The ParkerVision (PRKR) vs. Qualcomm (QCOM) patent infringement case has been a highly contentious, hard-fought litigation. Qualcomm designs, develops, manufactures and markets digital communications products and services, with annual revenues of $25 billion and has 1.68 billion shares outstanding. It was last quoted on the Nasdaq as of Nov. 13, 2013, at $70.03 per share. The result of the trial was a resounding verdict for ParkerVision on infringement and patent validity in the first trial, despite a jury award of damages for past infringement that was smaller than expected in the second trial.
Since these verdicts, there have been a number of post-trial motions made by both sides, which most experts believe will have little impact on the most important issue that will decide the future of Qualcomm business going forward -- namely the infringement of ParkerVision's technology. ParkerVision's technology has been described by Kevin Rivette, CEO of 3LP Advisors LLC, and one of the world's most highly respected patent experts and advisor to major hi-tech companies as "revolutionary, foundational (choke patents), and virtually impossible to replicate without infringing." According to courtroom witnesses, this was confirmed by Qualcomm's director of engineering, Charles Persico, during the injunction hearing before Judge Roy Dalton, where he testified that it would take Qualcomm at least three years and thousands of man months to find a workaround of ParkerVision's patents and that despite such efforts he doubted it could be accomplished at all. Unfortunately, that testimony was later sealed by Judge Dalton.
It will take several months for all of the pending motions to be decided, during which time the judge will encourage the parties to try and resolve their differences and settle the case. If the parties are unable to reach an agreement, the judge has several options. He will ask the parties to inform him of where the negotiations left off when they broke down and attempt to craft a settlement from those numbers. He can issue an injunction and wash his hands of the case, or order Qualcomm to pay compulsory royalties and licensing fees or decide to do both. He may choose to increase or decrease the jury's damages verdict, change the no willfulness verdict or any combination thereof. Most experts I have polled, including experienced patent attorneys, agree that increasing the damage award or issuing an injunction are the front runners, but there's no way to know at this stage.
Despite all of the above observations and speculations, the key to the outcome and resolution of this dispute and the impact on both ParkerVision and Qualcomm has more to do with the potential impact to Qualcomm's customers than anything else. The life blood of companies such as Samsung (GM:SSNLF), Apple (AAPL), Google (GOOG) and their competitors is their supply chain. Without a constant dependable flow of components for their products, they cannot function and be competitive in today's global markets. Anything that disrupts or threatens their supply chain must be avoided at all costs, and whatever preventative measures can be taken to assure the integrity of the supply chain is an imperative. The current legal issues confronting Qualcomm threaten the certainty of that supply chain. After all the litigation dust settles, Qualcomm will have to pay ParkerVision licensing and royalty fees. What the fees will be is unknown at this time, but they will likely be comparable to the fees that are paid by others in the industry for similar technologies. Qualcomm has no way out. The impact to Qualcomm's business and market cap are potentially severe.
Whatever the fees are ultimately determined to be as decided by the parties or the courts will be borne by Qualcomm. Qualcomm's customers will not accept a pass through of any of these additional product costs merely because Qualcomm has to pay and absorb an expense it should have been paying since 2006. Rivette calculates that a 5% royalty would result in a reduction in Qualcomm's market cap of as much as 5.5%. ParkerVision has over 200 patents issued beyond the four in the current case, of which many cover its receiver technology. If Qualcomm is infringing on any additional patents it will find itself subject to further liability. If those patents cover additional features, which is likely or they wouldn't be unique patents, then such infringement will bring additional chips and additional value into the damage equation.
If ParkerVision is successful in prosecuting any claims for infringement by Qualcomm of these additional patents, Rivette estimates Qualcomm could suffer an additional 5.5% hit to its market cap for a total of 11%. Even the highly litigious senior management of Qualcomm would not be crazy enough to take that chance. Qualcomm can stall and dance around the real issues, but in the final analysis it will have to come to the table and negotiate a real royalty and license with ParkerVision in the near term. Qualcomm can't opt to go back to its pre-2006 technology because it is not compatible with 4G mobile smartphones. Qualcomm is in a bad place. It can keep its business and customers happy by negotiating a fair deal with ParkerVision, or risk the whole pie by not wanting to pay a licensing fee it should have paid years ago while using stolen technology, upon which it illegally grew its business to where it is today.
Qualcomm must negotiate a universal license. Sixty-six percent or more of Qualcomm's business is done internationally, and thus it is mandatory for it to have a license that covers its foreign customers. Failure to make such an arrangement would expose these foreign customers to lawsuits by ParkerVision for infringement. The jury verdict covered both direct and indirect infringement, which allows ParkerVision to sue these foreign customers for past infringement as well as licensing and royalty fees going forward. It is reasonable to assume that these large customers have followed the Qualcomm vs. ParkerVision case very closely and have to be concerned that there is a real risk to their supply chain. This situation gets messier for Qualcomm. It must decide how to resolve this global issue while attempting to soften up ParkerVision by appealing, stalling, and trying to starve ParkerVision financially or possibly buying it at a bargain price by deliberately using these tactics to frustrate stockholders encouraging them to sell and drive the stock price down. That won't work.
ParkerVision currently has sufficient capital to see it through all of the appeals Qualcomm might file, along with ongoing promising discussions with other companies about future business and revenue. In order to quell its customers' anxiety, Qualcomm might offer them hold harmless agreements from any damage recovery by ParkerVision. This tactic is totally impractical. The contingent liability that Qualcomm would have to carry on its balance sheet to cover such agreements would be so large as to cause investors and analysts to severely cut their price estimates of Qualcomm's stock. The supply chain issue is immediate since large customers place their orders for components as much as 15 months out. A decision confirming the jury's verdict will take approximately 10.5 months, according to the current court calendar reporting services. That puts Qualcomm in a tricky situation. Its customers will attempt to pressure Qualcomm to settle.
Absent Qualcomm settling in the near term these large customers will look to protect themselves and consider other options. They could look for an alternative supplier (ParkerVision), make an offer to buy ParkerVision, or license the technology themselves and subcontract the manufacturing. None of these alternatives are good for Qualcomm and auger well for ParkerVision. Qualcomm is dancing on a dangerous tightrope, which could cripple its business.
Applying a conservative licensing and royalty fee of 5%, which was the percentage used by the jury in awarding the $172 million verdict for domestic sales, a Qualcomm universal license on approximately 630 million chips -- the number estimated by ParkerVision as using its technology -- will generate $140 million per year in royalty income worldwide for ParkerVision. Even after deducting annual expenses of $15 million, this still leaves a net pre-tax profit of $125 million per year, or approximately $100 million after tax. Based on a multiple of 20 times earnings, which is the multiple used by analysts and investors for ParkerVision's industry category, $100 million annual profit should result in a market cap of $2 billion.
An alternative valuation could be deduced based on Persico's sealed testimony in which, according to courtroom witnesses, he stated that ParkerVision's technology is embedded in Qualcomm's chip set. If this were the case, a reasonable claim could be made that as an integral part of the chip set, which has a value of approximately $20, and applying a conservative royalty estimate of 2% the income and profit to ParkerVision would increase by 60% from the first estimate. A reasonable settlement based on the above analysis makes ParkerVision a $20 stock at minimum. If the higher alternative profit analysis were to occur, the price of ParkerVision could be expected to be much higher. Stay tuned. As a final note, just the legal costs to Qualcomm for the last quarter as reported in Qualcomm's latest 10-Q filing drove its stock down 4%.