On Track Innovations' T-Mobile Lawsuit Update

| About: On Track (OTIV)

On March 27, 2012, On Track Innovations (NASDAQ:OTIV) announced a patent infringement lawsuit against T-Mobile (OTCQX:DTEGY) that alleges T-Mobile sells near field communications (NFC) equipped cell phones that infringe on one of OTIV's patents. A late-May 2012 preliminary conference between both parties and the judge was postponed until early July 2012, and a recent progress check on PACER (Public Access to Court Electronic Records) indicated that this meeting was postponed until Aug. 3, 2012, as both parties filed a letter with the judge stating that both are in talks to settle the lawsuit and asking for a continuance. The court allowed the continuance and scheduled the pretrial conference for Aug. 3, 2012, allowing no other continuances.

While T-Mobile has not made any claims as to the validity of the lawsuit, it appears to me that it would like to settle this case. A lucrative settlement could be a welcome boost to OTIV shareholders who have seen OTIV's share value fall approximately 92% from a high of $17.26 in 2006 to its current value of $1.40.

A settlement could be the "tip of the iceberg" for other patent infringement lawsuits that OTIV might file. T-Mobile, along with Verizon (VZ) and AT&T (T), are Isis partners for NFC. If the other two cell phone carriers are using the same patent technology that OTIV claims T-Mobile violates in its lawsuit, a successful settlement of this lawsuit could mean additional lawsuits as OTIV has publicly stated that it will aggressively defend its patents.

In a recent Seeking Alpha article, I wrote that OTIV is primed for a hostile takeover. OTIV has a poison pill defense, but shareholders in March 2012 overwhelmingly rejected an increase in authorized shares to fund this defense. T-Mobile could decide to buy OTIV outright rather than settle the lawsuit, and then sue its competitors for patent infringement. But the cell phone service provider industry is a "dog eat dog" world, so I feel that Verizon and/or AT&T could start a bidding war for OTIV rather than see rival T-Mobile own a lucrative patent portfolio.

Moreover, OTIV shareholders, in my opinion, have lost faith in OTIV management. It is one thing to develop a patent portfolio, but the more difficult part is to bring this patent portfolio to market. I believe in OTIV's patent portfolio, but not in a management team that has not been able to generate a profit in over 22 years.

In either case, the current shareholders of OTIV could be big winners. A cash settlement of this suit, and the potential of other patent infringement lawsuits, could go a long way to enhancing shareholder value and the role OTIV plays in the exploding NFC market. Alternatively, a buyout by T-Mobile or a bidding war for OTIV could validate long-term shareholder's investment in OTIV.

Disclosure: I am long OTIV.