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Winning judgments for intellectual property infringement can have big upside. Apple (NASDAQ:AAPL) won a $1 billion judgement against Samsung in August 2012 for mobile phone IP. Vringo, Inc. (NASDAQ:VRNG) took over $30 million and 3.5% royalties from Google Inc. (NASDAQ:GOOG) for Internet search advertising. VirnetX Holding (NYSEMKT:VHC) was awarded a $368 million judgment against Apple for mobile phone IP and also won $106 million from Microsoft Corp. (NASDAQ:MSFT) for virtual private-network technology. Just last month, Document Security Systems (NYSEMKT:DSS) took a hefty bite out of Novell, Inc. over an infrastructure software disagreement.

Soon another patent fighter will enter the picture - Local Corporation (NASDAQ:LOCM), an online media company connecting local businesses to customers through digital marketing with a network of 20,000 websites that reaches over 15 million viewers. A menu of its services includes business and product search functions, web-hosting, search engine optimization, social media, and mobile advertising.

Local's website, local.com, is a value-added version of digital yellow pages that links together businesses in a specific locale with online and mobile customers for the ultimate one-stop shopping experience. Founded in 1999 by a group of Internet entrepreneurs, Local has grown revenue by a compound annual rate of 26% since 2008, reaching $97.7 million in 2012. Operating expenses in the most recent quarter have been drastically reduced and its bottom line is one penny away from breakeven.

A big part of its draw is its technology platform that collects, categorizes, then separates items that are being searched. The business model is sleek: private label networks numbering into the thousands of sites use Local's syndication to give search results to their users while monetizing their listings with ads, and mobile applications extending to different service providers where monetization has been growing quarter to quarter. Drawing advertisers to mobile apps is a $2.7 billion industry.

Local has another big asset - its patent portfolio. Next week, Local faces its adversary Fry's Electronics, a privately-held seller of consumer electronics with an online presence, in a Markman hearing pursuant to a jury trial. At the hearing, it's up to the judge to decide if the claims are valid after sifting through the dense terminology of patent language.

Local's complaint against Fry's entered into a US District court in Southern California in June of 2012 for $75,000, charging infringement of the '453 patent. Two months later, Fry's put in a counterclaim against Local. Discovery dragged on until the judge ordered a cut-off date of last March with the jury trial set for June 11th (but later continued to July 2). After more legal maneuverings, a Markman hearing was scheduled for August 28th and a new trial date set after the hearings. Patent language is confusing and since 1996, Markman hearings are used more and more in disputes to let judges decide what the patent claims mean.

The '453 patent is a breakthrough invention for online shopping using a cascading menu to allow online shoppers easy access to a wide variety of products and services. Consumers can quickly arrive at a relatively narrow subsection of what's available in that category and drill down to find what they're looking for, like 17" Sony monitors or emerald earrings under $350.

A visit to Fry's website featuring a similar cascading window for product categories illustrates that it may indeed be using Local's technology without a license. The lawsuit is not big, but a favorable ruling could open doors to larger claims with other online businesses that want to display all their goods in the most convenient way. Websites of most big retailers with broad categories of products use a version of a cascading window where a search request is automatically generated and the customer is provided with information on products related to the request, and ranked by price ranges. The Wal-Mart website (NYSE:WMT) is a good example. Major wholesalers and distributors of consumer products have to have some sort of cascading menu because their lines are huge. If Local prevails, there could be thousands of opportunities for patent infringement claims.

There's another important patent in Local's portfolio that could be used in future infringement lawsuits - Enhanced Delivery Assistance, a method where a business pays to play its ad when a consumer dials directory assistance. This intellectual property is comprehensive, covering not only text but voice-to-text and voice assistance/search methods. In other words, when someone uses a mobile phone to find a number and presses a button to dial or when directory assistance is called from a mobile phone, Local's patent may be invoked.

These patents, because they are broad and more likely to predominate, afford Local many potential opportunities for licensing revenues. Settlements before a Markman hearing only emphasize the defendant's chances of failure; if this were to occur, the industry would be sent a clear message that Local may be on the prowl. As evidence, management stated in a recent conference call that its patent portfolio is being reviewed for possible leveraging of its IP rights.

Online search is fiercely competitive and technology changes happen fast, with obsolescence a constant worry. Advertising, tied so closely to the economy, is also a clear risk for companies like Local. I don't view the upcoming Markman hearing as a problem because the judgment is small, although a negative ruling could prevent its valuable and broad patents from reaching their licensing potential. Overall, much of any risk investing in Local is greatly mitigated by the fact that it's nearly a $100 million company about to turn profitable and growing its business lines, specifically mobile advertising, each quarter.

Investors are highly conscious of movements in patent enforcements among technology companies and positive developments can move stocks. Revenue may be enhanced with new licensing deals for the winner of the patent fight, and valuations benefit. This win by Local would set a precedent and could pave the way to collecting revenues from any number of companies. Given its good financial performance and prospects, the value of Local's shares is not in line with its peers, making this an ideal time to buy, regardless of the hearing's outcome.

Source: Markman Hearing Could Open The Door To Future Revenue Streams For Local