Last week was the most important development to date in the patent infringement suit brought by MGT Capital (NYSEMKT:MGT) against WMS Gaming Inc. (NYSE:WMS-OLD), Caesars Entertainment (NASDAQ:CZR), MGM Resorts International Inc. (NYSE:MGM), Penn National Gaming (NASDAQ:PENN), and Aruze as outlined in my recent article. On Thursday, May 9, United States Magistrate Judge F. Keith Ball of the Southern District of Mississippi held a case management conference with all parties (defendants and plaintiff) in the case. At this conference, the court and all parties were scheduled to discuss among other things dates for a settlement conference, completion of discovery, motions, the final pretrial conference and trial.
While no news (rulings, scheduled hearings, settlements) has been issued by the court or released by the plaintiff or defendants (WMS, MGM, CZR, PENN, & Azure) since last week's meeting, it is anticipated that we are near the eve of major developments in this case. These developments could include the judge's ruling on preliminary motions, the scheduling of a Markman Hearing and jury trial, and the status of any settlement negotiations.
To help an investor navigate the complicated terrain of a patent infringement suit like this and to be able to understand where significant, stock-moving catalysts might occur, it is helpful to look at the case in three separate rounds which occur after the initial suit is filed.
Defendants file preliminary and customary pre-answer motions seeking to move the court to change the terms of the suit or to seek outright dismissal of the case. This is followed by response briefs by the plaintiff and rebuttal briefs by the defendant. Discovery and the obtaining of expert witnesses may also occur in round one. The MGT vs. WMS, CZR, MGM, PENN, & Aruze case is currently in round one.
Judge holds a pre-trial Markman Hearing to determine the scope of the patent or more commonly referred to as "claim construction." Judge rules on meaning of patent claim. Markman hearings generally occur within nine months of the initial filing of the suit. In this case, the suit was filed on November 2, 2012, putting a target date for Markman Hearing before August 2, 2013. The announcement of the Markman Hearing date is typically a huge, positive catalyst for a stock as outlined in my recent article. In that article, I analyzed three, similar cases and arrived at May 25th as an estimate to when investors can expect the Markman Hearing date announcement in the case.
Status of MGT vs. WMS, CZR, MGM, PENN & Azure Litigation:
The MGT case is currently in round one of the process. This round has been very active with multiple defendants (WMS & Azure) filing motions followed by response briefs by MGT. The actions the defendants are seeking the court to make such as transferring venue and dismissing the case are similar and have resulted in nearly identical responses from the MGT. Therefore, I will focus the following case summary on the motion filed by WMS, who I consider the lead defendant in this litigation.
The formal title of WMS Gaming Inc.'s round one, pre-answer motion is "WMS Gaming Inc.'s Motion To Sever Plaintiff's Claims Against All Defendants, To Transfer The Action Against WMS Gaming Inc. To The Northern District of Illinois, And To Stay The Actions Against The Peripheral Casino Defendants, Or Alternatively To Dismiss The Entire Action," filed on January 3, 2013. (All court documents are available to view with an account at PACER, Public Access To Court Electronic Records.
To give investors some background and an overview of what is currently public record and pending before the judge in the case, I have outlined the three key issues brought up by this WMS Gaming motion. I will also provide an opinion of who will win round one based on their arguments filed to date.
Issue #1: Sever MGT's Claims Against Defendants Into Separate Actions
The objective of WMS in this motion is to separate itself from the other defendants (CZR, MGM, PENN, & Aruze). Simply put, WMS wants to face MGT's suit solo and to not be joined in the suit with another slot machine manufacturer (Aruze) and the three casino operators (CZR, MGM, PENN). By being a sole defendant, it would be easier for WMS to negotiate a settlement with MGT if they choose to pursue that option.
WMS Arguments For Motion to Sever:
"Plaintiff's claims against all Defendants should be severed into separate actions because Plaintiff improperly joined the Defendants in a single action. WMS and Aruze are direct competitors in the gaming machine industry. Defendants' alleged infringements do not arise out of the same transactions relating to the same accused products. Rather, Defendants' alleged infringements arise out of different transactions relating to different accused products. As such, WMS and Aruze cannot be joined, and Caesars, MGM, and Penn cannot be joined."
(excerpt from WMS Gaming Inc.'s Motion To Sever, filed 1/3/13)
MGT Arguments Against Motion to Sever:
"There is a critical substantive factual connection within each identified manufacturer-casino(s) group - infringement through the use, sale, or offer to sell the exact same products. Moreover, since the manufacturer and casinos often split the revenues from the games in an ongoing arrangement, they are partners in a continuing infringement based on the unlawful use of the same patented products on the casino floor. This ongoing substantive connection destroys any assertion that Plaintiff has joined the defendants to their respective game suppliers solely because they have infringed the same patent in suit in separate transactions."
