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

On Track Innovations (OTIV) reached an important milestone today -- a highly anticipated Markman decision issued in its favor. This decision strengthens OTIV's hand in its patent infringement case against T-Mobile. More importantly, particularly for investors long in OTIV's stock, this decision strengthens OTIV's prospects of collecting damages awards or settlements from accused infringers other than just T-Mobile. OTIV's case against T-Mobile is its first assault in its newly-launched patent-monetization campaign. In many ways, OTIV's case against T-Mobile is a test case, and before this decision, the question remained whether it has any teeth. In a carefully considered Markman decision by Judge Alison Nathan of the United States District Court for the Southern District of New York, that question was answered in OTIV's favor. The market should now understand: OTIV's position is much stronger as a result of this important ruling.

As we previously reported here, in March 2012, OTIV sued T-Mobile USA, Inc. (TMUS)("T-Mobile") for patent infringement in the United States District Court for the Southern District of New York. The complaint alleges infringement of one of OTIV's patents, U.S. Patent No. 6,045,043, titled "Contact/Contactless data transaction card". In particular, the complaint alleges that T-Mobile's sale of smart-phones, including HTC (OTC:HTCCY) Amaze 4G, Nokia (NOK) Astound as well as others, are infringing the '043 patent.

OTIV's case against T-Mobile represents the company's first step in the promised patent-monetization strategy. 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 for the job of focusing the company on patent monetization. In addition, the company recently announced that it had retained a patent law firm in support of its ongoing efforts.

Nevertheless, OTIV's first effort to monetize its patents, by suing T-Mobile, was less than ideal "all-or-nothing" type approach. But with this favorable ruling, OTIV's gamble appears to have paid off. If and when OTIV brings additional infringement actions, it will be starting from a more favorable negotiating position.

The Markman decision was favorable for OTIV on nearly every single front. For one, the patent is not limited to smart-cards. During the Markman hearing, the parties disputed whether the asserted claims were limited to a smart-card, or encompassed devices other than cards, such as phones. T-Mobile argued that the claim recites the word "card", which can be critical considering that the scope of the claim is determined principally by the words it recites. However, OTIV retorted that the claim only recites "card" within its preamble, which is conventionally not viewed as a limitation to a claim. The District Court agreed with OTIV. In short, Judge Nathan found that even though the claim recites the word card, it does so within the preamble, and this patent's preamble does not act as a limitation upon the claim.

This initial finding is an enormous positive finding for OTIV. Had Judge Nathan sided with T-Mobile, by holding that the claims were limited to a card, then OTIV's case against T-Mobile would be severely prejudiced. And OTIV's chances of suing any other manufacturers and sellers of smart-phones would also have taken a hit. This decision underscores how important a Markman decision can be in a patent infringement action. Overnight, the scope of possible damages potentially generated by a particular patent can swing between hundreds of millions and zero. Fortunately for OTIV, the pendulum swung in its favor in this instance.

Another term 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 is required to be disabled. T-Mobile argued that the contact mode must be disabled when the device is operating in the contactless mode based upon statements from the patent's prosecution history which were made to overcome the prior art. If the District Court adopted T-Mobile's proposed construction, that would have equipped T-Mobile with a strong non-infringement argument, with the potential of sinking OTIV's chances of monetizing the '043 patent.

Yet, once again, OTIV scored. Judge Nathan disagreed with T-Mobile's proposed construction and sided with OTIV. By doing so, the court disarmed T-Mobile of one its strongest non-infringement arguments in this case-namely, when operating in the contact mode, the contactless mode must be disabled. Once again, the upside for OTIV winning this construction rebounds outside of this case. When OTIV brings more suits, which it will likely do now that it is armed with this decision, those defendants will be hard-pressed to make the same non-infringement argument. Though not determinative, a district court's prior construction of particular claim term is highly persuasive on subsequent courts construing the same term. The bottom line, this Markman decision significantly strengthened OTIV's hand in this case as well as cases to come.

A few caveats are worth mentioning. OTIV was victorious in this Markman, but T-Mobile has the opportunity to challenge Judge Nathan's constructions. In cases where a claim construction order robs the defendant of all possible non-infringement arguments, which may be the case here, it is not uncommon for the defendant to stipulate to infringement so that it can immediately appeal the Markman decision to the Federal Circuit. The Federal Circuit reviews Markman decisions de novo, which is an esoteric way of saying "from scratch", meaning that the Federal Circuit is not required to provide any deference to the lower court. Bottom line, T-Mobile still has a chance to reverse some or all of this Markman decision.

In the alternative, a party that receives an unfavorable Markman decision has the opportunity to petition the court for reconsideration. In effect, that means asking the same court that just disagreed with you to somehow change its mind. That is hard to do, whether you are in court or at the dinner table. For that reason, litigants typically prefer to seek redress at the appellate court rather than through reconsideration unless they have strong reasons for doing so. In this case, T-Mobile may have a good basis for asking Judge Nathan to reconsider one of her constructions.

As discussed, the District Court disagreed with T-Mobile that the claims do not require disabling the contactless mode of operation when the contact mode is operating. In particular, the District Court found T-Mobile's position to be inherently ambiguous because it appears to require disablement without disconnection. In order for T-Mobile's argument to make sense, the District Court stated, "there would need to be a distinction between 'disabling' and 'disconnecting'." (Decision at 22). However, T-Mobile may have a basis for clarifying that distinction. During the technology tutorial, OTIV's expert explained that the connection to the contact mode provided power even when data transfer was disallowed. Thus, the distinction between "disconnection" and "disablement" is the difference between power and data-transfer. Because the District Court appeared to be hung up on the fact that there is no meaningful distinction between "disconnection" and "disablement", if T-Mobile can clarify that distinction, it may be grounds to move for reconsideration.

At the end of the day, whether T-Mobile moves for reconsideration will depend upon how strongly it believes it can convince Judge Nathan to reconsider her own decision. Regardless, absent a settlement, we expect T-Mobile to challenge these newly-issued constructions at the appellate level - assuming the case gets that far.

No doubt OTIV has its eye on potential litigation targets, and armed with this precedent-setting favorable claim construction ruling, the future is looking bright for OTIV's patent assertion efforts. Until then, we anticipate that OTIV's focus will continue to be on its current case against T-Mobile. As we mentioned above, the Judge, despite her relatively short tenure on the federal bench, issued a comprehensive and carefully considered claim construction opinion - even though it was issued quickly by patent case standards. Perhaps more importantly, the Markman decision triggers the remainder of the litigation schedule, also on a fairly aggressive track. OTIV is now further along the road to a possible jury trial.

At Markman Advisors, we believe that OTIV deserves more attention from the market. Investors have given, we believe, disproportionate attention to patent plays such as Vringo (VRNG) and Parkervision (PRKR) that promise hopes of bringing down behemoths such as Google (GOOG) and Qualcomm (QCOM). In the case of OTIV, the prospects for significant returns in the relatively short-term for investors long in OTIV are very much real. This Markman decision is an important step in confirming that potential.

Source: On Track Innovations' Markman Gamble Pays Off