Investors ran for cover at the latest Seeking Alpha Breaking News headline concerning Worlds, Inc (OTCQB:WDDD) vs. Activision Blizzard (NASDAQ:ATVI) patent infringement lawsuit. Worlds is litigating Activision over its multiple patents covering multimedia online role play gaming. Clearly the order of the day was to sell first ask questions later. Though I took immediate disagreement with other SA Contributors, like many investors I chose my own due diligence over uninformed decision. Reproduced below is the lead excerpt from SA's Breaking News title headline.
"Worlds plunges; court allows Activision summary judgment motion
"The Massachusetts district court handling Worlds patent suit against Activision Blizzard has allowed Activision's motion for summary judgment seeking a ruling that all asserted claims in the Patents-In-Suit are invalid."
On first glance the headlines suggested Worlds Patents were invalid, but after examining the actual court order an entirely different conclusion is reached.
Worlds, Inc. patents are valid and the court's ruling amounted only to a limitation of the infringement period.
Many investors failed to discern the order and consequently poured out of the stock, believing Worlds had little to no recourse and the lawsuit was effectively over. This couldn't be more wrong and here's why.
Judge Caspar's Order is Not Final
Activision Blizzard was granted their Summary Judgement, however Judge Denise Caspar recognizes the validity of Worlds patents and effectively withholds action pending a conference between the parties.
"In this case, Worlds alleges continued infringement through the lives of the Patents-In-Suit. D. 32. Indeed, nothing about the Court's order prevents Worlds from asserting infringement from the date of the certificate going forward. E.I. Du Pont De Nemours & Co. v. MacDermid Printing Solutions, L.L.C., 525 F.3d 1353, 1362 (Fed. Cir. 2008) (noting that "each act of infringement gives rise to a separate cause of action" and concluding that, while a certificate of correction will not apply if it issues after the "cause of action arose," it can apply to future infringing conduct). In light of the foregoing, the Court declines to enter judgment in Defendants' favor at this time. Instead, the Court ORDERS the parties to meet and confer to discuss whether the appropriate course of action is for the Court to dismiss the instant action (without preventing Worlds from commencing a new action alleging infringement from the date of the certificates going forward), or merely confine this decision to infringement allegedly occurring from the dates the patents issued through the lives of the Patents-In-Suit. The parties shall file a joint statement, not exceeding more than five (5) pages, outlining their respective positions with the Court no later than March 27, 2014."
Judge Caspar determines that Worlds patents are indeed valid from the date of the Certificate of Correction, thru the life of the patent. By her actions she affords both parties the opportunity to make adjustments to the claims and continue the lawsuit, or leave it unchanged. The later would surely end this lawsuit and force Worlds to re-file. I take the position that Worlds and Activision will spare the court unnecessary waste and make the adjustments.
Worlds Infringement Potential on its Current and Future Defendants
The Certificate of Correction issued by the USPTO is dated August 14, 2013. Worlds original 6,219,045 patent was issued November 12, 1996. The expiration of this patent is 20 years from that date. By the Courts decision Worlds is limited to August 14, 2013 to November 12, 2016, or 3 years and 3 months. Measuring Activision's sales during this time period, specifically the Call of Duty franchise among other titles, would certainly yield a substantial Royalty. Indeed Activision's combined sales exceeded $5 billion last year with strong projections for 2014. Worlds potential with Activision could easily fetch hundred's of millions at the low 3% royalty level annually. Naturally Activision is not the only game in town, just the most successful. My previous articles cover Disney (NYSE:DIS), Sony (NYSE:SNE), EA (NASDAQ:EA) games and about 40 other competitors. Just like Vringo (VRNG), who recently sued ADT (NYSE:ADT) over patent infringement and won, Worlds would capitalize on any Activision win and gain leverage in plying smaller awards, increasing its position along the way. Not surprisingly Vringo recently named Tyco (NYSE:TYC), a similar enterprise to ADT, and many are expecting a much faster settlement period due to the ADT win. A potential EA Games infringement claim would be hard pressed not to consider a rapid settlement, should Worlds prevail in their lawsuit vs. Activision Blizzard. Still there are many more hearings ahead for Worlds before this outcome can be achieved. Investors who liked the risk at $40 million market capitalization are finding the unfounded sell-off ($12 million cap) a pleasant entry point for their risk portfolio.
Conclusion: Worlds, Inc vs. Activision Blizzard continues its patent litigation
Some of my pundits might take exception with this return on investment, but there are few patent plays that offer this level of potential. Keep in mind that Worlds has already gone thru multiple reviews at the USPTO, and the Federal Court, and has yet to have held its Markman Hearing. Moving on and continuing this process thru the courts adds not only credibility, but limits and dissuades future challenges by prospective defendants. To its benefit Worlds enjoys and unusual relationship with its counsel, Susman Godfrey. Worlds lead attorney Max Tribble also represents the mega PAE Rockstar. Rockstar is a consortium owned by Microsoft (NASDAQ:MSFT), Apple (NASDAQ:AAPL) and others, and is engaged in litigating Google (NASDAQ:GOOG) for similar claims aligned with the Vringo vs. Google litigation. Susman Godfrey has agreed to represent Worlds, Inc. on complete contingency. The rewards here are great, as is the risk, but having your counsel share them only sweetens the resolve. Investors who invest in PAEs (patent assertion entities) must expect exuberant buying and sometime irrational selling and learn to test against these factors in favor of rational due diligence. Worlds loss today really amounts to a victory, as the market capitalization prior to the decision never accurately reflected the potential. That being said moving the lawsuit forward and validating the infringement period, were the real victories today. As always invest with knowledge and consult your financial professionals before making any investments.
Disclosure: I am long VRNG, WDDD, MSFT. 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.
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