- Analysis of the May 1 court transcript reveals significant risks to ParkerVision.
- ParkerVision faces high probability of losing the entire case due to Qualcomm's Non-Infringement JMOL.
- Even a best-case valuation shows ParkerVision is more than 100% overvalued.
While we have read several accounts of what transpired on May 1st during the ParkerVision (NASDAQ:PRKR) and Qualcomm (NASDAQ:QCOM) court hearing, everything that has been discussed to-date has been based on recollection and notes. In order to provide a more complete overview of the hearing, we purchased the transcript. This article will share our thoughts based on our analysis of the transcript. After reading the transcript, we came to two important conclusions. First, ParkerVision's attorney may have fatally blundered when presenting his argument regarding Qualcomm's JMOL for non-infringement. Second, Qualcomm may have a non-infringing alternative that is close to being shipped. These two observations should cause significant concern for the ParkerVision bulls. In combination with ParkerVision's elevated valuation, we believe now is an ideal time to short the stock.
After reading the transcript, we felt that ParkerVision's attorney, Joshua Budwin, made potentially critical errors when he was unable to answer Judge Dalton's questions about non-infringement. Judge Dalton makes it clear that he believes Dr. Prucnal's testimony may actually show non-infringement:
THE COURT: Let's talk about -- let's move past Mr. Sorrells and let's talk about Dr. Prucnal's testimony as it relates to the Magellan product. And again, I want to hear everything you have to say, but I am interested in your view of why Dr. Prucnal's concession that the broadband was created prior to the storage capacitor is not the end of the case.
Qualcomm argues (and Judge Dalton appears to agree) that Dr. Prucnal's unrebutted testimony that the baseband is generated before the storage capacitor and not after is fatal to ParkerVision's infringement case. This is fatal to ParkerVision's case because the claim construction says that the capacitor or storage element must generate the baseband signal. If instead the baseband signal coming out of the capacitor is in fact the same baseband being generated before the capacitor, this should be a non-infringing technology. Quite simply, it would be the end of the case because of the way the Markman defined claim terms.
This is a very difficult quandary for ParkerVision because they are trying to say two separate things in their arguments over infringement and invalidity. ParkerVision argued that a prior art reference is not invalidating purely because the incoming signal to the capacitor (in the reference) was a baseband signal, and hence the capacitor did not "generate" the baseband. Since the claim construction is identical for both infringement and invalidity, ParkerVision cannot have it both ways - either ParkerVision's argument for invalidity was wrong or the new argument for infringement is wrong.
After Mr. Budwin speaks for a while, we can observe that Judge Dalton comes back to this issue as he is unsatisfied with Mr. Budwin's previous explanations when he says:
THE COURT: How does that answer my question about what the frequency is when it's a lower frequency signal than the one that went in?
MR. BUDWIN: Because he's using the term "baseband signal."
THE COURT: Well, and again, I don't know that it's productive for us to argue. I'm trying to understand your argument which is, if I'm appreciating it correctly, it's that the signal coming out of the capacitor is not the same signal as the one that went in it.
MR. BUDWIN: Correct.
THE COURT: And that the one -- if the one that went into the capacitor is a baseband signal, in order for your position to be sustainable, then the signal coming out that's a baseband signal must be of a lower frequency.
MR. BUDWIN: Oh, I see.
THE COURT: So I'm trying to find out where in the record is there evidence that the signal coming out of the storage capacitor is, in fact, a lower frequency signal than the signal that went in, and I'm not going to call it a baseband signal because I know that's in dispute.
Mr. Budwin advances what appears to us to be a new infringement theory, which was not presented at trial. His explanation is that if the signal coming out of the storage capacitor is of a "lower frequency" than in the signal going in, then there can be infringement. Judge Dalton then repeatedly asked for evidence presented at trial that this was the case. Mr. Budwin could come up with no such evidence, as his new theory is patently false - the baseband signal that goes into the storage capacitor in the Qualcomm design is in fact the same baseband signal that comes out of the capacitor - there is no "change of frequency" because there is only one baseband signal. Once Mr. Budwin has concluded, Qualcomm's attorney, Timothy Teeter, answers the judge's original question. He explains that when the baseband is generated before the capacitor then there is no infringement according to the judge's previous rulings.
