Groupon's Achilles' Heel: Blue Calypso's Patents

Oct. 4.13 | About: Groupon, Inc. (GRPN)

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

Over the last two months, Groupon (NASDAQ:GRPN) has been on an upgrade parade as four of Wall Street's top technology analysts have all upgraded their sentiment on the stock and the company's future prospects.

Groupon Analyst Upgrades (Since Q2 2013 Results Reported)






Stifel Nicolaus (NYSE:SF)





Morgan Stanley (NYSE:MS)










Raymond James (NYSE:RJF)


Market Perform



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These upgrades came shortly after Groupon announced better than expected results for the second quarter of 2013. It was Groupon's strongest quarter ever in North America due to billing growth of 30% leading to total revenue of $608 million. Additionally, the company's fastest growing segment - mobile - saw nearly 50% of all North American transactions coming from mobile in the month of June.

Since Groupon's earnings report on August 7, the stock has soared 46% ($8.72 to a 52-week high of $12.76). This two-month gain increases Groupon's year to date stock performance to +133% making it one of the hottest technology stocks of 2013. These gains are impressive and the company reaffirmed full year guidance of operating income exceeding $100 million and announced a $300 million share repurchase authorization.

For investors holding positions in Groupon this year and over the past two months, congratulations on your stellar gains. With the recent news of Groupon's outperformance, many opportunistic investors will likely join you as new Groupon shareholders following the lead of the analyst upgrades.

But there is another facet of the Groupon story that investors may not be aware of yet. If you were doing responsible due diligence of reading Groupon's official press releases, you would not know of this fact. And, if you listened to the company's most recent earnings conference call (August 7, 2013), you would not know of this fact. The only hint to this fact is referenced generally in Groupon's recent 10Q filed on August 8th where you will read about a significant, potential weakness:

"The intellectual property claims, whether meritorious or not, are time consuming and costly to resolve, could require expensive changes in the Company's methods of doing business, or could require it to enter into costly royalty or licensing agreements."

Therefore, this article seeks to share a relatively unknown and hugely important fact which could potentially impact the future earnings power of Groupon in one of its fastest growing segments, mobile advertising. In short, this could be Groupon's Achilles' heel, a real weakness in spite of overall strength.

Patent Infringement Lawsuit Filed Against Groupon by Blue Calypso (OTCQB:BCYP)

On July 31, 2012, Groupon was named in a complaint filed by Blue Calypso Inc. in the U.S. District Court for the Eastern District of Texas for allegedly infringing on two of its patents (7,664,516 and 8,155,679). The patents cover Blue Calypso's proprietary system for peer-to-peer advertising on mobile devices.

Not only is Blue Calypso confident that Groupon's mobile growth is fueled by their patented technology, they have also filed nearly identical patent infringement suits against social marketing heavyweights YELP (NYSE:YELP), Living Social, IZEA (OTC:IZEA), MyLikes, and Foursquare.

If Blue Calypso's complaint has merit, it's intellectual property may very well be driving the highest growth segment of Groupon's operations - the increasing use of mobile devices for advertising and commerce. This is extremely significant considering Groupon's North American mobile piece of their entire transactions pie is growing by 10% per six months over the last year.

Growth in North America


% of Transactions on Mobile Devices







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Recent Development Negatively Impacting Groupon

Since July 2012, the cases have slowly worked their way through the U.S. District Court. But the last three months have seen major developments adversely impacting defendants including Groupon.

Recent Developments in Chronological Order:

May 6 - July 18, 2013: Blue Calypso Increases Scope of Infringement

Blue Calypso received three new patents (Patent numbers 8,438,055; 8,452,646; 8,457,670) from the U.S. Patent & Trademark Office to further solidify their case of patent infringement. With this new firepower in their arsenal, Blue Calypso amended and strengthened their 2012-filed initial complaints against Groupon and the other four defendants on June 13, 2013.

July 19, 2013: Four Other Defendants Consolidated with Groupon

In an unexpected order (available at by U.S. District Court Judge Michael Schneider, the court consolidated all five defendants [Groupon, IZEA (OTC:IZEA), Yelp (YELP), Foursquare, MyLikes] into the one lead case, "Blue Calypso, Inc. v. Groupon, Inc." for all pretrial purposes, including discovery and claim construction. Therefore, instead of having five separate cases, he ordered one lead case with Blue Calypso as the plaintiff against the five defendants. Groupon fought this development by filing a motion to change the U.S. District Court venue to their backyard of the Northern District of Illinois (this motion was denied last week, more below). This is good news for Blue Calypso and bad news for the defendants including Groupon. Now that the judge has consolidated the cases, defendants must now determine whether they will continue in court against a much stronger plaintiff or settle with Blue Calypso.

July 25, 2013: First Defendant Settles

The first of the five defendants, MyLikes, decided to settle with Blue Calypso instead of proceeding with this case post-consolidation order and post the issuance of Blue Calypso's three new patents. In the settlement, MyLikes has agreed to pay Blue Calypso the equivalent of a 3.5% royalty for the use of Blue Calypso patents.

For background, MyLikes is a private company and considers its business "the largest content and social advertising platform in the world." Founded and run by two former Google stars (Bindu Reddy and Arvind Sundararajan), the company has attracted the funding and involvement of a team of highly respected angel and venture capital investors including Vinod Khosla (Khosla Ventures), Paul Buchheit (Gmail Creator), Joe Kraus, Georges Harik, Sanjeev Singh, David Hirsch, Metamorphic Ventures, XG Ventures, Deepchand Nishar and Aydin Senkut.

