Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message| ()  

Executives

Patrick Van de Wille - VP, Communications and IR

Bill Merritt - President and CEO

Rich Brezski - CFO

Analysts

Charlie Anderson - Dougherty & Company

Anil Doradla - William Blair & Company

Michael Cohen - MDC Financial Research

Nicholas Rodelli - CFRA Research

Eugene Fox - Cardinal Capital Management

Tim Quillin - Stephens Investments

John Broderick - Permit Capital

InterDigital, Inc. (IDCC) ITC Decision Briefing Conference December 20, 2013 10:00 AM ET

Operator

Good day and welcome to the InterDigital ITC Decision Briefing Conference Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to Patrick Van de Wille. Please go ahead.

Patrick Van de Wille

Hi, thanks Melanie. Good morning, everyone and welcome to InterDigital’s conference call to discuss yesterday’s ITC decision. With me this morning are Bill Merritt, our President and CEO and Rich Brezski, our CFO. The goal of today’s call is to discuss yesterday’s decision of the ITC and also to go over other aspects of the business.

Before we begin our remarks, I need to remind you that in this call we will make forward-looking statements regarding our current beliefs, plans and expectations which are not guarantees of future performance and are subject to risks and uncertainties that could cause actual results and events to differ materially from results and events contemplated by such forward-looking statements.

These risks and uncertainties include those set forth in our earnings release published yesterday evening, our annual report on Form 10-K for the year ended December 31, 2012, our quarterly report on Form 10-Q for the quarter ended June 30, 2013 and those details from time-to-time and our other filings with the Securities and Exchange Commission.

These forward-looking statements are made only as of the date hereof, and except as required by law, we undertake no obligation to update or revise any of them, whether as a result of new information, future events or otherwise.

Now clearly yesterday was an important moment, but certainly a defining one for our Company and we’ll be discussing that decision today. That being said, the date on the calendar has been known to us for some time and the Company’s leadership and Board have been discussing the business which remains in great shape outside the scope of whatever decision the ITC might render.

So today rather than prepare a script for you we thought it might be best for me to just ask Bill to provide us with his views of the decision and a more general update on the business, and then open it for questions.

So with that Bill let’s start off with a quick review of the ITC decision, what the way forward is on that case and a quick overview of its potential impact on other cases and then move on to a broader review of the business.

Bill Merritt

Thanks Patrick, and good morning, everyone. As let me reiterate what Patrick has said. That while the decision is important, it is by no means a defining moment for the Company. So as Patrick said let me go through the decision itself. Just be aware that we have what you have. We have the notice. We do not have the underlying decision. So we don’t have any further information on the case beyond that that commission has put forth in the notice. We should be getting the decision in the near future.

So in terms of the decision, basically what the commission did was make some minor adjustments that appear to the claim constructions, but not sufficient adjustments such that the ultimate decision would change. So the commission basically upheld the ultimate decision by the ALJs in that to do with no violation of Section 337. We are obviously very, very disappointed in the decision. We think it is flat wrong, and obviously we will appeal.

Without the underlying decision, it’s hard to know exactly what the commission’s rationale was, but looking at the decision of -- one example on the 970 patent. They did not appear to make any change to the ALJ’s findings and on that patent the ALJ had used one claim construction for its infringement analysis and a different claim construction for its validity analysis, so -- and you can't do that. You can't use different claim constructions for validity and infringement. So we think the decision by the commission is fundamentally wrong.

And therefore, that we have a very, very strong opportunity at the Federal Circuit to review the case. And unfortunately, it’s been a pattern with the commission (inaudible) with us on a number of occasions, have gotten things that we thought were very, very straightforward, they got them fundamentally wrong. We’ll come back to that because I think that while we don’t know for sure why that is, I think certainly people read about the regulatory environment every day, and the effect that that could have on a number of things in the intellectual property world, so we will come back to that but obviously again very disappointed in the decision. That said, we think we have a very good opportunity on appeal.

So let me talk a little bit about the appeal just to give you that process and timeframe and then also talk about the 868 case, which is the next case up at the ITC.

So the Federal Circuit review, as you folks know, we’ve been through this a couple of times before. We can move that process along pretty quickly, so we can immediately file for a notice of appeal. We can quickly, once the commission gets its documentation over to the Circuit, get our brief in , and that will accelerate the timing such that we think we can be briefed by the second quarter of 2014, and then you need oral argument and then the decision, the latter two not being under our control, so the front half of the process we can control, the back half of the process we can’t control as much.