MR. TETTER: Your Honor asked the crucial question during ParkerVision's presentation, and this was with respect to where the low frequency signal is generated, whether it's generated at the mixer or whether it's generated after the capacitor. And I wrote down Your Honor's question. You said, "Where is the evidence that that is a lower frequency signal after the capacitors and the TX filter than it is before?"
Because our whole theory, as Your Honor correctly pointed out, is that the low frequency signal is generated right after the double-balance mixer by the double-balance mixer. That low frequency signal does, as Your Honor pointed out, cruise right on by that line past the TX jammer filter. That's what the -- the filter is there to get rid of the high-frequency TX jammer. It's not there to generate the baseband which has already been generated.
So Your Honor picked up on that point correctly. And you asked where is the evidence -- where is the evidence that the signal coming out of the capacitor is a lower frequency than the signal coming in? And there was no answer to that question because there's no evidence to that because that's not what happens.
Mr. Teeter clearly points out that Mr. Budwin couldn't point to any contrary evidence because there is none, and none was presented at trial.
Of note, the judge made several rulings from the Bench on May 1st. We believe that the judge ruled on all of the issues he had decided. Accordingly, if the issue of non-infringement was decided, he would have likely ruled from the bench. The lack of a ruling probably means that the judge is seriously considering granting one or both of Qualcomm's JMOL's for non-infringement and invalidity. If Judge Dalton finds for Qualcomm with regards to either of these JMOLs, the jury's judgment in favor of ParkerVision will be thrown out.
The most important revelation of the day may have been relegated to just a few simple sentences near the end of the hearing. Steven Neal, when arguing on behalf of Qualcomm said:
Qualcomm is, in fact, developing a noninfringing alternative for the smaller 28 nanometer technology, and that's being -- that is work that is underway. And Qualcomm is going to pursue that and is attempting to develop noninfringing alternatives.
These two sentences carry a lot of weight when viewed through the lens of the following press release, which announces a new transceiver. While Qualcomm has been using 28 nanometer process technology in their pure digital baseband since late 2011, the recently announced chips are the first Qualcomm transceiver (i.e. analog) chips using 28 nanometer designs. These chips are expected to be sampled in early 2014 and ship in commercial hardware in early 2015. The shipping of this new chip seems to fit well with Qualcomm telling the judge during the injunction hearing that it would take three years to design a non-infringing alternative. The design for this chip was probably started in mid-2012, announced in Nov 2013, sampled in Spring 2014, will be shipped in late 2014, and will be volume produced in 2015 - i.e. about 3 years from start to finish. We believe these chips are meant to be a non-infringing alternative and will put an abrupt end to any potential royalties for ParkerVision beyond mid 2015.
The above analysis shows that the bull case to ParkerVision, which holds that ParkerVision will receive many years of royalties from Qualcomm, faces very serious challenges. This bull case is especially important now that ParkerVision has revised their pre-judgment interest request from nearly $200 million to around $24 million as can be seen in court document 531 and 531-1. Now it appears that the whole the judgment for ParkerVision is in peril if Judge Dalton decides to grant one of Qualcomm's JMOLs.
In thinking about the preceding analysis, we see two possible outcomes with regards to valuation. If either of the JMOLs are granted, we believe that ParkerVision's stock is nearly worthless. On the other hand, if ParkerVision is ultimately successful in having the jury's verdict upheld all the way through appeals, we think that the stock is worth at most $2.11 per share at the time that the royalties are discontinued at the end of 2015. We calculate this valuation as follows:
Based on the above analysis, we believe that ParkerVision is grossly overvalued at its current valuation of approximately $5 per share. We believe shorting the stock at current levels carries a very favorable risk/reward.
Since court reporters make part of their living selling transcripts, we cannot post a link to the full transcript. However, the court reporter's contact information can be found on the court's website so that you can also purchase a copy of the transcript and see just how much trouble awaits ParkerVision.
Disclosure: I am short 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.