web page 34 .... "); id. at col.lll.51-61 ("A recent advance in Web site technology is the addition of streaming media, as well as other more sophisticated functional enhancements, to Web sites."); id. at col.14 11.12-14) The parties agree that the media function includes content but disagree on whether it also requires software. On this issue, the Court agrees with Pandora: in the context of the patent-in-suit, software is required.

Augme 2 Pandora 1

The fourth term under dispute was "processor platform".

D. "processor platform" (claims 1-6)

Plaintiffs Proposed Construction: This term does not require construction beyond its plain and ordinary meaning. Alternatively, Augme proposes "a networked computing device that includes a central processing unit (CPU), memory, and communications ports"

Defendant's Proposed Construction: "a networked client-side (i.e. end user) computer device having a processor, memory, including a non-transitory memory, input/output lines, a Web browser and a display device"

Court's Construction: "a networked computing device that includes a central processing unit (CPU), memory, and communications ports"

Judge's comment. Augme's construction is consistent with the specification in that it contains the features common to both processor platforms, i.e., a CPU, a memory, and network ports. (See '690 patent col.3 11.63-65; id. at col.411.13-16, 49-54; id. at col.5 11.2-4; id. Fig. 1) Pandora's proposal, however,improperly adds, for example, the requirements of: (NYSE:I) "input/output lines, a Web browser and a display device," which are features only of the disclosed second processor platform; and (ii) a"client-side (i.e., end user) computer," although only the second processor platform is strictly a client-side computer. (See id. at col.4 11.13-17)

Augme 3 Pandora 1

The fifth term under dispute was "a software device of a graphic representation representing a real world counterpart for display in connection with said webpage".

E. "a software device of a graphic representation representing a real world counterpart for display in connection with said Web page" (claims 1-6)

Plaintiffs Proposed Construction: This phrase as a whole does not require construction beyond its plain and ordinary meaning. Augme has provided a proposed construction for the term "Web page" that appears in the phrase.

Defendant's Proposed Construction: "a computer code module that when executed results in a graphic representation of a real world counterpart media device displayed in a Web Page"

Court's Construction: No construction necessary.

Judge's comment. The Court further agrees with Augme that Pandora's proposed construction "confuses what the media appliance metaphor is with one embodiment for how it is displayed on the screen;"

Augme 4 Pandora 1

The sixth term under dispute was "server system".

F. "server system" (claims 1-6)

Plaintiffs Proposed Construction: This term does not require construction beyond its plain and ordinary meaning. Alternatively, Augme proposes "a system having one or more computing devices and one or more databases that is connected to a network and that responds to requests from client computers on the network"

Defendant's Proposed Construction: "a processor (CPU), a memory, a database structure having Web address database and visitor database, and a server structure for accommodating streaming media server and other media servers"

Court's Construction: "a system having one or more computing devices and one or more databases that is connected to a network and that responds to requests from client computers on the network"

Judge's comment. Augme's construction, which the Court adopts, is consistent with the specification, which discloses a server system that is networked and responsive to requests from the networked second processor platform by delivering a second code module that includes a service response.

(See '690 patent col.41.49- col.5 1.4; id. at col.611.50-60; id. Fig. 1) This construction is further supported by the dictionaries and judicial decisions Augme cites for the proposition that "server" is "universally known in the computing arts as a networked computer that responds to requests from client computers on the network." (D.I. 41 at 14-15)

Pandora, by contrast, would limit the "server system" to the exemplary server system disclosed in the patent. (See '690 patent Fig. 1; see also id. at col.411.45-49) Pandora unpersuasively seeks to limit the disputed term to particular components of the exemplary system (e.g., not just a database but a "Web address database" and "visitor database;" not just a server but a "streaming media server").

Augme 5 Pandora 1

The seventh term that was under dispute was "formed by a server system as a service response in response to information provided by said processor platform to said server system."

G. "formed by a server system as a service response in response to information provided by said processor platform to said server system" (claims 1-6)

Plaintiffs Proposed Construction: "This phrase as a whole does not require construction beyond its plain and ordinary meaning. Augme has provided proposed constructions for the terms 'server system,' 'service response' and 'processor platform' that appear in the phrase." Defendant's Proposed Construction: "the processor platform provides the web address of the downloaded webpage, (ii) web browser information, and (NASDAQ:III) processor platform information to the server system which uses this information to assemble software code that includes the service response"

Court's Construction: No construction necessary.