Beginning to end, the timeframe varies as you know with the prior ITC decision in the Nokia case. That took a while as we’ve waited for the ITC to actually -- the Federal Circuit to actually write that decision, but our LG appeal actually went very quickly. That went in roughly 12 months or so, plus or minus. So we think, and I would tell you that our Nokia case was probably an aberration, and the LG case was probably more the norm. So we think we have a good opportunity at the Federal Circuit not only to win on these items, but also to do so in a reasonably short period of time. So, we’re certainly moving forward with that process now.

In terms of the 868 case, so that’s the next case that’s scheduled for trial in February 2014. So as we’ve described to a number of you before, that case contains patents from a number of different areas. So it has patients from the original Nokia case, which is the 613 case. It has patients from the 800 case, and it has some new patents, which have never before been at the ITC. In terms of the impact in that case, certainly the patents from the 613 case alone we believe makes that case a very technically strong case at the commission.

In terms of the 800, the patents from the 800 case, I would expect that we would trim those back to a degree or sort of two different buckets of patents for patents that have been declared invalid by the commission, we have no choice, but to take those patents out of the 800 -- the 868 investigation. On other patents where there is an adverse claim construction, it really will be a question of whether the products in the 868 case we can demonstrate infringement notwithstanding that construction, and so we’ll work our way through that and make a decision as to which patents we trim or not.

But just to reiterate, that case does include the patents in 613. We believe it’s very technically strong. It also incorporates on FRAND and domestic industry, we think all of the current thinking and it’s supported very strong by evidence by us, so again I think a very technically strong case for the Company at the commission. So that’s through where the current case and the most near-term impact on the 868 case takes you.

Let me talk a little bit though about the, take a step back and look at the licensing business generally. And then also the other opportunities for the business beyond just patent licensing, so I’ll start with the patent portfolio because I think that’s always where we start. Okay. And I think it’s very clear to us and hopefully clear to others while the case yesterday involved was a negative decision on a couple of patents. It also was just that a negative decision on just a couple of patents. The portfolio was much larger than that portfolio today over 20,000 assets in the portfolio over half of which are granted either U.S. or non-U.S. patents.

We think that there is not only extremely good assets in the portfolio outside the patents that were in litigation, but also given that we believe there is a very strong opportunity before the Federal Circuit to undo what the commission has done, the combination of those two things at the end of the day will give us a very strong patent portfolio. I have no -- having been with the Company for I guess at some point nearly 20 years, I’ve watched the R&D here. I’ve watched how others have responded to what we’ve done in terms of our technology development. I’ve been indirectly involved in license negotiations. There is a great amount of respect in the industry for what this Company has done from a technology standpoint. So I have no fears at all about the patent portfolio. It is large, it is valuable, and we will make money off of that portfolio.

Obviously, the thing we’re facing with respect to making money off of a patent portfolio is a very, very challenging regulatory environment. There is a notion out there that seems to say that patents that are not associated with a company that makes a product are somehow less valuable than patents that are associated with a company that does make a product. And obviously we believe that’s fundamentally wrong that there should be a great amount of value placed on the basic research itself regardless of who ultimately holds that innovation.

Our Company is very proud of its innovation culture and innovation history. We’ve done the tremendous amount of work in driving wireless industry. So I think the wrong reasons this regulatory regime has begun to sell that creates some challenges for us. And we’ve been pretty open about that and talked about that, and I think that sort of division if you want to call it that is affecting places like the ITC. So, going forward, I think we just have to -- on one hand, we’re very active in Washington in terms of trying to push the right type of regimes, make sure that the intellectual property laws that are in place encourage innovation regardless of where it occurs, protects that innovation regardless of where it’s held.

And I think we have a lot of allies in that process, but there is also folks that are lined up against this, and so it’s a big fight down in DC. The current legislation in that path that’s being considered now by the Senate is an example of sort of the negative kind of legislation that gets passed that legislation among other things would make it extremely difficult for smaller inventors to ever make any money off of their patents which seem to be completely contrary to what this country is about, which is giving anybody, large or small the opportunity to shine.

So thankfully there was some good push back the other day at Senator Leahy's hearing on the bill, I think a lot caution being expressed by the people on his committee. And so I think our voice is being heard in DC. That said there continues to be a tremendous amount of anti-patent rhetoric in Washington which is affecting, not only us, but affecting the folks that make decisions about us and being realist we need to kind of incorporate those factors into our go forward strategy.

And what I’d say is, is obviously we have been watching this for quite some time and over the past number of years we’ve shifted the business to respond to that deteriorating and changing regulatory environment. And if you take the business and divide it into two pieces you could sort of see how we've done that and, but there's more to do. So if you divide the business you have on one side the historic licensing program for cellular handsets, a very, very strong portfolio, great innovation history, great story to be told there in terms of the ability to get people to license without litigation all good stuff.

