The Supreme Court's Upcoming Decision Could Push Star Scientific Higher

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Lots of good news has been happening for Star Scientific, Inc. (CIGX) lately. Its nutritional supplement, Anatabloc, has shown impressive growth in sales on since February 1, 2012, and in select GNC stores since April 1, 2012. Now, GNC has decided to expand Anatabloc's distribution to all its U.S. stores. Anatabloc's success has been a catalyst to push Star Scientific higher and will significantly increase the company's revenues for the next quarter.

Now, another catalyst is coming up: the Supreme Court's decision against RJ Reynolds' (NYSE:RAI) appeal, which is likely to quickly lead to a settlement agreement with Star. I believe that this expected news isn't priced into Star Scientific's share price yet, because last year, the stock was trading up to $5 per share, and that was before it had a successful nationwide product, or clarity on when the RJ Reynolds ("RJR") lawsuit will be concluded. Now, Star has both.

After over 10 years of litigation, Star's '649 patent and '401 patents were found to be valid. This was a true victory for Star, because RJR had been fighting tooth and nail to claim the patents weren't valid. However, RJR admits to infringing on them if they are valid.The explanation of the '649 patent is here, the 401 patent is here. As a last resort, RJR filed a petition for certiorari with the Supreme Court on March 28, 2012, to review the decision of the United States Court of Appeals for the Federal Circuit as to the definiteness of the patents.

The Supreme Court grants review in less than 1% of all requests. The Supreme Court only looks at cases of national importance where the result can rock the nation. This certainly doesn't apply here. Also, RJ Reynolds was denied review before.

If you scroll down here, it shows that the petition for conference will be on 9/24/12. The Supreme Court's decision will be announced the following Monday on October 1st. If the Supreme Court decides to deny the review it could be a catalyst to push Star Scientific higher since it will signify the conclusion of the lengthy legal battle between Star and RJR.

This petition of certiorari doesn't impact the mediation/settlement process that has been ongoing between RJR and Star before Magistrate Judge Gauvey in the Federal District Court of Maryland. After the Supreme Court denies review, it should be a short time before a settlement is reached, because RJR has no other recourse options.

The Story So Far

Patents '649 and '401 protect a tobacco curing technique that Star's CEO, Jonnie Williams, invented. The old, former curing technique was to let the tobacco dry in a ventilated barn, or from the sun. This new curing technique is using a heat-exchanger technology. This technology reduces the TSNA's (Tobacco Specific Nitrosamine) to below detectable levels. The ability to reduce the TSNA level in tobacco is great for users because they are highly toxic chemicals and linked to several cancers like lung cancer and oral cancer.

From the description of the lawsuit, RJR's own expert said that RJR infringed on the claims of the '649 patent:

"On May 23, 2001, Star sued RJ Reynolds for infringement of the '649 patent. RJR counter claimed that the '649 patent is invalid and not infringed by RJ Reynolds. In August 2001, RJ Reynolds conferred with Mr. Richard G. Lione of Brink, Hofer, Gilson & Lione regarding the infringement, validity, and enforceability of the '649 patent. Mr. Lione provided RJ Reynolds with a formal opinion regarding the '649 patent on December 21, 2001. According to Mr. Lione, RJ Reynolds and/or its growers infringed on the claims of the '649 patent, but the claims of the '649 patent should be found to be invalid."

On July 30, 2003, Star sued RJ Reynolds for infringement of claim 41 of the '401 patent as stated in the above description of the lawsuit. RJ Reynolds was decided guilty of patent infringement for both patents, and in January, 2012, a federal court referred both parties to a magistrate judge for a settlement.

How Much Will The Settlement Be Worth?

From the lawsuit description:

"In 1999, Reynolds spent over $11,000,000 to purchase 2,050 heat exchangers and retrofit hundreds of curing barns owned by independent farmers with the heat exchanger technology. For the 2000 curing season, RJR contracted with these independent farmers to purchase low-TSNA tobacco cured in their barns retrofitted with the heat exchanger technology. In early 2001, RJR replaced many of its 2000 curing season contracts with new five-year contracts for the purchase of low-TSNA tobacco cured using the heat exchanger technology."

So if RJ Reynolds spent $11 million in 1999 alone to purchase the exchangers, it spent a lot more in the 13 years after 1999. Some experts say the settlement could be from the tens of millions up to over a billion dollars.

Lorillard (NYSE:LO) and Phillip Morris (NYSE:PM) have also been using this curing technology, so after a successful lawsuit against RJR, Star Scientific will then have the momentum to sue and settle with them.

Disclosure: I am long CIGX.