Editors' Note: This article discusses a micro-cap stock. Please be aware of the risks associated with these stocks.
There were plenty of big surprises in the patent litigation world last month. Companies like ParkerVision (NASDAQ:PRKR), Vringo (VRNG) and Worlds (OTCQB:WDDD) saw dramatic swings in their stock price as a result of infringement related litigation events. In the patent assertion game the lawyers run the bases and the juries call the homeruns. The judges play the ref's and sometimes call the games before they start. Investors in these equities have reaped huge short-term gains as well as substantial losses, depending on their ability to predict the future moves of the courts and the USPTO. From an investor's viewpoint, Judges, Juries and the Patent Office rarely appear to be on the same side of an issue. Analyzing these patent assertion entities with a mind to understanding the potential impact of possible short-term future events, whether in the courtroom or at the USPTO, is the key to profiting in this sector.
ParkerVision vs. Qualcomm, a reflection of Vringo vs. Google
After a federal jury found infringement against Qualcomm, ParkerVision investors have been reeling. Unlike other prominent cases of the past, such as Vringo vs Google (NASDAQ:GOOG), ParkerVision chose two separate phases for the jury to determine infringement and award. By utilizing this procedural courtroom method investors were left with a few days between the jury verdict and the unknown award. Many have commented that the pent up speculation of the potential award was like pouring gas on fire. In contrast to Vringo (styled I/P Engine vs. Google) which opted for a single jury decision that included verdict and damages. Immediately the stock's market capitalization was far beyond ParkerVision's initial $500 million damage estimate. ParkerVision investors should have tempered their expectations in light of court cases like Vringo's. Long shareholders were punished and in a matter of a few days the jury returned an award of $173 million, far less than the $2 billion some heady ParkerVision longs had speculated. Immediately the stock fell, losing as much as half its value.
This meltdown event was almost identical to the Vringo share price drop. Vringo which also won their jury verdict, has since been mired in speculative doubt. The jury's damage assessment made little sense, as the defendants Google, AOL Inc (NYSE:AOL), Target (NYSE:TGT) and Gannet (NYSE:GCI) assigned damages were not commensurate with their businesses. Since Google indemnified all its partners, the damage award falls completely on them. However, the jury's decision to weigh an unequal proportion of damages on Google's partners left everyone, including Judge Raymond Jackson in dismay. Many lament the immediate crash of share price following that troublesome jury verdict back in November 2012. Since then Vringo (I/P Engine) has languished in federal court, leaving long-term Vringo investors with a bitter experience of the federal court system. The damage win, exclusive of the royalty, in the Vringo case was only $133 million, in contrast to the more than $600 million Vringo had earlier estimated. ParkerVision is hoping more leverage may be gained in its attempt to win an injunction to stop Qualcomm from producing its infringing products. However for most investors this PAE upside is mostly complete.
Worlds vs. Activision Blizzard (NASDAQ:ATVI)
The latest salvo of legal motions in the Worlds vs. Activision Blizzard case has Activision challenging the priority date of the Worlds, Inc. core patents. The core Worlds 6,219,045 patent basically covers online interaction in a virtual 3-D world.
"The present invention provides a highly scalable architecture for a three-dimensional, multi-user, interactive virtual world system. In a preferred embodiment a plurality of users interact in the three-dimensional, computer-generated graphical space where each user executes a client process to view a virtual world from the perspective of that user. The virtual world shows Avatars representing the other users who are neighbors of the user viewing the virtual world. In order that the view can be updated to reflect the motion of the remote user's Avatar, motion information is transmitted to a central server process that provides position updates to client processes for neighbors of the user at that client process. The client process also uses an environment database to determine which background objects to render as well as to limit the number of displayable Avatars to a maximum number of Avatars displayable by that client."
