I have written several cursory articles about MGT Capital (MGT), but now that we are well into the waiting phase ahead of all major catalysts (Markman hearing, acquisition of WMS by Scientific Games, and final trial, as outlined in my previous article), I wanted to write a more in-depth analysis of the company's patent and legal team. As my readers know, MGT Capital is a debt-free business trading near cash and focused on a single revenue opportunity: suing five casino industry defendants for infringing on its 55%-owned patent. The original lawsuit announcement can be found here.
Let's begin. In the late 90's, Steven Brandstetter conceived of a way for casinos to entice their patrons to spend more money on slot machines. He wanted to draw the attention of bystanders with huge screens and the noisy participation of patrons competing in high-energy games. Brandstetter also wanted to target a large revenue market, so he selected slot machines, which account for over 65% of U.S. casino revenue.
So, on October 18, 2001, Brandstetter and his business partner, James Devlin, filed U.S. Patent 7,892,088 (the '088 patent). Their patent described a method for linking slot machines into a pod through one overhead, interactive LCD display. Casino patrons would compete on this screen during bonus rounds. Periodically, certain events on individual slot machines would trigger brief "group play" events, and players would then compete against one another and the house for extra money.
This is an excerpt from the patent claim:
A gaming machine system comprising: at least two gaming machines linked together, said gaming machines linked to an interactive sign; said at least two gaming machines allowing at least two players playing a first regular game on said at least two gaming machines; a device connected to said gaming machines to direct said at least two players to play a second bonusing game after satisfying a certain operation of the linked gaming machines that triggers a bonusing event from said linked machines; said second bonusing game is a bonusing video game to be played on said interactive sign; said interactive sign comprising an LCD screen; said LCD screen displaying said bonusing video game that players enter in once said bonusing trigger event occurs on the said at least two linked gaming machines; wherein said LCD interactive sign allowing said at least two players playing said at least two linked gaming machines enter said bonusing game and compete against each other by playing said bonusing video game on said LCD interactive sign.
The somewhat complex concept needed further definition. A series of rejections by the U.S. Patent and Trademark Office followed. Brandstetter continued refining the language and reapplying. On February 22, 2011 - approximately a decade later - the office finally approved the '088 patent entitled "Gaming Device Having a Second Separate Bonusing Event."
During this time, Brandstetter alleges that manufacturers of slot machines and casino operators had begun implementing his technology. After all, according to a 2010 American Gaming Association study of 550 U.S. respondents who were 21 years and older, 76% said that the gambling experience was more enjoyable when interacting with other players. Slot machines such as Paradise Fishing, Pirate Battle, Wizard Of Oz Journey to Oz, Great and Powerful Oz, Battleship, and Clue popped up, which pod four to six slot machines together with bonus play rounds. These pods were quickly becoming customers' favorites. Group play slot machines provide a different user experience with the ability to interact with other gamers and earn additional payouts.
Rising Popularity of Group Play Slot Machines
As the world becomes increasingly digital and interactive, it is important for casinos to understand slot machine customers and how their spending patterns are changing. Excitement was the most frequently reported motivation for regular slot machine play in a 2011 study by Liu and Wan. Exciting interactive group games attract younger patrons than traditional slot machines, broadening a casino's target audience and expanding its demographic appeal. In 2010, 33% of U.S. casino visitors were 50-64 years old, 18% were 21-34 years old, and 21% were 35-49 years old.
There are 854,000 gaming machines in the U.S. Many casinos have slowed down their upgrades of single player slot machines because of weakening revenue growth. Casinos will soon decide to replace aging machines with either new, single player slots or interactive, group play machines.
"Corporations use lawyers these days to beat up on the little guy," said Brandstetter. He and Devlin partnered up with an experienced intellectual property law firm in the fight to make others pay for using their brainchild.
Brandstetter Partners with a Public Company
Enter MGT Capital (NYSE MKT: MGT), a public company engaged in acquiring and monetizing intellectual property rights. For an equity interest in the company and a cash payout, Brandstetter and Devlin of J&S Gaming sold a majority of their patent rights to MGT Capital.
MGT, a debt-free company with millions in cash on hand, acquired a 55% interest in the '088 patent on May 11, 2012 in exchange for $200,000 in cash, a consulting contract with Steven Brandstetter for $5,000 per month and the financial wherewithal to see the high-stakes lawsuit through to a jury trial.
MGT transitioned from focusing on medical imaging to acquiring a patent and attempting to enforce it. Specifically, Medicsight operates in medical imaging, which is no longer a core business of MGT. CEO Robert Ladd recognized some of the problems faced by the company, including its failing medical imaging business. Ladd helped the company recover and switch gears. He was an early investor in MGT before he became its CEO, and he continues to risk personal funds in the company's outcome (see the section "CEO as Value Investor" in my previous article).
