Apple/Microsoft's 'Rockstar Consortium' Attack Google And Android - Who Could Benefit?

| About: VirnetX Holding (VHC)

A Brief History

Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Ericsson (NASDAQ:ERIC), BlackBerry (NASDAQ:BBRY), and Sony (NYSE:SNE) formed a consortium - the "Rockstar Consortium" - in July of 2011 to purchase some 6000 patents from a bankrupt Nortel. The patents covered a wide range of wireless and search technology including 4G LTE. The consortium paid $4.5B for the patents outbidding Google (NASDAQ:GOOG) who had bid $4.4B.

Shortly after Google was outbid on the Nortel (OTC:NRTLQ) patents they purchased Motorola Mobility for the princely sum of $12.5B - mainly for the huge patent trove and, to a lesser extent, the handset manufacturing. This purchase has appeared to be a massive bust for Google based on no enforceable injunctions and only a smallish revenue stream they have earned from the patents.

The Current Situation

Fast forward 2.5 years and on October 31, 2013 (Halloween) these patents are finally being asserted against Google and several Android phone manufacturers including Samsung (OTC:SSNLF), LG Electronics (OTC:LGEIY), Huawei, HTC (OTC:HTCCY), Pantech, Asustek (OTC:AKCPF), and ZTE (OTCPK:ZTCOF). Rockstar Consortium filed 8 different lawsuits asserting the technology in federal court - specifically the Eastern District of Texas - a popular venue for patent litigation. Apparently Google/Android and Rockstar could not reach an agreement regarding these patents.

This is an all out assault on Google and the Android smartphone ecosystem and it would be fair to say that most experts expected those patents would rear their ugly head sometime in the future. The web of patent litigation is complex and it is impossible to know at this point who the big winner will be or whether we will see some kind of compromise between the big players like Apple, Microsoft, Google, and Samsung. However there are some smaller players in the IP space that could see some action related to these suits.

Who Could Benefit?

As was mentioned above the Nortel Patents ended up being sold for $4.5B - this was several times more than what experts were anticipating and as a result at least two other companies in the intellectual property space saw shares of their stock skyrocket. Those two companies are Interdigital (NASDAQ:IDCC) and VirnetX (NYSEMKT:VHC). I'll show graphs for both companies but I will delve deeper into the potential implications for VirnetX since it is a stock I have written about, am invested in, and follow closely.


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Interdigital is a 40 year pioneer in the wireless technology with over 19000 patents including 2G, 3G, 4G, IEEE-802 and related technologies. They have licensed many of the largest companies such as Apple, LG, Sony, Ericsson, Nokia, and Samsung to name a few. As the graph above shows - Interdigital's share price skyrocketed during the Nortel Patent auction and final sale. I doubt Interdigital would be an acquisition candidate for Google or Samsung because they already have a pretty mature licensing program including FRAND agreements with Apple, Sony, Ericsson, and Nokia (NYSE:NOK) but their share price could certainly move up as Rockstar litigation plays out.


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VirnetX develops software and technology solutions for securing real-time communications over the internet. VirnetX's patented secure real-time internet communication technologies are foundational and declared essential for 3GPP LTE-A Release 10 specifications. This means for companies to comply with 3GPP Release 10 security specifications they will license with VirnetX or potentially face litigation. As the graph above shows - shares of VirnetX stock also skyrocketed during the Nortel patent auction. However what makes this a more compelling story is the fact that VirnetX has beaten both Microsoft and Apple in court and has current litigation ongoing with both companies.

In 2010 VirnetX won a $105M jury award against Microsoft who settled a few months later for $200M and a limited license. In 2012 VirnetX won a $368M jury award for past damages against Apple. Immediately following the 2012 Apple trial VirnetX filed a new lawsuit against Apple to cover the newer iPads and iPhones. In May of 2013 VirnetX filed a new suit against Microsoft for newer products like Skype that weren't included in the first license. Of course Apple and Microsoft are the headlining names of the Rockstar Consortium.

Why Is This Important Regarding VirnetX?

Think if you were Google and Samsung and you just had these lawsuits filed against you by the Rockstar Consortium headlined by Apple and Microsoft and there happens to be a company out there (VirnetX) that has beaten both Apple and Microsoft in court to the tune of nearly $600M? Now consider that same company (VirnetX) has current litigation pending against both Microsoft and Apple for the EXACT SAME PATENTS that they previously asserted against them successfully!

I have previously written articles on Seeking Alpha here and here outlining why Samsung would be a good suitor for VirnetX and why Google could be a good suitor for VirnetX. Okay - so let's remove the speculation that Google or Samsung could buy VirnetX to try and fend off Rockstar - what if just the threat of them buying VirnetX spurs Apple and Microsoft to settle up with VirnetX - that would definitely be a win/win for the shareholders and the company. The pressure on Microsoft and Apple to settle with VirnetX would seem to be ratcheted up based on the Rockstar lawsuits filed.

Even without any Google/Samsung speculation VirnetX has two impending catalysts coming up that could rocket the share price upward:

1. JMOL/New Trial motions pending against Cisco (NASDAQ:CSCO)

2. Running Royalty Rate to be imposed on Apple for future infringement since the 2012 $368M judgment only was for past damages. VirnetX has asked for 1.52% - The dollar amounts are staggering - consider Apple did around $37B of sales in the last quarter alone. Apple has filed an appeal with the CAFC which was expected by VirnetX and in fact VirnetX issued this press release expressing their optimism about prevailing in the matter.

Of course VirnetX's patents are in various stages of re-examination. However, in June a shell company called New Bay Capital, LLC filed petitions for Inter Partes Reviews (IPRs) against 4 VirnetX patents - singling out the exact same claims that were asserted in the 2012 Apple trial (I wrote about this here). Recently New Bay has requested to terminate those IPR petitions and Apple protested. Apple had filed their own IPRs against the same patents and claims but they filed after the deadline and were trying to get their IPRs joined to New Bays to avoid the chance of being collaterally estopped. However the Patent Trials and Appeals Board rejected Apple's request due to lack of standing in the matter.

Meanwhile, VirnetX has continued to secure new patents - 10 so far in 2013 citing the exact same references that Apple and Cisco are asserting as "prior art". They are confident about the re-examination process and believe it will only further bullet-proof their already battle-hardened IP.

To add some gasoline to the VirnetX mix there are 14.7M shares short comprising nearly 35% of the float. With a $52.50 analyst mean price target and currently trading just under $22 - VirnetX is an extremely compelling buy at this level.

Disclosure: I am long VHC. 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. This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE.

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