As a private company, public financial information on MyLikes is not available. But with their broad platform reach, top technical talent, and heavily funded advisors, MyLikes's royalty payments to Blue Calypso could become very valuable as the company continues to expand in this high growth market of word-of-mouth marketing.

With this strong, credible validation of the Blue Calypso patents, Groupon and the other defendants must assess anew whether to push ahead into a lengthy and costly litigation season with Blue Calypso or to settle out of court with a payment or a licensing deal.

August 21, 2013: Second Defendant Settles

The second of the five defendants and Groupon's competitor, Living Social, reached a confidential settlement and licensing agreement with Blue Calypso further validating the strength of Blue Calypso's patents. The fact that this settlement and the licensing going forward is confidential is very significant. As Groupon's chief rival, Living Social, now appears to have use of Blue Calypso's mobile patents to help them grow. Groupon is now left in the dark as a surviving defendant to what might be a benchmark settlement price for use of Blue Calypso's patents. With Living Social's annual revenue run-rate of over $500 million and with its main investor and 29% owner, Amazon (NASDAQ:AMZN), Blue Calypso's hand has strengthened significantly going forward in their negotiating position against Groupon and the remaining three defendants.

September 12, 2013: Conference with Plaintiff & Groupon

Groupon, Blue Calypso, Yelp, Foursquare, and Izea "held a telephone conference on September 12, 2013 and identified possible areas of compromise regarding their proposed claim constructions; however, no agreement was reached at that time. The Parties have scheduled a follow-up conference on September 18, 2013 and believe that further discussion may yield a compromise on the construction of some of the claim terms." (Joint Motion to Modify Fourth Amended Scheduling and Discovery Order, Filed 9/14/13)

September 14, 2013: Deadline Extension Sought

Blue Calypso, Groupon, Yelp, Foursquare, Izea file joint motion seeking extension of the deadline to file a Joint Claim Construction and Prehearing Statement to October 4, 2014 (from original deadline of September 20, 2013). In each instance of settlement in this case by defendants (MyLikes and Living Social) to date, both were preceded by motions seeking extensions.

September 16, 2013: Extension Granted by Judge

Judge Michael Schneider grants the extension request to make the new deadline of October 4, 2013, for the Joint Claim Construction and Prehearing Statement.

September 27, 2013: Groupon's Motion Denied

Judge Michael Schneider issues order denying Groupon's Motion to transfer venue. Groupon was attempting to move the case to their backyard in the Northern District of Illinois instead of the current, plaintiff-friendly venue of the Eastern District of Texas in the backyard of Blue Calypso. This order would keep the Groupon case consolidated (with defendants Yelp, Foursquare, & Izea).

October 4, 2013: Joint Statement Deadline

Joint Claim Construction and Prehearing Statement Deadline

Estimated Groupon Settlement Based on MyLikes Licensing Deal Metrics

Based on the fact that defendants (MyLikes & Living Social) in this consolidated case are settling with Blue Calypso at a pace of one per quarter, one could logically conclude that more settlements are likely based on these patent validating actions. Therefore, Groupon investors should conduct a risk analysis to understand what a possible settlement would cost the company. What you will find is the cost to Groupon is very significant over the long lifespan of Blue Calypso's patents (13 years - valid until December 14, 2026).

By using the MyLikes 3.5% royalty rate as a basis, we can estimate a calculation of what a similar royalty settlement may cost Groupon over the course of 13 years. To be incredibly conservative, this calculation for Groupon's exposure will only be based upon North American (NA) mobile revenue (or 50% of NA revenue reported in Q2 2013 of $377 million). I will also conservatively factor no North American mobile revenue growth at all over the 13 year patent period.

Estimating $754 million in revenue per year, a 3.5% royalty on that revenue would equal $26.4 million year or $343 million over the lifetime of the Blue Calypso patents. This royalty hit to Groupon's future revenue would surely be considered a weakness in spite of overall strength.


While Groupon's recent earnings report has caused investors to bid up shares to reach +133% year to date gain, many have no idea of the risk involved in a relatively unknown, high stakes litigation battle which could directly impact Groupon's robust, mobile growth.

The risk to Groupon shareholders if a settlement or royalty deal happens is that current and future revenue will be diminished based on the settlement terms with Blue Calypso until the patents expire in 2026. Conversely, Groupon may ultimately be successful in a jury trial verdict in fending off this patent infringement complaint. But, the cost and distraction of litigation over the next 12-18 months will come at a price to Groupon's bottom line and performance.

The key Markman Hearing is scheduled for February 5, 2014, with a jury trial expected in Q4 2014. But the way defendants have recently been lining up to settle with Blue Calypso, there may be no defendants left in 2014.

We will have to wait and see what Groupon decides to do - mitigate the risk of a jury trial by negotiating a settlement with Blue Calypso following fellow defendants MyLikes & Living Social's calculated decisions recently or let the jury decide their fate. We do know that Groupon has a history of settling out of court for cash awards in previous suits against them as recently evidenced by a recent class action suit against Groupon in the U.S. District Court for the Southern District of California (Case name: In re Groupon Marketing and Sales Practices Litigation) which resulted in a settlement agreement of $8.5 million.

Going forward, I would caution investors to not expect a play by play via press releases from Groupon's Investor Relations department. The best place to watch the legal action as it happens is by following the flow of court business via by referencing "cause number 6:12-cv-486, Blue Calypso, Inc. v. Groupon, Inc."

I am of strong conviction that MyLikes and Living Social are likely not the first and only defendants to settle out of court with Blue Calypso instead of pressing their luck with individual jury awards for damages that could reach much higher than the $364 million royalty (3.5%) based estimate outlined above in the case of Groupon.

Disclosure: I am long OTCQB:BCYP. 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.