"Indeed, the defendant casinos are not only promoting and operating the very games they acquired rights to from WMS (and Aruze), they are often operating these games jointly with WMS (and Aruze) and sharing revenues."
(excerpt from MGT's Response to WMS' Motion to Sever, filed 2/8/13)
Likely Ruling on Motion to Sever:
The argument that WMS is making that its alleged infringement as a manufacturer of the slot game has no connection to the financial transaction taking place on those games on the casino floor is a high bar to reach. It is common fact that revenues gained on these games are split by the manufacturer and casino operators. WMS even willfully acknowledges this relationship in a Supplemental Declaration of Joel Jaffe (Sr. Director of Games at WMS) filed on February 27, 2013, when he explains how WMS leases slot games to MGM or CZR, and then jointly share revenue based on a percentage of amount wagered into machine, a percentage of the net win for the machine, a fixed daily fee, or a combination of amount wagered and a fixed daily fee.
MGT clearly has the stronger argument in this issue to sever the defendants. Based on the revenue sharing arrangements between the slot machine manufacturers and the casinos, these transactions join the two sets of defendants. The only possible sever that could happen is for the judge to rule that the suit must be grouped into two sections. One group would join manufacturer, WMS, with its casino operator partners, CZR & MGM. The second group would link manufacturer Aruze with its casino operator partner, PENN.
Even MGT is amenable to this grouping as expressed in their Response to WMS's Motion to Sever filed on February 8, 2013 when they argued that,
"If, however, the Court decides to sever any parties, the manufacturer-defendants, i.e., WMS and Aruze, should clearly remain joined with their principal licensed casino-defendants, i.e., Caesar's Entertainment and MGM Resorts with WMS, and Penn National with Aruze…..Joint litigation against the closely related defendants (WMS/MGM and Caesars, and Aruze/Penn) in the same court at the same time will allow consolidation of and consistent rulings on many common questions of law and fact….especially since the majority of the revenue is believed to remain with the casino defendants, the very parties that WMS wants to sever out and stay."
Opinion on Issue #1: When the judge rules on WMS's motion to sever, the likely winner will be MGT.
Issue #2: Motion to Transfer Venue
The objective of WMS in this motion is to convince the judge to transfer the venue of the trial to the district and state of the WMS corporate headquarters in the Northern District of Illinois. This is a typical strategy and preliminary motion used by defendants to move the court to transfer venue to a more favorable district. Apparently, WMS is concerned and worried that MGT has filed their suit in the Southern District of Mississippi. According to Forbes magazine, the Southern District of Mississippi is a very "plaintiff friendly venue."
WMS Arguments For Motion to Transfer Venue
"Plaintiff's action against WMS should be transferred to the Northern District of Illinois because the action has no meaningful connection to this District, and this District is inconvenient to parties and witnesses. All of WMS's documents, witnesses, and other evidence for this action are located in the Northern District of Illinois. Plaintiff's documents, witnesses, and other evidence - to the extent it has any - are located in New York, not this District. WMS is not aware of any documents or witnesses in this District for this action."
(excerpt from WMS Gaming Inc.'s Motion To Transfer, filed 1/3/13)
MGT Arguments Against Motion to Transfer Venue
"WMS' brief does not even attempt to challenge the propriety of jurisdiction and venue in this Court; it merely says that it has a better venue in mind. The witnesses and evidence in this case are very clearly not concentrated in Illinois as WMS erroneously asserts. On the contrary, the relevant witnesses and evidence are spread all over the United States, especially in Mississippi."
"WMS' infringing "Pirate Battle" game is located and played at the Grand Casino Biloxi, the Beau Rivage in Biloxi and at the Ameristar Casino in Vicksburg, as well as the Gold Strike Casino and Resorts Tunica in Tunica. None of the defendant casinos operate the infringing games in the Northern District of Illinois."
"In light of WMS' extensive Mississippi contacts, millions of dollars in Mississippi revenue, dozens of Mississippi employees, and recent 3-year litigation of its suit in the Southern District of Mississippi, it is not credible for WMS to complain that it suddenly finds it too burdensome to litigate in Mississippi."
(excerpt from MGT's Response to WMS' Motion to Transfer Venue, filed 2/8/13)
Likely Ruling on Motion to Transfer Venue
WMS argues that transferring the venue to Illinois would be more convenient for them to access documents and witnesses for the trial. What WMS has vastly underestimated is the extent to which MGT's case will likely involve the witnesses, records, and discovery in the many Mississippi casinos where MGT claims WMS manufactured slot machines are producing large revenues by infringing on their patent.
