Seeking Alpha
Event-driven, deep value, long/short equity, banks
Profile| Send Message|
( followers)

In 1998 ParkerVision (NASDAQ:PRKR) approached Qualcomm (NASDAQ:QCOM) to consider adopting ParkerVision's RF receiver technology, known as "energy transfer sampling" technology, promised to reduce the cost and size of cellular phone receivers while increasing performance and decreasing power consumption.

A Qualcomm business development executive commented that if the technology worked, "this is virtually the holy grail of RF". After testing the ParkerVision technology, sometimes referred to as "D2D", a Qualcomm engineer commented, "This would make better phones than what we are currently shipping," although Qualcomm did not share their internal views with ParkerVision. Upon executing additional non-disclosure agreements, ParkerVision agreed to show Qualcomm the details of how its D2D technology worked and Qualcomm began to encourage ParkerVision to license the technology to Qualcomm. A Qualcomm Sr. VP for technology studied ParkerVision's pending patents and reported to colleagues, "Bottom line is I think it is going to be very difficult for anybody to ever use this technique without stepping on one or more of their (patent) claims". Negotiations to license the technology ceased in late 1999, when the parties could not agree on license terms.

In Jan of 2006 Qualcomm launched the RTR 6275 which incorporated ParkerVision's patented energy transfer sampling technology for the RF receiver. From 2006 to 2013 Qualcomm continued to launch over 60 new products from over 15 different product families based on the ParkerVision's technology. Qualcomm's market share of the US cellular phone transceiver market grew from less than 30% in 2006 to just over 90% in 2013. In July of 2011 after ParkerVision had discovered Qualcomm's unauthorized use of the technology several months earlier, Parker filed a complaint in Federal District Court of the Middle District of Florida.

Trial started on Oct 7, 2013 and lasted two weeks. Jury was empowered with the task of determining if the 11 claims of 4 ParkerVision's patents were valid. Additionally, the jury was to determine if the products accused of infringement were in fact infringing products. On Oct 24, 2013 the jury awarded ParkerVision $172.7 million for past damages. Damages awarded were based on approximately 750 million infringing units shipped in the US from January 2006 until start of the trial--or approximately 0.23 cents per unit.

Remaining issues to be determined by the Court are:

1) ParkerVision's request for a permanent injunction against Qualcomm's infringing products shipping in the US, or request in the alternative (rather than an injunction) enhanced damages per unit, (greater than .23 cents per unit) on a going forward basis.

2 ) Request for pre-judgement and post-judgement interest to be paid on the infringing products, and request for the Judge to re-consider the Jury's verdict of "no willfulness".

The Judge can consider all testimony he heard, including testimony of a Qualcomm VP who has been responsible for all RF chips. This VP's testimony was not heard by the jury, but was heard by the Judge in an Injunction Hearing, and appears to have a number of conflicts with the testimony heard by the jury from the only Qualcomm employee that testified before the jury.

During the period prior to trial there have been several misleading articles about ParkerVision. The following is an attempt to set the record straight:

Over 50% of Markman's are overtuned on appeal:

WRONG, and here's why. The Federal Circuit website posts statistics here.

According to the Appellate Court's own website 17% of all District court patent cases that it reviewed over the past year were reversed - or said another way - 83% were upheld. How is it possible that 50% of Markman rulings are overturned on appeal when only 17% of ALL cases are overturned in total? It appears that the judge in the ParkerVision case was thorough and did a great deal of work in the Marmkan, including hiring an expert to assist him, and where both parties agreed to the expert. It would seem that the chances of overturn on Markman is very slim to none - certainly nothing anywhere near the "over 50% chance" that the bear case tries to make.

That one of the 19 accused products was supposed to be removed from infringing products and is grounds for reversal

WRONG, and here's why. Both ParkerVision and Qualcomm agreed and accepted the judge's verdict form. Both parties agreed that there was one product that was supposed to be on that form and therefore removed it. ParkerVision explained that there were $0 damages attributed to the product that was removed and therefore there is no adjustment required and Qualcomm agreed. A party waives their right to challenge something that they agreed to. Not only will there not be a reversal but there is no impact to the damages number at all.