Nowadays, MGT Capital holds the controlling (majority) interest in MGT Gaming's '088 patent. MGT Capital Investments is therefore a holding company consisting of a majority-owned subsidiary, MGT Gaming, and a wholly-owned subsidiary, Medicsight Ltd.
MGT Gaming filed a lawsuit in the U.S. District Court for the Southern District of Mississippi, Jackson Division against the infringing game manufacturers and casino companies in November 2012. The lawsuit named WMS Gaming of WMS Industries (WMS),Caesars Entertainment Corporation (CZR), MGM Resorts International (MGM), Penn National Gaming (PENN) and Aruze Gaming America for patent infringement. WMS and Aruze make gaming machines that MGT believes infringe on its '088 patent and Caesars, MGM and Penn National are the casino operators who enable the infringement by using those machines in their casinos. Both groups benefit from the revenue generated by the infringed technology. The complaint states that MGT Gaming's patent rights were and continue to be violated by those who manufacture, sell, lease or operate the slot machines.
MGT's Counsel: Nixon & Vanderhye
MGT Capital hired Nixon & Vanderhye, a law firm specializing in patent litigation and one of the most experienced in the protection of intellectual properties, patent prosecution and patent litigation. The firm was listed as a top firm for intellectual property law in the 2010 Legal 500.
U.S. News and Best Lawyers, the leading survey of lawyers worldwide, rank more than 10,000 firms in 118 practice areas in 170 metropolitan areas and 8 states. In 2013, U.S. News and Best Lawyers, which team up for the annual survey, ranked Nixon Vanderhye as a Tier 1 firm in trademark law. The 2013 edition of Washington, DC's The Best Lawyers in America ranked Nixon & Vanderhye as a Tier 1 firm in intellectual property. Nixon & Vanderhye has a team of 37 members with specialties in patent, trademark and copyright law. Instead of overstaffing litigations with inexperienced junior attorneys or overpopulating trials and depositions, the firm relies on each member of the firm to be experts in their field. The firm's diverse customer base ranges from single inventors to worldwide companies. The lawyers at Nixon & Vanderhye have technical degrees in highly specialized areas, allowing them to compete based on expertise and performance rather than size.
Robert A. Rowan and Joseph S. Presta are the lead attorneys from Nixon & Vanderhye representing MGT in the '088 patent infringement case. The Rowan and Presta trial team previously won over Progressive Gaming (formerly Mikohn Gaming) in a case tried in the U.S. District Court for the Southern District of Mississippi. It was one of the largest jury verdicts in the casino industry for 2007.
Joseph Presta, lead counsel for MGT Gaming, is one of the most experienced and nationally recognized litigators involving patents. He was key counsel in the complex patent and anti-trust case against Prime Table Games. In addition, he won a $3 million patent infringement verdict through a three-week jury trial against Mercury Marine. He successfully asserted several LCD patents for Sharp against competitor ITC, resulting in the largest value exclusion order ever issued. He represented Nintendo in numerous litigations involving the Wii video game system and defended Sharp against LCD technology infringement allegations.
Robert Rowan has over 35 years of litigation experience and specializes in patent, trademark, copyright and anti-trust litigation. He was lead counsel on hundreds of cases and has an impressive track record. He has practiced in several federal district courts, as well as many federal appellate courts, including the Federal Circuit Court of Appeals and the U.S. Supreme Court. Rowan also engages in intellectual property counseling, licensing and trademark prosecution. He was an expert witness in attorney-client arbitration and in court-awarded attorney fee adjudications. He is a member of bars associations in Virginia, Washington, DC and Hawaii. and Rowan has the Martindale Hubble's AV Preeminent rating, the highest ranking for legal ability and ethics. In addition, Rowan was named a top patent litigator in 2009 and 2010 by The Legal 500.
Other Staff at Nixon & Vanderhye
Other attorneys at Nixon & Vanderhye worth mentioning who may be counseling or assisting MGT with its case include Larry Nixon, Joseph A. Rhoa, Paul T. Bowen, Robert W. Faris and H. Warren Burnam, Jr.
- Larry Nixon has an electrical engineering background and 39 plus years of experience in intellectual property law, including providing patent law opinions, patent litigation and patent prosecution involving technical issues. Best Lawyers, the oldest and most respected peer-review publication in the legal profession, named Larry Nixon as the "Washington D.C. Best Lawyers, Patent Law Lawyer of the Year" for 2012 - he earned a spot as one of the Best Lawyers several years in a row. Super Lawyers magazine named Larry Nixon one of the top attorneys of 2008 in the Washington, DC area.
- Joseph Rhoa was a patent attorney with Liniak, Berenato, Longacre & White prior to joining Nixon & Vanderhye. He was a U.S. Patent Examiner at the U.S. Patent and Trademark Office from 1989-1993. Rhoa has successfully acted as lead attorney in numerous patent infringement litigation matters. He has extensive experience in all aspects of patent prosecution and litigation, as well as patent licensing. Rhoa has practiced in the U.S. Patent and Trademark Office, U.S. Court of Appeals for the Federal Circuit, U.S. District Court for the District of Maryland, and the U.S. District Court for the Central District of Illinois.