The issue with that part of the business is it is not currently associated with a product that we have in the market and I do think that affects us from a perception standpoint. The other sides of the business are things like our machine and machine technology our SAM technology and all the other technologies that we have incubated. And I would tell you that we have positioned those technologies for a lot of reasons I've given you, we've positioned them very differently. Those are patents that are positions within product offering or the solution offerings that we have in the market.

So as an example our Smart Access Manager is a full client solution that we can deliver to operators, handset manufacturers it incorporates our intellectual property that deals with the smart policy-based assignments of handsets onto Wi-Fi or cellular systems, we think they're very, the technology that over the last year has grown in terms of market interest and has also solidified in terms of a standard and one that we're very, very proud to have driven, so that's one opportunity for us and there the product opportunity and licensing opportunity kind of go hand-in-hand and I think the overall picture of that licensing opportunity may be different than the other one, than the one we first talked about which is the handset opportunity where with cellular handset opportunity, but we do not have a product in the market. Again, we don’t believe that this distinction makes sense but we also understand that we need to deal in the real world.

On machine-to-machine, it’s a similar setup for the Company, machine-to-machine is not merely a technology, or a patent generation activity at the Company it is an activity in which we are developing real solutions, so as an example we have the only application enablement platform which is e-platform, which serves to connect machine-to-machine devices back to the network. We have these standard compliant AEP, it's a full product. We have other components of our machine-to-machine technology and we’re making more investments there, so again approaching those opportunities very differently than, actually the approach to that technology is very similar to what we did before on cellular obviously they were all associated initially with the products.

And so that goes M2M today and continues to have that association and will continue to have that association and well I think we can create some very good opportunities financially for the Company but also create the right perception for that because again, not the rules we created but perception seems to be extremely important here, sometimes perhaps even more important than reality.

So if you think about the business from those two perspectives, let’s go back to the cellular handset licensing business and the go forward strategy on that. So we understand the regulatory regime has changed and we also firmly believe in the value of that patent portfolio. Again I've been here a long time. I've observed a lot of things and I have observed a lot of other patent portfolios and I would put our portfolio up against anybody's in the industry in terms of its value.

I also would put our licensing program up against anybody's in terms of our flexibility and reasonableness and our ability and willingness to respond to market changes. So the things that we’ve done over the course of the last year are things like embracing arbitration as a possible way to resolve these disputes in a very sort of business friendly environment. We think there's been a lot of work around arbitration by others as well, I would tell you based upon the discussions that I've had with folks I think we are at the leading edge in terms of thinking through the issues and the opportunities that arbitration presents.

I think it works for a number of reasons. Particularly it kind of is a good dovetail to the standard’s environment. The standard’s environment is a cooperative R&D environment where people contribute their innovations willingly with the knowledge that they will be used around the world by folks in handsets and infrastructure. Arbitration would be a comparable process where you would secure licenses of your handsets for your technology and inventions around the world. It also is -- if you look at the cost -- transaction cost of arbitration compared to litigation it’s much lower it’s not cheap arbitration because obviously there is a lot of issues in there, but historically we’ve been able to we look to -- as you compare to court litigation cost to arbitration, typically the arbitration is lower in part because it tends to be less discovery and a bunch of other things.

And so it’s a very, very efficient process I think and again a complementary process that what goes in the standards one that we have spent a lot of time on with folks. And going forward I think it’s one that will be called a more standard part of our offering to people. And I think the fact that it becomes a standard part of our offering takes and it’s very good when you go back to some of the overall regulatory climate. And I think while I think we’ve been there with respected individual companies and we’ve been there in terms of a little bit more of an ad hoc basis and more systematic approach I think would be very helpful for us. And I think we’ve learned a lot from folks over the last year and are able to position arbitration I think in a very good way.

So certainly that will be one adjustment going forward for the Company going forward, but again I would also tell you it has been -- it’s not a knee-jerk reaction but rather a very studied approach that we’ve been working for quite some time. Overall on the rate structure, I think our rate structure continues to be very, very fair that, I think there is always opportunities to modify your rate structure and in particular if they can lead to lower transaction cost. And so we would consider that as well.

Overall, the strategy with respect to this side of the business is if possible lower those transaction cost, lower the litigation cost, create more certainty in licensing maybe doing so through at least arbitration and perhaps some combination of arbitration and rate structure adjustments.