Nash Bargaining Model is a good grounds for reversal

WRONG again, and here's why. The Federal Circuit does not endorse or prohibit the NB model. ParkerVision used this only as the last step in their expert's assessment of damages to describe how the two parties would divide the profits between them. PRKR's expert suggested a 50/50 split. There was also other testimony during the trial on how Jeff Parker would have negotiated a license, testimony regarding the VIA license, etc. The jury came to their own conclusion on what was an appropriate damages number. It cannot be said that they used a 20/80 split, for all we know they used the VIA license as a model. The VIA license is for a total chipset, and if they calculated how that percentage would be adjusted if measured off of just the transceiver ASP then this could have been their methodology, nobody knows.

What we do know is that the .23 per unit that the jury awarded is a conservative number that certainly does not fall outside of what the Federal Circuit, from recent rulings, would consider unreasonable. Based on the transceiver of having an ASP of $4 to $5 this comes to slightly over an average of a 5% royalty on a transceiver. That is a conservative number, especially after Qualcomm VP Charles Persico testified of the value and importance of the receiver, and that there were no near term non-infringing alternatives, all which would lead one to conclude the jury's royalty is conservative due to the importance of the patented technology. The judge and the Appellate Court can and will use all testimony, not just what the jury heard, so there is not a good case for reversal on the damages award.

Enhanced royalties going forward by the judge would result in a nearly 15-25% unheard of royalty rate

If the judge enhanced the rate, as Qualcomm is now a willful infringer, since they have not taken out a license, he could double the rate or even more, and it would still fall within the range of how the Federal Circuit views reasonable royalties for the important technology such as the D2D.

A .50 royalty rate on a $20 chipset, if the judge was to use the VIA license model as a guide, would be wholly justified based on:

i. the VIA license was paying PRKR for worldwide shipments in ALL jurisdictions, both where the company had patents and where they do not. Since Qualcomm would be taking out a U.S. only license in this court's view they can adjust the royalty higher for the lower volumes of U.S. only,

ii. the VIA license is based on the entire chipset not just the transceiver,

iii. the VIA license is only exclusive in CDMA it was non-exclusive on everything else and the vast majority of the now infringing products are multi-mode and therefore would fall under the non-exclusivity provisions,

iv. Qualcomm is now a willful infringer and can no longer hide behind Qualcomm engineer Jaffee's testimony that he never heard of PRKR. It is not uncommon for courts to increase the royalty significantly for willfulness if the infringer doesn't take out a license, otherwise why would anyone ever take out a license?

The judge in my opinion will enhance the royalty and will not be overturned because the jury was conservative and left the judge a lot of room to work with. Furthermore this judge heard Qualcomm perjure themselves with conflicting testimony between Jaffee and Persico, and if Qualcomm appeals the Federal Circuit will hear this conflicting testimony as well.

No Possibility of Injunction:

WRONG and here's why. Should the judge determine that a future royalty will not compensate ParkerVision for the irreparable harm that Qualcomm creates by use of ParkerVision's patents, then the judge can grant injunctive relief and grant an injunction against the infringing products. Support for this legal basis was recently reaffirmed at the Federal Circuit (Appellate Court).

The ruling from the Federal Circuit re. Apple (NASDAQ:AAPL) vs. Samsung (SSNGY) overturned a California District Court's ruling where the District Court did not grant Apple an injunction against Samsung's infringing products.

The key issues in this ruling that could be viewed favorably to ParkerVision's request for an injunction against Qualcomm are:

1) Showing that the patented feature makes the product more desirable or in the alternative that the absence of the patented feature makes the product less desirable. This should be straight-forward since Qualcomm itself moved to ParkerVision's patented feature to achieve less costly receivers, smaller receivers, more frequencies and modes for worldwide use of cell phones, and better performing receivers - all discussed and documented at trial.

