Seeking Alpha
Hedge fund analyst, investment advisor, patents/litigation, tech
Profile| Send Message|
( followers)  

Public companies leveraging their patent portfolios, (aka "patent plays"), are getting the market's attention. Companies such as Vringo (NASDAQ:VRNG), ParkerVision (NASDAQ:PRKR), MGT Capital (NYSEMKT:MGT), Worlds Inc. (OTCQB:WDDD) and others have presented trading opportunities due to their volatility while retaining the chance for a big payoff to those investors who stay the course. Yet there exist viable patent plays that are still undiscovered. Some of these so called "plays," which are not getting enough attention, are actually real companies making and selling real products or services in contrast to pure patent monetization companies. Some known examples are Single Touch Interactive (OTCQB:SITO) and Blue Calypso (OTCQB:BCYP). This article is focused on another one of these patent plays, On Track Innovations Ltd. (NASDAQ:OTIV).

OTIV is currently embroiled in a patent litigation against T-Mobile (NYSE:TMUS). In that litigation, T-Mobile is accused of infringing one of OTIV's patents through its sale of smartphones. Thus, the likelihood of substantial damages is high. OTIV's case against T-Mobile has been steadily progressing, and a Markman hearing was held just last week before Judge Allison Nathan of the U.S. District Court for the Southern District of New York. Two days before the hearing, Judge Nathan presided over a technology tutorial by both OTIV and T-Mobile on the patented technology. In our experience, technology tutorials are helpful aids to a judge before a Markman hearing.

The actual Markman decision, which should issue shortly, has the potential to greatly increase OTIV's potential payout from T-Mobile. But a favorable decision also increases OTIV's potential payout from a slew of other companies in the market for smartphones, in the event OTIV pursues them as well. For this reason, we believe OTIV is a patent play worth paying attention to.

OTIV's Patent Monetization Strategy

OTIV was established in 1990. It sells solutions directed to ID-credentialing, payment and loyalty. This includes contactless microprocessor-based smart card solutions for homeland security, payments, eID Systems and other applications, including payment solutions, Smart-ID solutions and petroleum solutions. OTIV is international, generating nearly half its revenue from Europe, as well as significant revenue from Africa and Asia in addition to the Americas.

During 2005, OTIV traded above $12.50. After that, the price dropped off. Since 2008, OTIV has traded below $2.50, and within the past year, more consistently below $1.50. Currently, its market cap is approximately $35 million.

OTIV continues to manufacture and sell products as a source of revenue. For instance, on April 22, 2013, the company announced that its wholly-owned subsidiary was awarded multiple projects as e-ticketing operator for transit systems throughout Poland, for a total projected revenue of $50 million over the next 10 years.

While OTIV's business operations are slowly improving, its most valuable asset today is its patent portfolio pertaining to near-field communications technologies that encompass products and services in the fields of NFC, contactless payment, secure ID, petroleum and parking solutions. OTIV owns more than 100 patents and pending applications. By our count, there are at least 14 issued utility patents in the U.S. The company recently indicated a major strategic shift for increasing shareholder value by focusing more on enforcing and monetizing its extensive IP portfolio.

On April 30, 2013, OTIV issued a press release announcing the election of a new chairman, Dimitrios Angelis. Mr. Angelis' election was touted by the company as "mark[ing] the start of a new chapter for On Track Innovations." In particular, with Mr. Angelis at the helm, the company aims to pursue shareholder value "through its patents and intellectual property." The company has touted Mr. Angelis, who is described by the company as an "accomplished attorney" and "negotiator," as particularly suited to focusing the company on patent monetization.

Patent Litigation Against T-Mobile

On March 26, 2012, OTIV filed a complaint for patent infringement against T-Mobile USA, Inc. ("T-Mobile") in the United States District Court for the Southern District of New York. The complaint alleges infringement of OTIV's patent, U.S. Patent No. 6,045,043 titled "Contact/Contactless data transaction card." In particular, the complaint alleges that T-Mobile's sale of smartphones, including HTC Amaze 4G, Nokia Astound as well as others, are infringing the '043 patent.

The '043 patent is directed to a data transaction device that can operate in both contact and contactless modes. The preferred embodiment is directed to a card, such as a smart credit-card. The card has a semiconductor device component, which acts as a microprocessor, for processing information read by the card during a transaction. The card can operate in two modes -- contact, where a contact field is physically connected to the semiconductor device, or contactless, where data is transmitted to the semiconductor device via a coil antenna inside the card. Although prior art data transaction devices existed that contained both contact and contactless modes of operation, the '043 patent claims to be an improvement over these earlier cards by virtue of requiring no switching element. This means that the '043 card can allegedly operate pursuant to different protocols for both contact and contactless modes. This allegedly makes the '043 invention more versatile as compared to earlier smart-cards.

