Markman Hearing Preview: Worlds Vs. Activision Blizzard

| About: Worlds, Inc. (WDDD)

Editors' Note: This article covers a micro-cap stock. Please be aware of the risks associated with these stocks.

The 30-day countdown to the Markman "claim construction" hearing in the case of Worlds, Inc. (OTCQB:WDDD) vs. Activision Blizzard, Inc. (NASDAQ:ATVI) has begun. The hearing will take place in the District Court of Massachusetts, located in Boston, with Judge Denise Casper presiding. It is impossible to overstate the importance of this hearing as key terms, or words, will be decided (in an official Markman Order) providing the ammunition for one side or the other to prevail in front of a jury should the case make it to trial. If this were a duel, it would be fair to say that the judge will choose who gets to bring the gun and who gets to bring the knife.

To date, we have seen ATVI's pleadings on why the prior art trumps the WDDD patents and the WDDD patents are supposedly invalid. (See our views on that subject here). There has also been discovery (mostly not known to us at this point) that allows both sides to know where the actual alleged infringement occurs in the ATVI products. The Markman hearing is the opportunity for both sides to tell their side to the judge, and to get her to decide what the disputed words in the WDDD patents mean.

The attorneys will proceed as follows:

Defendant's counsel will argue for interpretation of the patent claims that makes those claims appear to be nothing more than what was revealed in the prior art. For example: An electric refrigerator is not novel because we already know about the technology of an icebox, and both are just insulated containers that keep things cold. The defendant will also argue that the plaintiff's claims are indefinite ("I don't know what these claims mean") because, by statute, indefinite claims are void. Lastly, the defendant will argue for a claim to be interpreted in a way that makes it inapplicable to what his/her invention does.

Plaintiff's counsel will argue for an interpretation that permits a jury (the finder of fact if the case proceeds to trial) to determine that the prior art does not reveal the invention claimed by the plaintiff's patent. The plaintiff will say that its claims are definite and that the specifications of the patent can be used to interpret the claims so that they are clear in scope and practice. Lastly, plaintiff's counsel will argue for an interpretation of the patent claims that makes them applicable to what the defendant's invention does, so that a finding of infringement is possible.

The Markman hearing will result in a determination of the meaning of the disputed claim terms, which are the terms that will make the difference in the lawsuit. This determination will tip the scales significantly in one party's favor. This is why many cases settle after the Markman but before trial. In our view, Worlds is in a very strong position for this Markman hearing. But let's take a look at how it sets up.

There are 11 disputed "constructions" to be decided in this hearing. They are listed in order of importance as submitted by the parties in their "joint claim construction statement" of May 17, 2013. (For the complete 12-page analysis of the disputed terms, please click here). For simplicity, we refer to the last three numbers to identify each patent subject to this litigation. We also note which claims of those patents are affected by each disputed term.

  1. "position of less than all of the other users' avatars" ('690 1-5, 11-14, 19)
  2. "determining, from the received positions, [a/the] set of the other users' avatars that are to be displayed." ('690 1-5, 11-14, 19)
  3. "condition" ('998 1-3, 7-8, 11-18, 20-21)
  4. "participant condition" ('501 1-8, 10, 12, 14-16)
  5. "programmed to limit the number of remote user avatars shown on the graphic display" ('998 11-15)
  6. "avatar" ('690 1-16, 18; '558 4-9; '856 1; '501 1-6, 8, 10, 12, 14, 15; '998 1-3, 11-15, 18-20)
  7. "client process" ('690 1-20; '558 4-9; '856 1)
  8. "server process" ('690 1-20; '558 4-7; '856 1; '501 1-8, 10, 14-16)
  9. "synchronously disseminating" ('690 9, 18, 20)
  10. "third user perspective" ('998 2)
  11. "switch between a rendering in which all of a perspective view of a local user avatar is displayed and a rendering in which less than all of the perspective view is displayed" ('998 19)

Readers are reminded that it takes only one claim to be infringed for a finding of infringement. There are 55 claims at issue in this case. Lets take a look at the first four disputed terms.

In disputed terms one and two, Activision seeks to impose the words "set maximum" and "selecting" in order to narrow the claim language sufficiently enough so that the prior art would exclude it. The claims and specifications of the '690 patent reveal that there is no "set maximum requirement," and in fact the specifications clearly discuss a "variable." In one embodiment a set maximum is described but there is a presumption in patent law that wording in an original claim is distinct from an embodiment found in a dependent claim. Activision wants to use "selecting" to show that a sequence is preordained by the user. Worlds holds that these sequences are not preordained because of the variables involved, and therefore a determination is made after variable sequencing. We find support for Worlds interpretation in the ordinary meanings of the words they use in the claims as well as in the written specification.

In disputed terms three and four, "condition" and "participant condition," Worlds says that no construction is needed or in the alternative (for condition), that it is "an expression in a software program that affects the status or display of an avatar" or (for participant condition) "a condition imposed on an avatar, its controlling user, or its associated client device that affects the status or display of an avatar." Activision contends (and there is a theme here) that these conditions are either "set by the client" (or user) or that they are indefinite under 35 U.S.C. § 112, ¶ 2.