Judge's comment. The Court further agrees with Augme that the prosecution history argument made by Pandora is unavailing, particularly as it is based on prosecution of a different patent involving a different claim term.

Augme 6 Pandora 1

The eighth term under dispute was "automatically provided"

H. "automatically provided" (claims 1-6)

Plaintiffs Proposed Construction: This term does not require construction beyond its plain and ordinary meaning.

Defendant's Proposed Construction: "provided from the server system without any action by the user"

Court's Construction: Plain and ordinary meaning.

Judge's comment. The dispute here is whether "automatically provided" necessarily excludes any human intervention, as Pandora contends. The Court concludes that, in the context of the patent-in-suit,"automatically provided" does not have such a limited meaning. Pandora has not cited persuasive support for excluding all human intervention.

Augme 7 Pandora 1

The ninth term that was under dispute was "customized by said server in accordance with information content of said Web page"

I. "customized by said server in accordance with information content of said Web page"

Plaintiffs Proposed Construction: This term does not require construction beyond its plain and ordinary meaning. Alternatively, Augme proposes "tailored by the server system (as construed) to complement or relate to data contained in or otherwise associated with the Web page (as construed)"

Defendant's Proposed Construction: "the server system uses information derived from all publicly accessible characters and words written on a Web page to customize the media appliance metaphor"

Court's Construction: "tailored by the server system (as construed) to complement or relate to data contained in or otherwise associated with the Web Page (as construed)"

Judge's comment. Augme's proposed construction is supported by the specification. For example, in the preferred embodiment, the radio metaphor is tailored to complement a Web page about Texas cooking by playing country music. Pandora's proposal, by contrast, appears to exclude disclosed embodiments in which the server system customizes the metaphor "in accordance with" the claimed "information content of [the] Web page" without directly "using" that information.

Augme 8 Pandora 1

A recent article written by James Altucher, Google Vs. Vringo: Vringo Delivers A Knockout In Round One has shown how important the Markman ruling can be in the final outcome of a case. Being able to make a jury understand what is often very technical material is the key and having the broadest definitions possible add to the potential damages. Of the nine terms ruled upon, eight being in favor of Augme is significant.

With respect to the one term where the Judge sided with Pandora, his comments appear to provide clarity that media function includes content itself, without limitation of content type. Given Pandora's use of both software and media, some feel that in the absence of wins in other argued terms, this term provides no argument or relief for Pandora. Conversely, it seems to actually benefit Augme who argued that audio, video, graphic content, audio sounds, video images, video images, graphic images, banner ads, and information feeds were content types included in the invention based on their presence in the specification. All of these items got into the court's construction with Judge Stark noting in his decision "The specification indicates that the claimed "media function" includes content itself." With "content" not being limited to content of any specific type.

Further, the limitation of software being present is not a limitation that would hinder Augme vs. Pandora. Considering that most can only conclude this Markman ruling as very close to being a complete and clean sweep for Augme (9-0), the presence of software limitation being the sole element that Augme argued to have removed as a limitation that remains post ruling. The presence of software limitation, in Pandora's case, given this construction of the court is a key to their value proposition across all of their offerings.

A company that wins a patent case can use that in other litigation to win additional settlements or command premium licensing of its technology. In Augme's case, they have ongoing litigation against AOL (NYSE:AOL), Time Warner (NYSE:TWX), Millennial Media (NYSE:MM), Velti (VELT) and Gannett (NYSE:GCI) and Yahoo (NASDAQ:YHOO).

While certainly the Markman is an important step along the litigation path it is of course just one step. Litigation has and always will be a slow path with many ups and downs along the way. As has been seen in recent case with companies like VirnetX (NYSEMKT:VHC) and Vringo (NASDAQ:VRNG) it can be very rewarding to its shareholders over time.

In Augme's case, they uniquely differ from these NPE's only seeking to monetize their patents. Augme also owns Hipcricket, one of the top mobile marketing companies in the US currently running at an approximate $30 million run rate. By also having a high growth mobile business, where it actually uses its patented technology and which is growing almost 100% year over year and roughly 20% quarter over quarter, the company offers a fundamental growth story in conjunction with the potential upside of their patents.

Source: Pandora Media Singing The Blues