Markman Conferences Provide Big Opportunity For Technology Stocks

Includes: DSS, FH, PRKR, VHC
by: Entry Point

In patent infringement cases, a Markman hearing can help outline what is at stake in the trial. It's a pretrial hearing during which a judge examines evidence and the meanings of relevant key words used in a patent claim. This "Claim Construction Hearing" can ultimately put a value on the alleged infringement. The judge also decides on how the language of the patent is to be interpreted, making this pre-trial hearing a seminal part of the lawsuit. Recently, several companies have made the news as their stocks jumped following their Markman hearings. Vringo (VRNG), Parkervision (NASDAQ:PRKR), and VirnetX Holding Corp (NYSEMKT:VHC) have all seen their stock prices move following their Markman hearings, and savvy investors and writers for Seeking Alpha have let us know the time to get in is before the hearing.

The key to maximizing the value from these Markman hearings is to get in before the hearing takes place. In the case of VRNG, the stock began a run up in the weeks before the hearing, trading at $2.72 on May 23, 2012. One day after the ruling, which was favorable to VRNG, the stock closed at $4.36. VHC has seen multiple jumps in its stock from favorable Markman hearings; one of the biggest percentage jumps coming from a hearing early on July 30, 2009, where its stoc kdoubled from $1.48 to $3.00. PRKR traded at $2.43 the day of the hearing on February 20, 2013. The next day the stock closed up considerably, at $4.21 a share, with a market cap of over $340 million. Parkervision has done this without any revenue, and it will not be commercializing a product in the near term.

These hearings can have tremendous financial importance to these companies, but they also play a large part in whether these companies and their patents will remain viable. For example, VirnetX has yet to commercialize their patented security technology for 4G/LTE services, but is involved in several IP lawsuits which have caused VHC stock to fluctuate dramatically. One case regarding the use of patented VPN technology resulted in a highly publicized $368 million ruling against Apple. This sent VHC stock soaring temporarily, as there was to be expected future revenue from a small royalty paid by Apple for the use of certain VPN services, but Apple decided to "throw the baby out with the bathwater," as another Seeking Alpha writer pointed out. One of the things making life difficult for VHC is that they don't currently have any products or services on the market themselves, which complicates assessing damages when making an infringement claim. VHC is currently trading at a valuation of slightly over $1 billion on virtually non-existent earnings.

Vringo has become nearly synonymous with patent control, as its intellectual property portfolio continues to drive the company's value despite a net loss for fiscal 2012 of $20.8 million. Most of that loss was due to legal costs associated with its infamous lawsuit against Google, Inc., AOL, and others in a U.S. District Court for patent infringement on its search technology. The majority of the company's mere $369,000 in revenues came from mobile technologies, so clearly the IP moves are what have driven the stock from the $1-$2 range in 2011 up to the $3-$4 range in the past year. Vringo is also currently in settlement talks with Microsoft, which drove the stock price up on March 28th after it was reported that they were suspending a pretrial conference for ongoing talks. Clearly when it comes to companies that are strong in IP holdings, revenues matter less than one-time settlements and licensing arrangements to the future value in stockholders' eyes.

There are some notable companies that have some Markman hearings approaching and have room for a jump. Blue Calypso, Inc. (BCYP.OB) has a Markman hearing approaching on August 27, 2013. Its stock is currently trading at $0.19 with a market cap of $26.29 million. BCYP is being represented on a contingency basis by one of the nation's leading I.P. firms, Fish & Richardson, against LivingSocial, hopefully setting precedent for Blue Calypso's claims against other companies, such as Groupon (NASDAQ:GRPN), Yelp (NYSE:YELP), IZEA (OTC:IZEA)and foursquare. It appears that Fish & Richardson thinks highly enough of BCYP's chances of winning in an infringement case, from which the damages could be substantial, that the law firm has agreed to pay all of the costs associated with the litigation. In addition to the company's I.P. story, BCYP has the support of a world class management team led by their Chairman and CEO, Bill Ogle. He has extensive experience in marketing and brand awareness. He was the Chief Marketing Officer of Motorola Mobility, Samsung Telecommunications America, and Pizza Hut. BCYP's CFO is David Polster, who has served as the director of finance of Dell Software and Peripherals and as the VP of Finance of ASAP Software, just to name a few. BCYP has a pipeline of 30 blue chip companies. Recent customers feature Travelocity, Ford (NYSE:F), J.C. Penny (NYSE:JCP), Oreo and Blue Calypso would be an ideal company for investors looking for a stock that has flown under the radar so far as its Markman hearing approaches.

Another company that has an upcoming Markman hearing is Document Security Systems (DSS). This company is in the midst of a merger with Lexington Technology Group. Lexington's management team, which will be taking a number of management positions at DSS, have a proven track record in investing companies and helping them with their IP and monetizing their businesses. CEO Jeff Ronaldi has overseen a $60 million verdict against Microsoft, a $20 million verdict against Citrix, and helped manage a $50 million claim against Genzyme, just to name a few of his courtroom wins. In May, 2012, DSS had ipCapital Group complete a high-level assessment of DSS' technology and intellectual property portfolio and it was valued at $245 million. Document Security Systems' current market cap is $47.76 million, and the stock is down to $2.22 from its high of $4.60. The company has a Markman hearing scheduled for October 2, 2013, in its patent infringement cases against Facebook (NASDAQ:FB), LinkedIn (NYSE:LNKD), Novell (NASDAQ:NOVL), Broadvision (NASDAQ:BVSN) and Jive Software (NASDAQ:JIVE). DSS has an advantage over the other companies discussed, being a fully operating company, with revenue of over $17 million last year, a 28% increase year over year. Investors are anxiously awaiting for the completion of the merger, and anyone following the company's IP story will be looking to get in before the Markman hearing on October 2nd.

While the Markman hearing is merely a part of the pre-trial process, its impact on company's stock is undeniable. While an imperfect analogy, these hearings are similar to an announcement of results from a clinical trial, before a ruling from the FDA occurs. The hearings are considered a critical event in a patent lawsuit, defining property rights for the intellectual property, driving and informing many aspects of the litigation.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.