Marathon Patent Group (MARAD.OB) has been on a fantastic streak recently. Marathon announced two settlements of its Sampo patent portfolio. There are people who assert that the aforementioned settlements constitute a validation of Marathon's patent portfolio. However, for the reasons discussed below, I respectfully disagree with the talk that the patents have now been 'validated'. First let's talk about what this article is not: it is by no means to say that Marathon's patent strategy is inherently flawed. This article is not to say that Marathon is a bad investment (on the contrary, I believe Marathon to be a good investment). The purpose of this article is to merely present a point of dissent on why the recent settlements do not constitute a definitive validation of the Marathon patent portfolio.
Marathon's recent settlements will likely not be the end of the settlements for the Sampo IP portfolio. The same can be said for the CyberFone portfolio. Marathon's strategy appears to be to sue many different companies (many of the times these are smaller companies). While this may sound fine, what Marathon appears to do is to then offer to settle for an amount lower than what it would cost for the defendant to defend against the patent litigation. Often the smaller companies will not have the resources for a long drawn out trial and will be much more likely to accept the settlement.
How do I know that Marathon employs this strategy? In regards to the Sampo IP portfolio, I would refer investors to a filing from Rally Software Development Corp. v. Sampo IP, LLC. The filing found here, helps to demonstrate the tactics that Sampo and by extension Marathon are likely employing in order to generate the settlements. I would like to refer your attention to a specific few lines of the filing found on page 3:
On May 14, 2013, Orion Armon (counsel for Rally) spoke with Steven R. Pedersen, (counsel for Sampo) by phone to ask why Sampo sued Rally's customers and what Sampo hoped to gain from its lawsuit. (Armon Decl. at ¶ 4.) On May 16, Mr. Pedersen represented that Sampo's lawsuit against Rally's customers could be resolved if Rally would agree to purchase a patent license for itself and its customers. Id. Mr. Pederson also expressly threatened to sue additional customers and/or Rally if Rally didn't take a license. Id. The next day, Mr. Pederson provided Rally with a license demand of $750,000.
The license demand helps to show that Marathon will ask for rather low amounts of money in order to attempt to force settlement agreements.
Why Do Companies Settle With Marathon
Quite simply, companies are settling with marathon due to the fact that the settlement proposal $750,000 is lower than the cost of defending against the litigation action. On a side note, I assume that Marathon is not getting its first demands I would assume that after some negotiation that Marathon is getting less than $750,000 per settlement.
The Enormous Costs of Fighting Patent Infringement Lawsuits
A rather recent article points out the large costs associated with defending a patent infringement lawsuit:
According to a 2011 survey by the American Intellectual Property Owners Association, the average cost to defend a patent case is about $1 million when the amount at risk is less than $1 million, about $3 million when $1 million to $25 million is at risk, and about $6 million when over $25 million is at risk.
Therefore, it seems as though Marathon is taking advantage of the high costs associated with defending against a patent lawsuit. Through offering settlements in the range of $750,000, Marathon will make money as it likely costs them substantially less than the settlement amount to file the complaint and to get to the point where the companies are willing to settle.
It is likely that the smaller companies will not take on Marathon in court simply because of the fact that to do so would expose the Defendant to the risk of losing, which would end up costing them more money. Even if the judge awarded Marathon $1, going by the averages above, it would have cost the Defendant over $1 million to defend the infringement lawsuit. Therefore they will cut a deal with Marathon for less, say hypothetically $500,000 and move on.
Why This Strategy Is Not Validation
The strategy is not validation due to the fact that a court has not held that the patents are valid and enforceable. It happens in court that a jury will find that the patents are invalid either due to prior art or due to obviousness, and that the plaintiff is not entitled to damages because of it. Marathon's strategy does not necessarily rely upon the enforceability and validity of their patents due to the fact that many Defendants will not take them to court, and Marathon is not suing very many companies large enough to spend the time and money to take them on in court. Examples of what I would describe as patent validation are VirnetX (NYSEMKT:VHC) winning their patent infringement lawsuit against Apple (NASDAQ:AAPL), or Vringo (VRNG) winning their patent infringement lawsuit against Google (NASDAQ:GOOG). In both of these instances a jury found that the patents were valid and enforceable and that the defendants infringed upon the patents in question.
The validation strategies for VirnetX and Vringo induce settlements (like Vringo's recent settlement with technology giant Microsoft (NASDAQ:MSFT) to resolve litigation over the same patents that Vringo asserted against Google). VirnetX and Vringo through their victories have shown that juries believe the patents to be valid and enforceable and have shown the approximate value of their patents. They can demand rather high amounts now for settlements and threaten potential defendants with the possibility of a loss in the courtroom. Whereas for Marathon, they have already established the approximate value of their portfolio through the licensing history as well as they have not necessarily shown that a jury will consider their patents to be both valid and enforceable.
While I do not believe that the recent settlements constitute a validation of the patent portfolio that is not to say that Marathon is not a compelling investment opportunity. I believe that Marathon has the potential to provide investors with significant returns utilizing its current patent monetization strategy. It will be interesting to see what the future holds for Marathon.
Disclosure: I previously owned shares of Marathon and may initiate a position again in the next few weeks. I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.