- Paul Bowen primarily focuses on building and enforcing international patent and opining on the validity and infringement of U.S. patents. Bowen has prepared numerous cease and desist letters, licenses, and pre and post litigation opinions, including advising on designing around patents. Bowen worked at the U.S. Patent and Trademark Office from 1989-1994, which helped prepare briefings for, and argue before, the U.S. Patent and Trademark Office's Board of Patent Appeals and Interferences. He has also assisted with the preparation of briefs and motions for the U.S. Court of Appeals for the Federal Circuit and various U.S. District Courts.
- H. Warren Burnam, Jr. has over thirty years of experience in intellectual property with a focus on patent application preparation and prosecution. He played important roles in a variety of intellectual property matters, including patent interference practice and patent infringement litigation. Burnam also has litigation experience in trademark, copyright, and trade secret protection, as well as all aspects of intellectual property licensing. He has personally written and prosecuted hundreds of U.S. patents. He practices in Virginia and Alabama, the Court of Appeals for the Federal Circuit and the U.S. District Court for the Eastern District of Virginia.
- Finally, Robert Faris has over 25 years of experience as a patent attorney. Faris is an expert in communicating technical concepts, which assist in solving complex legal problems. Faris has experience in high-tech, high profile patent cases. He was an important part of teams litigating federal district court/ITC actions including jury trials. He often supports lead attorneys on technical tasks, including infringement and validity analysis.
Nixon & Vanderhye is consistently ranked in the top 5% of all intellectual property firms in the U.S., according to IP Today. In addition, the firm proved its expertise in gaming issues in the case of Progressive Games vs. Prime Table Games when Rowan and Presta won an enormous sum of money for their clients. The jury in this case found that Progressive's use of patents to monopolize the casino table games market damaged Prime and awarded $39 million. The judge also awarded Prime its attorney fees and related costs. Nixon & Vanderhye won other significant patent cases for Sharp, Toshiba and Nintendo.
Typically, one of the biggest issues for non-technology and non-patent experts is the ability to gauge the enforceability of a patent. MGT's '088 patent is easy to understand and corresponds to conspicuous features of the five slot machines. The LCD interactive signs are diagrammed in the patent. MGT's case is further strengthened because it underwent a decade of revisions between the inventor and the U.S. Patent and Trademark Office prior to its issuance.
Patent Monetization Environment
The business of patent litigation has gained favor in recent years among U.S. investors. Other cases involving patent issues, such as with VirnetX Holding Corp (VHC) and the recent success of Vringo (VRNG) have fueled investor optimism. Both companies rallied over 500% amid their lawsuit proceedings.
On November 7, 2012, VirnetX won in Federal court in Texas and Apple (AAPL) was ordered to pay $368 million. In another case in Norfolk, Virginia, a federal jury ruled in favor of Vringo (VRNG) when they concluded that Google (GOOG) infringed on internet search filtering technology held by Vringo's subsidiary. The total award was $30 million with a running royalty of 3.5% and a portion of Google's search revenue.
Assertion of a patent like MGT's '088 patent allows potential collection of past damages from the time when the patent was granted, as well as future licensing or royalty fees. The enforceable period of this patent could span 20 years. In fact, the '088 patent infringement settlement could be worth as much as $4.5 billion altogether, according to MGT's corporate presentation, with additional revenue going forward. MGT has a 55% stake in MGT Gaming, so public shareholders will split any award proportionately. Even after deducting attorney's fees and accounting for an award amount significantly below $4.5 billion, the award could be significant for a company with a market capitalization of less than $20 million.
For now, those representing WMS, Caesars, MGM, Penn National Gaming and Aruze Gaming America made a customary complaint that the parties were improperly joined as defendants, and Nixon & Vanderhye have responded to these complaints on behalf of MGT. All parties are awaiting the scheduling of the Markman hearing when the claim will be formally defined and constructed.
On January 31, 2013, Scientific Games announced that it is buying WMS for $1.5B ($1.4B + debt), adding pressure to settle the MGT '088 patent case without going to trial. In turn, this might create a domino effect for other defendants to settle. The chances of winning this type of case with a jury is about 25%, with 95% of all of these types of cases being settled before trial. Investors will be anxiously monitoring MGT's likelihood of winning as the lawsuit progresses.
I hope that this article has provided readers with more detail and hyperlinks relating to the patent and legal counsel at MGT. I am still bidding for my entry, and as I stated in other articles, "within 10 months, I expect shares to double from current prices as we approach the summer and fall." Obvious risks include blowing cash on a stupid acquisition, typical low-float share price volatility, and any negative developments relating to the lawsuit (such as a jurisdiction transfer from Mississippi to Nevada or a Markman ruling in favor of the defendants).