Again, MGT has the stronger argument to not transfer venue to Illinois but to keep the litigation in the state in which the patent infringement suit was filed, Southern District of Mississippi. As the third largest gaming jurisdiction in the United States, Mississippi is uniquely qualified and appropriate to litigate this case.
Opinion on Issue #2: When the judge rules on WMS' motion to transfer venue, MGT will likely be the winner.
Issue #3: Motion to Stay the Action Against Casino Defendants
The objective of WMS in this motion is to convince the judge to stay (postpone) the suit against the casino defendants (Caesars, MGM, and Penn) until it is determined if MGT's patent was infringed by the manufacturers (WMS and Aruze). This motion appears to show that WMS does not want to face a jury linked with two of the largest casino operators in the industry in a suit that accuses these billion dollar companies of infringing the patent from an individual inventor and in turn profiting handsomely in the process.
WMS Arguments For the Motion to Stay
"Plaintiff's actions against the Casino Defendants (Caesars, MGM, and Penn) should be stayed until the resolution of Plaintiff's actions against the Manufacturer Defendants (WMS and Aruze) because Plaintiff's claims against the Casino Defendants are peripheral to Plaintiff's claims against the Manufacturer Defendants. Plaintiff alleges WMS and Aruze infringe the patent-in-suit by designing, developing, manufacturing, and distributing their respective slot machines at issue in this case. Plaintiff alleges the Casino Defendants infringe the patent-in-suit by merely using the slot machines provided by WMS and Aruze. The Casino Defendants have no role in the design, development, or manufacture of the accused slot machines, and they have no relevant evidence that is not already it the possession of WMS and Aruze."
(excerpt from WMS Motion to Stay, filed 1/3/13)
MGT Arguments Against Motion to Stay
"The casino defendants are not peripheral to this case as alleged by WMS. The casino defendants directly infringe the asserted patent by their continued use of the accused games and are not simply resellers of the infringing product."
"Unlike the typical manufacturer/retailer arrangement, WMS, Caesars, and MGM are believed to have a revenue sharing agreement which provides a split of the daily revenues to each party. Under such an arrangement, the manufacturer does not "sell" the gaming product to the casino, but instead enters into an agreement wherein the daily proceeds of the gaming machines are divided on a percentage or hybrid arrangement. This, WMS, Caesars, and MGM are each joint infringers by virtue of their ongoing, joint use of the gaming machines which continues on a daily basis."
(excerpt from MGT's Response to WMS' Motion to transfer venue, filed 2/8/13)
Likely Ruling on Motion to Stay
Once again, WMS has failed to differentiate the revenues that WMS and their partner casinos generate from the machines in the suit. Very similar to the motion to sever mentioned above, MGT clearly has the stronger argument based on the revenue sharing arrangements between the slot machine manufacturers and the casinos.
According to the testimony of 25-year gaming industry veteran and expert casino analyst, Jim Kilby, documented in a Declaration filed on 2/8/13 for this case, " a manufacturer and casino typically into an agreement wherein the daily proceeds of the gaming machine are split between the manufacturer and the casino on the basis of percentage of win, flat daily fee, or percentage of coin in, and wherein the lion's share of the daily proceeds (as much as 80%) often goes to the casino."
Opinion on Issue #3: When the judge rules on WMS's motion to stay actions against the casinos, MGT will likely be the winner.
At a time when the developments of MGT Capital's patent infringement suit against gaming heavyweights are very close to judge rulings on round one motions and the scheduling of Markman hearings and trial dates, investors should stay extremely focused on positioning themselves before these announcements are made.
Based on thorough analysis of this case's court filings to date and relevant case studies, MGT is strongly positioned to win the round one arguments and advance their case forward to round two and the crucial Markman Hearing. Investors still have a window of opportunity to establish a position in MGT before these expected catalysts, or to add to their current positions at this attractive price point of $4.00.
History shows that the largest moves in a stock involved with a patent infringement suit occur when the Markman Hearing date is announced. If MGT scores victories in round one, the Markman Hearing date should be announced in very short order.
MGT and Patent Infringement Suit Background:
On November 2, 2012, MGT Capital filed a high profile patent infringement suit against Caesars Entertainment , MGM Resorts International, WMS Gaming, Inc., Penn National Gaming and Aruze Gaming America, Inc. The suit alleges that these companies are violating MGT's patent used in slot machines. The estimated present value of the royalties over the life of this patent range from $330 million to $4.5 billion.
MGT's business is to acquire and monetize intellectual property rights. MGT has a current market cap of only $19.8 million, a debt-free balance sheet, and approximately $8 million in cash. That cash position was just bolstered recently when 678,934 warrants were exercised at $3.85/share adding a fresh $2,613,895 to the balance sheet.