All of that I think is very doable because you go back to the fundamental strength of the patent portfolio. And I think that fundamental strength of the patent portfolio has evidenced itself in the many licenses we’ve been able to execute with people outside litigation. So while the ITC may come up with a claim construction that we disagree with, frankly many of our licensees would disagree with it as well having taken licenses under the portfolio.

So that’s the thoughts and go forward strategy in terms of the licensing side of the business, the cellular licensing side of the business. As I said, the other side of the business already incorporates many of the things we’ve saw and needed to do to react to what is an adverse regulatory climate. So again on both machine-to-machine and SAM and in other areas we’re developing full solutions. Those solutions contain very important intellectual property but also have a solution and product wrapped around them. They allow us to approach a different set of customers and our traditional customers, which is good. Broaden our reaching into the market which is very good.

And ultimately they’re backed up by licensing programs which if in fact at some point they need to be -- they need to be patent litigation around those solutions or those offerings they’re positioned very well because we’re positioned as the product or solution supplier.

So, the work we did last year in reorganizing the Company into the solutions group and the partners group has been very instrumental in driving the readiness of those solutions. There is more to come. There is more we’re doing. And the fact that we can do that is backed up by the fact that we have a very, very strong balance sheet and we continue to produce very, very strong financial results.

So, yesterday’s ITC decision doesn’t affect our underlying base of licensees. As you’ve seen this year, we’ve delivered very strong revenue and we have a very strong licensing base that we will carry forward into 2014. So, we’ll continue to have the financial strength to drive the business and to the extent necessary pivot the business to respond to the regulatory environment.

Again, we don’t necessarily agree with everything that’s being said on the regulatory side. We will do our best to alter that thinking and maybe inform that thinking a little bit more. That said, we’re also realists that we need to respond and have responded to those changes in terms of how we run the business and the opportunities we pursue. So, overall, the long-term prospects for the Company I think continue to be very, very solid. And obviously we’ve laid out some goals for the Company. I think we have flexibility within what we’ve talked about in terms of arbitration and rate structures and still hit our goals.

That said, if there is a way with lower transaction cost to get near to those goals but not quite there, I certainly would be -- it’s important to do that because at the end of the day it still makes us a very, very profitable, very, very healthy cash flow producing Company.

So obviously we were disappointed in the decision yesterday. But I think we have a pretty clear path forward and I think we’ve shown very good success one when we appeal the legal decisions up that chain and also very good success when we think about new technologies and new offerings in terms of creating things that are relatively very, very valuable to folks.

I think it’s been said twice but I think it’s worth finishing on that. Again, while yesterday was an important moment it is by no means a defining one for the Company. I think we have a number of very attractive options available to us. We have a very strong balance sheet in which we can pursue those options and we have a strong team in which we can manage our way through all this.

So with that I would turn it back to you Patrick unless you open it up for questions.

Patrick Van de Wille

Okay well Melanie if you could open things for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We'll take our first question from Charlie Anderson with Dougherty & Company.

Charlie Anderson - Dougherty & Company

So Bill in your history you have tended to do two things to show the strength of the portfolio or your belief in the strength of the portfolio. And that is number one, buybacks, share buybacks; and number two is on the heels of some of these decisions, you have often signed deals with new licensees or extended licensees, and that's proven to people that there is still value that value hasn't changed. I wonder if you could address both of those and what you see in the coming months on those?

Bill Merritt

Sure, so the Company continues to have a buyback program in place, as you saw on the last quarterly release, we are continuing to buy shares, so I think there is a strong belief in the Company in terms of the long-term fortunes of the business. And so, I think that's a good statement in that regard.

In terms of licensing opportunities, I currently believe that as you have seen over the years, the vast majority of our licensees sign up without litigation, and I think they respect what we have done, when we get to the much larger companies, the economics of litigation are different.

I think that we have had some very good opportunities to drive things forward, I think the one thing I suggest is we have a couple of different paths now that we could use to drive things forward right, so one is sort of stand up traditional license agreement that we can do. I think with what we have learned over the years, arbitration also becomes another thing that we can advance, and we're very comfortable with it, if you look at the long history of licensing at this Company and the many, many companies who have signed agreements.

Within a fairly tightly bounded range in terms of rates, I think that's pretty good evidence, pretty compelling evidence in our arbitration process. So, it’s full steam ahead on licensing I think using both of those options and I would still -- I am very confident that we can continue to do deals and drive and deliver good revenue.

Charlie Anderson - Dougherty & Company

So I want to make sure I understand the arbitrations. I think what I'm hearing is that -- I could see a scenario in which you would approach the counter-parties that you have on litigation now and say, let's go into arbitration -- binding arbitration, and we'll agree to lower our ask at the outset of that arbitration, and you think that would be the sweetener to get them to want to participate in that arbitration? Am I hearing that right?