On March 9, 2013, a Markman hearing was held. In patent infringement actions, the Markman hearing can be a critical turning point of the case. This is because, during the Markman hearing, the court construes the meaning and scope of terms set forth in the asserted patent claims. These constructions will be important to OTIV for two reasons. First, the constructions establish the boundaries of the claim. That means these constructions may be determinative of whether or not T-Mobile infringes. For instance, if the court adopts broad constructions, that will make it easier for OTIV to prove that T-Mobiles' phones are encompassed by the asserted claim. Yet these constructions are important for an additional reason. Namely, they go a long way towards establishing the boundaries of the claims for future cases as well. That means if OTIV plans to sue more smartphone sellers, the outcome of the Markman hearing in this case may facilitate those efforts dramatically. Thus, more is at stake in this inaugural Markman hearing over the '043 patent than just OTIV's case against T-Mobile.

Key Claim Terms

During the Markman hearing, only four terms were at issue. The first, and perhaps most important term, pertained to whether the asserted claim should be limited to a "card" (which would be a narrow construction) or a "device" (which would be a broad construction). T-Mobile argued that the claim should be limited to a "card." This is because T-Mobile has not been accused of selling "cards." Rather, T-Mobile has been accused of selling phones. Thus, if the court agrees with T-Mobile, and limits the asserted claim to a "card," then OTIV's chances of collecting damages from T-Mobile, or any other smartphone sellers, practically evaporates.

The question of whether the patent is limited to a "card" rather than a "device" included many technical patent litigation claim construction arguments, most of which are beyond the scope of this article. Briefly, however, T-Mobile argued that the claim recites the word "card." That is important, considering that many of the other claims recite "device." OTIV retorted that the claim only recites "card" within its preamble, which is conventionally not viewed by the Federal Circuit (the authoritative federal appellate court with respect to patent questions) as a limitation to a claim. Both parties argued that additional disclosures from the patent's prosecution history bolstered their position that the claim was or was not, respectively, limited to a "card."

Though it is difficult to assess how the court will construe this issue, we note that OTIV made a very strong argument that the prosecution history statements did not support T-Mobile's position. This will be a close issue, but one that will have significant impact on OTIV's ability to collect substantial damages from phone-makers. Put simply, if OTIV wins its proposed construction, and the court does not limit the claim to a "card," that will be a fairly binary event opening up OTIV's potential for multiple patent litigations against sellers of smartphones.

One of other issues that was hotly debated at the Markman hearing involved how the patented device operated. Briefly, the device has two modes of operation -- contact and contactless. The question was whether, when the device is transmitting data to the semiconductor device in the contactless mode, data transmission from the contact mode was required to be disabled? Again, this argument was a very technical -- both with respect to the technology at issue as well as the patent claim construction doctrines called into play. T-Mobile argued that the contact mode must be disabled when the device is operating in the contactless mode. T-Mobile's attorneys identified several statements from the patent's prosecution history, which were made to overcome the prior art that backed up their argument. If the court adopts T-Mobile's proposed construction, this will likely provide T-Mobile with a strong non-infringement argument. That may also hinder OTIV's ability to pursue other phone makers for infringement of the same patent.

OTIV's Prospects for Future Patent Litigations

The preferred embodiment disclosed in the '043 patent is smart-cards. For that reason, the obvious targets for OTIV to pursue for patent infringement would be the major credit card companies. However, these companies appear to presently be some of OTIV's major customers, which most likely means they have already taken a license to some, if not all, of OTIV's patents directed to smart-cards. Accordingly, if OTIV brings additional infringement actions, we expect them to be against competitors of T-Mobile in the market for smartphones, such as AT&T (NYSE:T), Verizon (NYSE:VZ), or others. Device manufacturers such as Samsung (OTC:SSNLF), HTC (OTC:HTCKF), Nokia (NYSE:NOK) and others may be targets as well.

That said, OTIV's case against T-Mobile asserts only a single patent -- the '043 patent. OTIV claims to hold a much larger portfolio of patents and pending applications. In our experience, companies typically commence a patent monetization strategy with their best patents. But in this case, OTIV's case against T-Mobile was commenced by prior leadership, before Mr. Angelis was elected chairman. Under its new leadership, as well as its new strategy of monetizing its portfolio, we expect to see more cases filed by OTIV that will make this company one to watch over the next several months.

One final consideration is worth noting. OTIV's patents appear to be mostly within the field where OTIV itself develops and sells products. That means that it is likely eligible to pursue injunctions against some of the entities it intends to sue for patent infringement. The possibility of an injunction always greatly increases the leverage a patentee brings to a litigation. From an investor perspective, OTIV would do well to continue focusing on maximizing the value of its patent portfolio. We look forward to watching its progress.

Source: On Track Innovations - An Undiscovered Patent Play?‎