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Summary

  • Markman Hearing - court rules in Zecotek's favor.
  • Zecotek can now move to trial.
  • Stock reacted favorably, but we still see significant upside in the shares.

On May 14th, the U.S. District Court of Ohio ruled in favor of Zecotek Photonics (ZMS.V / OTCPK:ZMSPF) by adopting interpretations of certain patent language that is key to its lawsuit against Saint-Gobain and Philips. The Markman hearing allows the judge in a patent infringement case to examine evidence from both parties and to determine the interpretation of the language of the patent in question. A ruling in ZMS's favor in the Markman hearing was critical, as had it not gone the company's way, the lawsuit likely would not have gone to trial.

As a reminder, in February 2012 Zecotek announced that they brought a lawsuit against Saint-Gobain Corporation and Philips alleging infringement of Zecotek's patent (7,132,060) covering the substances and chemical formulations to grow their LFS crystals. Zecotek was granted the patent in November 2006. See the U.S Patent and Trademark office website for the full description and claims of the patent.

The lawsuit, which was originally filed in U.S. Federal District Court in Los Angeles and is now being heard in the U.S. District Court in Ohio, claims that Saint-Gobain's currently commercialized LYSO (lutetium yttrium orthosilicate) crystals infringe Zecotek's patent and that Philips is also liable because they use these Saint-Gobain crystals in their commercialized PET scanners. BOET, the manufacturer of ZMS's LFS crystals, is co-plaintiff in the lawsuit.

See our October 2013 Seeking Alpha PRO article in which we detail similar scintillation crystals patent-related lawsuits and how they may offer insight into potential awards and outcomes of Zecotek's lawsuit versus Saint-Gobain and Philips.

Timing for conclusion of the lawsuit is a complete unknown. We believe that it's still possible that the two sides could settle prior to trial. And if it does go to trial, it's possible that it could be drawn out for some time given the potential for appeals by either side. Clearly, the lawsuit will be of significant interest to investors as the outcome could, if in Zecotek's favor, could provide significant upside value to the company.

We also note that Philips, which holds significant share of the OEM PET market, is a potential future customer for Zecotek's products - LFS crystals, MAPD, IDM, and potentially future products. While complete speculation on our part, we think there may be an interest for both Zecotek and Philips to come to terms of an agreement and settle the lawsuit in exchange (at the very least) to allow for good relations and potentially enter into a supply/purchase agreement.

Either way, it's a clear positive development that the Markman hearing went in Zecotek's favor, as this affords the company the option to go to trial, or potentially, to seek some sort of settlement with the defendants.

The stock, which was halted pending this Markman hearing announcement, opened the next day up 17% and currently trades on nice volume about 14% higher than the prior close. We cover the company with an Outperform rating and a $3.75/share price target.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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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Source: Favorable Ruling In Markman Hearing Opens Up Options For Zecotek