Bill Merritt

I think a little bit different, I think you could set a -- again I think our rate structure has been pretty solid, and I am very comfortable with it, but that's not to say you can't tweak it a little bit and I think to some extent some additional formalization of our rate offer, I think it's in reasonably good shape, but obviously as the market moves and we move adjustments that could make sense. I think you say path A is this very reasonable rate sheet which has been accepted by many, many people in the industry. If you don't want that impact B becomes an arbitration, where you can argue for something different.

I think in the context of arbitration, there is a couple different things that people can consider right. So you can have it unbounded and therefore whatever comes out of the arbitration as a result that poses some risk to both parties. So where I think your notion could come in as you could say, alright we're going to bound it but maybe there is going to be an upper bound that's a little bit more favorable to you, but there is a lower bound that's a little bit more favorable to us, and so it's operating in a little bit narrower of an area.

And I could tell you a lot of the discussions over the last year has been around not just that notion but lots of other things in terms of how long does it take. What's the evidence and a bunch of other things that we have learned a lot, so I think there could be compromises in the arbitration itself, because it does the thing that an arbitration agreement does unlike frankly litigation. There is an element of finality to an arbitration process that is very, very valuable.

And so that's depending upon the term for which that arbitrated result would apply and a bunch of other factors because you are gaining finality and you may be gaining finality in a shorter period of time. And you maybe in that instance willing to compromise, well but to get that which is, so as I said we have had lots of discussions around this topic and I think we have learned a lot.

And I think we have educated people, because I think we're ahead of the curve in terms of this process. So I think it has given us another really good tool in the tool box to use in licensing and we intend to fully utilize it.

Operator

We’ll go next to Anil Doradla with William Blair.

Anil Doradla - William Blair & Company

A couple of clarifications, I mean you kept on referring to this challenging regulatory environment. It appears that this is a hard reality, and we'll have to live in with it. So, I just wanted to ask two questions around it. One is that in your 20-plus years at InterDigital, have there been periods where such a regulatory environment has existed, and how long did it exist? And the second question was, is one of the unintended consequences of this challenging environment being greater dependent on the federal courts rather than ITC's? And therefore, do cases now extend because ITC being a headwind?

Bill Merritt

Yes in terms of the environment I’d actually capture two things, right so I think it’s regulatory and I can’t use that in a broad sense but I think a lot of people would take regulatory only, it only means one side of department, I think it’s a regulatory and political environment that for us it’s a broad spectrum of headwinds, if you want to put it that way.

In terms of what I have seen before and I think there is, I haven’t really -- let’s say the patent systems itself has gone through many evolutions, right historically. And so we have before the Federal Circuit was formed, the patent decisions used to head in one direction or many directions because it wasn’t consolidated system in the U.S. for patent and I think eventually that was corrected.

And so, I think the patent and in essence have been and then the patent office -- the patent system sort of swung back to the middle. I think that there is a thing that swings back and forth so while we haven’t seen this exact situation before I think that it does ultimately resolve itself.

I have had lots of discussions with people that chair -- that the senators that chair. There are various committees down in DC. And they -- and you could see it at the Tuesday's hearing this week that they are while on one hand they hear a lot of rhetoric and hear a lot from their constituents in terms of abusive litigation tactics and obliviously that’s not something we get engaged in at all. They are equally concerned about the incentives for innovation out there.

And so I always told people if -- what we need are a set of rules give us a set of rules and we could comply with almost any set of rules. I think the issue now is that they keep moving the goalpost around the field but it’s hard for us to put the ball down and kick it through the uprights. So, I think we do get some clarity it’d probably take some time. But I do think it eventually settles out.

In terms of jurisdictions in which we could bring claims our success with the ITC has not been good, it’s just that’s just a fact. And I think it’s wrong, I think we’ve proven it wrong time and time again, but at some point you just have to decide that is it continuing to worth it I think the new case is a very technically strong case and we have going in February I think the opportunity to better -- even better position our licensing programs through enhanced arbitration offers and things like that could take some of the political edge off.

That said, I think in terms of jurisdictions to enforce our intellectual property district courts are very good and can be very good as many businesses if that’s what they want. And it’s not just courts in the U.S. they can be courts in Europe as well. So, I think there is many options for us if we decide that if the political wins at the ITC are too strong. So, I’m not worried about not having avenues and I think we have a number of avenues. I think we’re well geared for any one of those avenues, so whether it’s here or Europe we’re in a good patent position again because it all comes back to the patents at the end of the day. But I do think we may need to shift up how we go after things.