2) This ruling also determined that a defendant's ability to pay damages does not in and of itself determine if payment is an adequate remedy, rather that the court should look for other considerations as to whether money alone is an adequate remedy, and;

3) That whether a patent owner could license a patent, does not mean that the patent owner would automatically license everyone - in this ruling the higher court determined that just because Apple might license the patents to some, doesn't mean that it would license them to everyone, especially a competitor such as Samsung. The reason is that it is not reasonable that a patent holder would license to someone who would by use of the patent be able to gain such an advantage that they would take market share away from the patent holder, which might never be regained again. Therefore it was determined that Samsung's use of the patents could be determined as "different" than others. This point is important because the same could be said of the relationship between ParkerVision and Qualcomm.

It is not possible to predict whether the court will or will not grant an injunction that Parker Vision is requesting; however, one other notable fact is that both ParkerVision and Qualcomm get their products from 3rd parties - i.e. neither company owns manufacturing, but rather outsources to 3rd parties the production. Therefore it is not as if Qualcomm can make the case that they have manufacturing staff, significant depreciating manufacturing assets, etc. and therefore and injunction shouldn't be granted - both Qualcomm and ParkerVision outsource this function and therefore look alike under the law.

4) If ParkerVision can show the Court that by Qualcomm opening up its interface so that other RF chip companies can interface to Qualcomm's baseband processors, then there will not be a supply problem for cell phones in the U.S. There are other companies that have recently introduced transceiver chips that can replace Qualcomm's should an injunctive relief be granted to ParkerVision. The court could provide a design timeframe before the injunction is in effect, providing Qualcomm's customers the time to change RF transceivers away from Qualcomm products.

The real possibility of an injunction creates a motivation for Qualcomm to settle rather than disrupt the supply chain of their customers and the burden to their customers in having to design in new RF chips. This possibility, and the reality of an injunction creates real value for ParkerVision and therefore is a reason for optimism by the Bulls.

ParkerVision can't expect their first payment from Qualcomm or anyone until 2019 because that's how long the process takes

WRONG: The Appellate Court's own website shows that the time to hear an appeal is slightly over 10 months. Assuming the judge's final order is in sometime first quarter 2014 then Qualcomm has only 30 days to appeal. This means that the Appellate Court would likely hear this case late 2014 or first of 2015.

PRKR's case has been handled with excellent skill by the court, with extreme experience by McKool Smith, with extraordinary patents prepared by Sterne Kessler, and with many mistakes and contradictions made by the 4 different law firms that Qualcomm used. If the average patent case on appeal has an 83% chance of sticking, then I believe this extraordinary case has well over 90% maybe 95% chance of not being reversed. This means that Qualcomm will have to pay ParkerVision the $172 million + Interest ($50 to $100 million) + additional royalties which will likely be enhanced. By late 2014 to early 2015 this means that ParkerVision has over a 90% chance of collecting between $300 and $400 million dollars.

Qualcomm can appeal to the Supreme Court, but there is such a small chance of that court taking this vanilla patent case that I put no merit on that occurring.

ParkerVision's chances of generating revenue from enterprising into relationships with other companies as licensees or other business relationships is excellent, especially before this is settled between ParkerVision and Qualcomm.

This patent case was based on 4 patents, PRKR has 240 patents! Parker, Sorrells, Rivette have all been looking at other possible infringing products in cellular, WiFi, Bluetooth, GPS, and other apps according to recent updates. While I can see certain companies may wait to see how Qualcomm comes out on this case, I can also see why many other companies will want to arrange arms length licenses or other agreements with PRKR BEFORE PRKR has $100's of millions in the bank. It just stands to reason that companies will be able to get better financial terms now than later, and in the process licensees and partners now will gain competitive and financial advantage over those who wait. PRKR has shown that it is able to go through a very contentious litigation against a company who knows how to litigate, and yet for PRKR to come out the winner. This will have a positive impact as many are not a litigious as Qualcomm and will enter into some form of business relationship with ParkerVision sooner than later.

Disclosure: I am long PRKR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Why The Bulls Have It Correct In Their View Of ParkerVision's Future Prospects