Since Worlds announced the upcoming Markman hearing the stock has slowly moved up. However the delay of the scheduled Markman Hearing, as a result of the Whitey Bulger federal trial, caused that timetable to get shelved. Activision Blizzard took advantage of this delay and followed up with a Motion for Summary Judgment, claiming the USPTO Examiner failed to properly detail the priority date on the face of the patent. Activision Blizzard argued in its Motion that the priority date of the '045 patent was indeed missing from the face of the patent. Worlds immediately filed a corrective notice with the USPTO from which they received a very quick response; that included correcting the missing date. Activision used this correction to their advantage by citing the Code of Federal Regulations rules (CFR 1.78) the effect of which limits USPTO corrective action in ongoing litigation. Accordingly, Activision would not be liable for infringement prior to the USPTO September 2013 correction date. Worlds' stock within days lost more than half its value. Since the filing and the recent hearing of the yet to be decided MSJ, Worlds' stock has stagnated and many investors have taken a blind eye to the value of Worlds' litigation. However, I believe Activision has a complete grasp of exactly how much damage Worlds can do. During the latest MSJ hearing, (link to the video), Activision's chief counsel stated before Judge Denise Caspar that Activision was indeed being prejudiced by Worlds action of seeking judicial correction of the contested priority date. He further expresses what's at stake in this lawsuit. Here's the exact quote:
"Since there are billions of dollars at issue here." At 53.32 minutes into the video provided above.
Does Worlds have a chance at winning the MSJ? Only a Federal judge has the power to use equitable jurisprudence in correcting the contested priority date and allowing the lawsuit to continue. Investors took exception earlier in the hearing when Judge Caspar asks the following question.
"…If I were to rely on the prosecution history would it be clear to me what the priority date would be?" At 49.21 minutes into the video.
Worlds Counsel replies, "Absolutely you're Honor".
The main underlying drawback for Worlds' argument is the lack of a previous federal case in which a Judge corrected a priority date on the face of a patent; specifically on the basis that the missing date was solely disclosed in the prosecution documents (between the Examiner and the patentee). Activision argued that under the FCR rules, the provisional priority date of the patent should have been detailed in the "Application Data Sheet". However no document exists within the Worlds' patent filing labeled "Application Data Sheet", yet the patent issued. Subsequently over the years Worlds was awarded 8 more continuing patents based off the core patent. A continuing patent application is a patent application which follows, and claims priority to, an earlier filed patent application.
Worlds' argument is persuasive in form over content, as the contested priority date was well documented in the patent prosecution documents, and makes it clear what the USPTO Examiner and the Patentee were basing the priority date on. Federal Judges in past decisions have corrected other components on the face of a patent. The US Court of Appeals has affirmed federal judge's corrective rights to patent defects in an infringement action. However this is new ground for the federal court in correcting this kind of specific error, related to a priority date, and a missing application data sheet. Judge Casper's decision might just be a precedent case for similar problems, since the Worlds' missing priority date appears to be the only such case in recorded case history. Many investors are watching this case closely, especially in light of news that Activision's leading "infringement product", Call of Duty; Ghosts just recorded $1 billion in sales in the first 24 hours of retail sales. Indeed as Activision's lead counsel stated, "there are billions of dollars at issue here", though it appears very few investors or WallStreet for that matter is conscious to what is happening here.
Conclusion: Investors holding PAE equities require a time commitment in staying vigilant on the courtroom and the USPTO actions.
At any given time a Federal Judge could issue a ruling that causes either a massive spike up or down in any of these discussed equities. ParkerVision and Vringo stand as examples to the effects of the courtroom and the USPTO. Today's USPTO decision validating Vringo's '664 patent saw a slight increase in the market capitalization. Those following Vringo know a likely 7% royalty and the ramifications of that would easily raise Vringo's market capitalization by as much as a billion dollars. By the same token, further delays in decisions add fuel to short sellers looking to capitalize on an impatient shareholder base, driving the stock down in the near term. Investors have the ability to draw on certain resources to monitor the events of the courts, utilizing the PACER System as well as monitoring the USPTO's website. Many have witnessed PACER updates that are minutes ahead of stock halts, and corporate releases. There are costs associated with some of these tools however the knowledge gained can be monumental in your investment decisions. Staying ahead or in front of these changes also requires a time commitment that some investors find impossible. Researching and staying observant to the litigation and the USPTO details, coupled with patience, is the best advice when making investments in speculative patent plays.
Disclosure: I am long VRNG, OTCQB:WDDD. 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.