Anil Doradla - William Blair & Company

And then just as a follow-up, now you talked about taking out those instances in the 868 case that had references to the ruling that came out, but beyond that, what are the implications for the 868 and 613? Could you have the same set of individuals ruling on those cases that ruled on 800? And given that they have certain mindset and certain inclination, would that be a headwind to your current cases? Can you walk us through some of that thinking?

Bill Merritt

Sure. So, we have a different judge in the 868 case. I think that there are 613 patents are in and you have some pretty strong guidance from the Federal Circuit on those patents. So I think that that puts us in a pretty good position. And so I think as I have said I think technically we have a very, very strong case. But -- I think your question is a good one. It’s notwithstanding the technical strength of the case that we need to at least think about the political wins.

And I think the actions that we can take in terms of further refining what is already a very strong licensing program, I think will be very helpful. And in terms of how that -- how we'll perceive and how the case is perceived. Now obviously this is a speculation on our part, in terms of how much the political wins are affecting the ITC. But obviously the fact that we are able to routinely at least in two instances already get them reversed would tell you one thing right.

So I think we take it through. I think most important for us for the long-term business is making sure that people understand the strength of the patent portfolio. And there is many options we have to demonstrate that strength. And then how we deploy that strength, whether it is at the ITC, federal courts, Mannheim in Germany or some combination thereof, to become tactics I think the first and foremost we have got to continue, what has been a very good effort and very good work by the Company in making that portfolio very strong.

So obviously we’re always very thoughtful on these things. We are not knee-jerkers here. We will figure out the best path forward. But as you can tell we are obviously, we’re thinking about a number of different factors and a number of different options.

Operator

We will go next to Michael Cohen with MDC Financial Research.

Michael Cohen - MDC Financial Research

Bill, just for clarification, is the commission's determination in the 800 investigation appealable immediately against Nokia, Huawei and ZTE, or do you have to wait for the final determination regarding LG on February 17?

Bill Merritt

It’s appealable now.

Michael Cohen - MDC Financial Research

And in a similar vein, I have looked at the notice and it seems a little ambiguous on this point. Has the domestic industry been found in the investigation against Nokia, Huawei and ZTE already, or will that actually be determined on February 17?

Bill Merritt

They didn’t do anything on that in this notice that we could see, right. So one, probably we need to wait to get the decision to see exactly what they say, just to give you the history on DI right so obviously we’ve been very successful on domestic industry at the commission, we have had the commission at our side at the Federal Circuit supporting us in terms of our domestic industry. The ALJ in this case supported us on domestic industry, so exactly what this one sentence at the end of their notice means in terms of that DI remains under review, it’s not sure.

Sometimes they will withhold review of items as a way to preclude appeal on items. I think it actually makes it a non-final decision and therefore non-appealable. It allows the commission and manage what goes up on appeal. I don’t know if that’s what they’re doing here, but that is an option that they sometimes use.

Michael Cohen - MDC Financial Research

So hypothetically, the domestic industry issue might not be, then, appealable immediately? It might only be appealable upon the finding with LG?

Bill Merritt

Yes. I think that’s right. Again maybe probably we would want to need the decision to be assuring, but I think that’s right.

Michael Cohen - MDC Financial Research

Switching over to the 613 investigation, we've been waiting for that to get started forever. Do you have any indication why the commission is holding back on its decision to either [run into] an ALJ or to handle the remand itself?

Bill Merritt

We have no feedback from the commission in terms of what their thinking is. We’ve obviously, on a number of occasions written to them, to move forward on the case. So we’ll see whether, the case from a patent perspective is very strong. From a domestic industry perspective, it is very strong. The issue in that case is, it arguably involves standard essential patents and Nokia ultimately dropped its FRAND in the sense, so there is not a fully vetted FRAND position in that case. And it’s kind of back to the regulatory environment whether the commission wants to press forward on a case that doesn’t have a fully developed FRAND record.

Because as of right now the commission, based upon the evidence they have before them, could put in place an exclusion order with respect to Nokia’s products based upon what’s there that’s what we got the commission to do. So we're not sure, we’re in some kind of, whether they can try to start to combine records across cases is unprecedented for the commission but theoretically that’s possible because the FRAND record in the 68 investigation should be equally applicable to the 613 or from the 800 place it’s applicable to 613. You’re exactly right that that case is long in the tooth a little frustrated by the commission’s failure to act. But at this point the best we can do is wait and see what they do.