We do not agree that any of the disputed terms will be deemed invalid as indefinite. It is the duty of the judge to construct these terms and to render a claim as having meaning. For a term to be "insolubly ambiguous," as is a requirement for indefiniteness, the bar is high. The term "set" comes up often in Activision's arguments because it seems clear that if there are variables at work that yield results that the user does not control in the Worlds invention, it is likely that the system Activision is using infringes.

The specification of the '501 Worlds patent clearly states "CPU 100, or a specific motion control process, limits the motion of an avatar, notwithstanding commands from input devices 116 to do so, to obey the constraints indicated in rooms database 70. A user may direct his or her avatar through a doorway between two rooms, and if provided in the virtual world, may teleport from one room to another." It would appear that in the virtual world described herein we have several databases such as a "rooms" database or an "objects" database. The specification talks about constraints on the Avatar that are part of a database not controlled by a user but stored essentially as "game memory." This is one example of what may be considered a condition or participant condition that is not set by the user. While the court may favor some alternative construction, it is unlikely to include any condition or participant condition "set" by the client or user (which is what would help Activision's case) nor will it find these terms indefinite.

Our more lengthy examination (which we linked to earlier in this article) yields a result where we felt that Worlds would receive favorable if not unchanged constructions in 10 of the 11 disputed terms. For example, disputed term No. 5 might find the judge agreeing to replace the term "limit" with "restrict." We do not, however, see her agreeing to add the set maximum number limitation at the end as Activision would also like. Therefore, a partial change only still benefits Worlds.

Disputed term No. 10 held perhaps the best opportunity for Activision to construe it in a way that may have been more beneficial to its cause. Instead, it chose only to argue that it could not be construed and was therefore indefinite. We feel that this was a mistake because it is forcing the judge to either find some meaning (Worlds wins because Activision provides no alternative) or invalidate the claim (high bar and option of last resort for the judge). The judge is going to err on the side of finding meaning and the defense knows this, so the only conclusion we can draw here is that Activision either had no viable alternative response or felt it did not infringe the claim anyway. The absence of an Activision alternative means the judge is most likely to go with the original construction or Worlds' alternative construction.

It would be naïve to say that Worlds is going to sweep this event, as the perceptions and understanding of the judge cannot be divined at this point. It may be instructive in this case to look back on the Vringo (VRNG) claim construction hearing against Google (NASDAQ:GOOG), where the final score was 4-2 Vringo. Vringo spiked to a new high of over $5 on news of the Markman Order last June. As most readers know, those were something of the glory days for Vringo as the outcome of that case has been and remains in doubt even though Vringo won a jury verdict in the Norfolk District Court on Nov. 6, 2012. Judge Jackson's Laches ruling in the case became the skunk at the dance for Vringo, and it may be argued that his one decision created a negative chain reaction that has left the stock floundering in the low $3 range for most of the time since.

I underestimated Google's determination to go to the mat in the case as there seemed many logical points where a settlement would have seemed preferable. Today we await Judge Jackson's opinion on an ongoing royalty rate, but regardless, Google has essentially appealed everything and any payday for Vringo seems distant. Vringo's '420 Patent has been invalidated (for now) and the '664 Patent could be, which would be disastrous for Vringo. Many have speculated that if Judge Jackson were to grant a 5% or 7% running royalty that might trigger a settlement with Google. I'm not sure most road weary VRNGers would believe anything short of a signed agreement. I am still hoping for the VRNG revival that seems is their/our due, but like many, I remain cautious in part because it is very hard to gauge Judge Jackson's next move.

By contrast and with benefit of hindsight, there are several factors that make the Worlds vs. Activision case a significantly different opportunity than the Vringo suit against Google et al. Given our study of the Worlds/Activision claim construction briefs, we see a final tally that well exceeds the margin of victory that Vringo enjoyed in its Markman hearing. What follows are other significant differences that investors should be aware of and in our view take advantage of:

  • Because of the '690 grant date with respect to the date of the complaint against Activision there will be no Laches defense.
  • Activision (unlike Google) does not have unlimited funds to litigate this case if (as we expect) it loses the Markman hearing.
  • Worlds, unlike Vringo, is suing Activision for Willful Infringement, which could result in a 3x damages multiple if it succeeded.
  • The patent's shelf life is considerably longer than the Lang-Kosak patents, which is not only better for Worlds than it was for Vringo, it is better for anyone contemplating a buyout of Worlds.
  • The United States Patent and Trademark Office (USPTO) has repeatedly affirmed the Worlds technology by continuing to grant continuation patents to the '690 patent.

For these reasons (which are not exhaustive), we feel that the real opportunity in Worlds is not post-Markman but right now. We cannot state with any certainty where Worlds' market cap will sit on the eve of the Markman hearing, but we will not be surprised to see a positive outcome quickly yield a $250 million market cap and quite possibly more.

What Worlds possesses is essentially a blocking patent. There isn't a massively multiplayer online role-playing game (MMORPG) that we know of that does not use the Worlds technology. Like Vringo vs. Google, Worlds decided to play "conquer the market share giant." Unlike Vringo's case, however, this giant has limited staying power, and the expense involved in getting Worlds out of its way will be a lot less than a finding of infringement or of willful infringement.

Disclosure: I am long OTCQB:WDDD, VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.