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I recently wrote an Instablog posting about Syntroleum's (NASDAQ:SYNM) lawsuit with Neste (NES1V.HE) detailing why I thought the fears were overblown. Just recently SYNM got a partial victory in its lawsuit.

U.S. Patent Office Again Rejects All Claims of Neste's '344 Patent, and District Court Stays Neste's Suit on '094 Patent

I say partial because there is still one lawsuit pending regarding the '094 Patent which was granted a "stay." The victory was that "all claims" of the 344 Patent were rejected, as SYNM had predicted. SYNM's claim was that the Neste patents were too broad, and would be "obvious to anyone familiar with the arts." While I'm no legal expert, and would never try to claim I know with certainty the outcome of any legal hearing, I do try to understand the issue, and from there handicap the odds of the outcome. From my Instablog posting I made the case that SYNM most likely has the better argument. That does not mean SYNM has the better lawyers, and that sometimes will determine the outcome, and why investors need to be cautious no matter how compelling the evidence is.

SYNM's defense is that Neste's patent covers a process that would be "obvious to anyone familiar with the arts." I disagree, I would argue that the process would be obvious to anyone you pick off the street, and this article will demonstrate that. If I was a lawyer for SYNM this is how I would present the case.

Neste's 344 patent is for turning animal fats into diesel fuel. The only real difference between an animal fat and a vegetable oil is whether or not it is "saturated" or "unsaturated" which determines if it is solid or liquid at room temperature. Everyone knows the difference between butter and oil, one is solid and one is liquid. It shouldn't be a surprise that if you can take an oil and turn it into a fuel, you can do the same with a nearly identical molecule that just happened to be the solid form of a liquid. That basically is what this lawsuit is about. Here is what the two molecules look like. Neste's 094 patent lawsuit adds vegetable oil to the covered feedstocks, but that doesn't change much, at least regarding the basic chemistry. It broadens the scope of a process that is already considered too broad by some. It does however complicate matters for SYNM if it is upheld because it would cover the two lowest cost feedstocks, inedible corn oil and yellow grease, and nullify the argument I made in the Instablog posting about how SYNM could simply switch to corn oil to avoid the claims of the 344 patent.

The "saturated" fatty acid on top is solid at room temperature, and has all its carbon atoms "saturated" with hydrogen molecules except for the far right one that forms an acid. The "unsaturated" one has a few carbon atoms that bind to themselves instead of hydrogen atoms, and it too has an acid attached to the end. The key here is that if you shave off the acid at the end, and replace it with a hydrogen molecule, you get n carbon atoms surrounded by 2n + 2 hydrogen atoms if it is saturated, and fewer hydrogen atoms than 2n + 2 if it is unsaturated.

In reality, it isn't that simple. In reality those fatty acids are attached to a glycerin backbone and they form what is called a triglyceride, but all that really does in package the fatty acids in nice groups of 3. Kind of like putting 8 hotdogs in a package. When you use them, you simply pull one of them out of the package. The fact that there were 8 in the package is irrelevant.

The final output of the SYNM "Bio-synfining" process is a "drop-in" diesel fuel. Not a biodiesel, but a diesel that is chemically identical to petroleum diesel. A diesel molecule looks like this.

Now compare that molecule to a saturated animal fat molecule.

The only thing different is that the diesel fuel has the end carbon surrounded by hydrogens instead of oxygens. Pull anyone off the street, give them a quick explanation of what they are looking at, and my bet is that 100 out of 100 people picked randomly off the street would be able to tell you how to turn a fatty acid into a diesel molecule. You simply either shave off the acid at the end and fill the bond with a hydrogen, or you replace the carbon oxygen bonds with carbon hydrogen bonds. It simply isn't that difficult to figure out that if you have a molecule with n carbon atoms and 2n hydrogen atoms and 2 oxygen atoms, and you want a molecule with n carbon atoms and 2n + 2 hydrogen atoms, that you have to get rid of the oxygen atoms and replace them with hydrogen atoms. Yes, this is an ultra simplified review of the chemistry, and yes it is a bit more complicated than I've outlined, but the above explanation pretty much captures the crux of the lawsuit as I understand it. I'm sure that there are non-public details that I do not have access to that may alter the verdict, but if the claim that Neste's claim is invalid because it would be "obvious to anyone familiar with the arts" is based upon the chemistry I learned over 30 years ago in organic chemistry, then I think SYNM has a pretty good shot at getting the 094 challenge thrown out as well.

In conclusion, from my simplified review of the chemistry detailed above, it is clear to me that SYNM has a very solid position in claiming that Neste's patent would be "obvious to anyone familiar with the arts." I tried to demonstrate the basis for that claim above, and I agree with it. My case is bolstered by the fact that the US Patent Office just agreed with my conclusion on at least one patent claim. Because the ruling was made on the first claim, I would imagine that the same outcome will also apply to the second lawsuit as well. My reasoning being that you don't file your strongest lawsuit second, you file it first. I would imagine that Neste thought their best chance was with the 344 patent, and the 094 was a backup plan. The 094 lawsuit does include vegetable oil, but that isn't much of a difference. That is pure speculation, but follows a logical path of reasoning. Does my review of basic organic chemistry prove that the US Patent Office will also reject all claims for the 094 patent? Absolutely not, anything can happen in a court of law, but I think I've demonstrated that Neste's patenting a process for turning a saturated or unsaturated fats into diesel fuel is like someone patenting the steering wheel of a car or a keyboard of a computer.

Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.

Disclosure: I am long SYNM. 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.

Source: Understanding Syntroleum's Lawsuit