Michael Cohen - MDC Financial Research

And the Court of Appeals Federal Circuit clearly agreed with your claim construction in the 613 investigation and not with the ITC? Could you remind us of your position to elaborate on this at this point? But if you could, could you point out some of the claim construction issues that has been determined by the Court of Appeals Federal Circuit that you think may help you in the 868 investigation?

Bill Merritt

Yes, without going through what the commission actually said I wouldn’t be able to do that. And as a practical matter for example the 970 patent in the 68 case was not part of the 613 case. So, a lot of the issues that or for issues that came up in 868 were unique or some of them were unique.

But again to digest the whole decision I think at some point because these are claim construction matters we’re hoping that the commission makes the decision available because if there shouldn’t be confidential information this is all just reading a patent. But from time-to-time the commission doesn’t make the full decision available so that’s probably a question we could answer better at a later date.

Michael Cohen - MDC Financial Research

And the last question is regarding Apple. You've got the arbitration confirmation coming up in April. Could you talk a little bit about the -- I guess the upside potential from that arbitration? And also if you think that you may have a claim against already-licensed suppliers that are supplying [a bulk order] perhaps increased revenue there?

Bill Merritt

Sure. So just to be clear so what comes up in June of this year is not anything to do with Apple arbitration it’s actually the expiration of the current Apple’s agreement. What occurred this year has been two arbitrations that affected essentially the revenue that we are recognizing related to Apple products. So the two arbitrations this year one involved Pegatron and the second involved Apple itself as we noted previously the Apple arbitration confirmed that the Apple agreement was limited in scope so for example excluded iPad products excluded LTE products.

Once that license is limited in scope being a product that’s not covered under that Apple license that opens up the opportunity where Apple is securing those products from one of our licensed manufacturers either in China or in Taiwan and that was exactly what happened with Pegatron, so Pegatron was producing the products, and they were not covered by the Apple license and therefore the Pegatron pays royalties for those products.

So, the expiration of the Nokia -- the Apple agreement has somewhat limited affect and actually somewhat unusual way has more of a positive effect and a negative effect. And so while we’re recognizing revenue into that agreement it’s a small amount of revenue, because the agreement was done long ago based upon Apple forecast at the time. Once the agreement itself expires to the extent that there is any remaining products that were licensed under that agreement those products go unlicensed and to the extent one of our licensed manufacturers are producing them we will begin to recognize revenue from those. So it actually has somewhat the opposite effect of our typical expiration revenue goes down there is the opportunity here for revenue to actually go up upon expiration.

So, we’re very happy this year in terms of our management of that relationship and the supply chain it’s obviously a big part of our results for the year but that make sense since Apple is a big part of the market. So, I think we’re in very good shape there it’s one of the reasons why we’re financially very strong and I think have a lot of options going into 2014.

Michael Cohen - MDC Financial Research

And in your case against Apple in California, it seems like Apple is not objecting to the affirming of the arbitration award. So what should we expect in April when that comes down?

Bill Merritt

So there is a -- the only continuing aspect in California is that there is a district court confirmation proceeding which is what I think you’re referring to sorry I didn’t make that connection. So I don’t think that they -- Apple is not objecting to the confirmation of the award so I think for that there is not -- that case is not of any significance and really what was significant was the underlying arbitrations.

Operator

We’ll go next to Nicholas Rodelli with CFRA Research.

Nicholas Rodelli - CFRA Research

Bill, you're arguably at a nadir here, both in terms of the patent law environment generally and your recent bumps in the road at the ITC this morning. The public market values the Company at an enterprise value under $700 million. You sold about one-tenth of your patents to Intel last year for $375 million. You obviously had a public sale processed previously. Can you refresh for us your current corporate defensive profile, for example, presence of a poison pill, your -- if you have the pill in place, that pill percentage trigger? And just anything else you need to Pennsylvania corporate law, where you're incorporated, that we should know about? Thank you.

Bill Merritt

Generally, on the one hand we've actually made a number of shareholder friendly moves I think for a lot of good reasons that, in terms of we don’t have a staggered board anymore. We stand uphill, so a lot of sort of, a lot of those types of defenses we don’t have but we didn’t believe we gave in and I don’t think I have a different view today on that, obviously being a Pennsylvania corporation you do -- there's a different standard in Pennsylvania in terms of what the Board needs to consider if it's approached.

So on that, I think that in a situation like this the Board basically looks at the go forward strategy, I think it sees some good opportunity here, not to the extent somebody approaches the Company you just deal with it and anything more than that I think it is speculating on what could happen, and so again I think our focus is to run the business, run it strong, I think we have got great opportunity, if someone were to be opportunistic and come in at this point the Board will just a look at it at the time and make a decision based upon the facts at the time.

Operator

We'll go next to Eugene Fox at Cardinal Capital Management.

Eugene Fox - Cardinal Capital Management

Just a couple of questions, could you review for us, briefly, the status of the -- of LG? And what needs to be -- what's left to be handled at the ITC, with respect to the original 800 claim you made against them?

Bill Merritt

Right, so the commission notes that that's part of the decision that remains under review right, so to just kind of bring people up to-date, to refresh people's recollection, so LG exited the 800 investigation at a fairly early stage claiming that it had a license and USITC agreed with letting them out, Federal Circuit as they are fairly strong in word of opinion said there is absolutely no license here and basically kicked them back into the ITC, unfortunately one of those instances where it was obvious to us with the answer was, and unfortunately, we have to go to the circuit to get an answer.

The parties have been asked along the way how do you handle, LG, because having not participated in the case, their procedural status and profile in fact is kind if murky. So again probably we'll see if there's anything further in the decision itself when we get it that deals with the LG. I think the parties view was let’s let the decision come out because that will at least give us some indication of how you could fit LG back into the case or not, so unfortunately I think it’s another one of these situations that were sort of unprecedented at the commission where somebody removed themselves from the case, and frankly they did so on a completely inappropriate basis and the commission unfortunately let them get away with it.

They then came back into the case when it was done there was no pressure at the commission of how to handle this. So I think my guess, either they've handled it in the decision itself or they may now ask the parties again, okay now how do you want to handle it in light of the decision, so.

Eugene Fox - Cardinal Capital Management

At this point, Bill, from your perspective, is it -- so it may be in your hands. You simply don't know what options are going to be had until after you see their opinion?

Bill Merritt

Yes, I think as I said at the beginning we're working on a limited set of data from the commission, once we get the decision from them, it is going to inform us with respect to a number of different things those in terms of the strength of different appeal aspects that we may have, what it all means with respect to LG and other folks, so I think with that additional information we’ll be able to be able to move forward on a couple of things, regardless now of that decision we are unable to move forward in a bunch of other spaces as well, so again we should get that decision in the not too distant future, I think the only thing that will affect the timing of we get it fact will be the holidays, is that it may take a little longer than normal to get to us.

Eugene Fox - Cardinal Capital Management

Bill, just a couple others, too, in terms of the 800 case, did -- could you remind us of -- were both FRAND and domestic industry bought back to the commission level, in terms of their -- what the other parties would have asked the full commission to review or just one of them?

Bill Merritt

I think all the issues were before the case, I think, if I remember right it was a full review by the commission, I don’t remember every issue that the other parties raised but I can be pretty certain that DI FRAND and all or at least aspects at all the levels were raised.

Eugene Fox - Cardinal Capital Management

Last question, Bill, can you remind us of, with respect to the 613 litigation, what position have you taken in term -- or said differently, what did the Federal Circuit leave open, from your perspective? What needed to be resolved in order for you to get the exclusion order that you were looking for, were there issue of fact, process? What's your position as to what needs to be done with respect to bring 613 to a close?

Bill Merritt

So, we believe that to get an exclusion order they don’t need to do anymore factual discovery. We believe that based upon what the Federal Circuit did, we’re entitled to a Federal -- to an exclusion order based on the record as it exists today.

Operator

We’ll go next to Tim Quillin with Stephens Investments.

Tim Quillin - Stephens Investments

Just one quick point of clarification and you may have talked about this earlier and I didn't catch it, but just the modifications in the final determination around vacating the specific findings on the 636 patent, and the claims construction on the 406 and 332. Or is anything positive or negative to read into those modifications of the initial determination?

Bill Merritt

Yes that’s one of the things we need to read the decision because just seeing what they did is without the underlying sort of their arguments as to why they did or they didn’t do something, it’s hard to say. So, let us get the decision and then once we have the decision in place, we’ll be able to give a much better view in terms of what they’ve done here. And the short point is that they didn’t do enough to reverse the infringement finding. But it’s always interesting to read their rationale and how they got the certain places because that raise it’s -- could raise opportunities for us.

Operator

We’ll go next to John Broderick with Permit Capital.

John Broderick - Permit Capital

Thanks. My questions have been answered.

Operator

(Operator Instructions) And it looks like we have no other questions. I’ll turn it back over to management for any additional or closing remarks.

Patrick Van de Wille

Okay, well thank you very much Melanie. And there are no closing remarks. Thanks everybody for joining us today. We appreciate your time and looking forward to talking to you in the future.

Operator

This does conclude today’s conference. We thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: InterDigital's CEO Hosts ITC Decision Briefing Conference (Transcript)
This Transcript
All Transcripts