Maxim Patent Litigation Strategy Attacks Institutional Investors - A Wise Move?

Oct. 9.12 | About: Maxim Integrated (MXIM)

In January, Maxim Integrated Products (NASDAQ:MXIM), designer of analog and mixed-signal integrated circuits, began quietly, but aggressively, enforcing a portfolio of patents related to secure communications through a series of targeted lawsuits in a District Court in Sherman, Texas. The filings followed a letter-writing campaign exposed by several companies--PNC Financial Services, Fidelity and Key Corp among them--who, rather than wait for Maxim to file suit, launched pre-emptive lawsuits in other parts of the country.

Maxim quickly found itself either filing, or opposing litigation in 18 separate lawsuits. In addition to the companies above, Maxim's opponents included Chipotle (NYSE:CMG), Starbucks (NASDAQ:SBUX), Expedia (NASDAQ:EXPE), Groupon (NASDAQ:GRPN), Capital One (NYSE:COF), and Southwest Airlines (NYSE:LUV). According to court records, the Maxim litigation was varied and widespread enough to prompt a Multidistrict Litigation (MDL) Panel to review the case and order all cases to be centralized in Pittsburgh, Pennsylvania. The MDL panel noted that the five patents enforced by Maxim (including US Patents 5,940,510,5,949,880, 6,105,013 and 6,237,095) were part of the company's acquisition of Dallas Semiconductor in 2001.

The motivation behind Maxim's decision, after more than a decade, to suddenly launch a major patent offensive are unknown. In addition, the benefits to Maxim are entirely unclear. The lawsuits call out a variety of mobile applications (including mobile payments, mobile banking and mobile ordering). However, court records failed to disclose any evidence of settlement agreements reached with any of the defendants, and Maxim's most recent earnings reports fail to mention the lawsuits or the patent monetization effort in any way.

According to a Seeking Alpha transcript of Maxim's most recent earnings call, the subject of litigation was not raised at all. However, in the past week, Maxim's litigation effort picked up steam with the addition of several new defendants and the entrance of new legal counsel: Matthew Powers of Tensegrity Law Group, and formerly with Weil Gotshal. Among them are the parent companies of several research analysts that attended Maxim's last earnings conference call. Specifically, Maxim previously fielded questions from research analysts at numerous banks. On October 1st, Maxim sued retailers Target (NYSE:TGT) and Wal-Mart (NYSE:WMT), along with many of the same financial institutions represented on their last conference call, including Wells Fargo & Co. (NYSE:WFC), JP Morgan Chase & Co. (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC).

Companies that choose to monetize their patent portfolios have a choice to make. Some sell their portfolios outright, while others partner with enforcement specialists. Of course, Nokia's deal with Vringo (NYSE:NOK) (VRNG) is a good example of a mixture of these two options, where Nokia gets up-front cash for their patents, but partners with Vringo for long-term interests. Maxim, on the other hand, chose a different route entirely, by directly enforcing its patent portfolio.

The immediate risk in pursuing such a strategy generally centers around the pursuit of litigious competitors, as well as partners and customers. Because such companies typically find themselves in a similar technology space to the patent owner, enforcement actions against these companies are often met with counter-patent assertions. A patent counter-assertion often neutralizes the original enforcement action, threatening the monetization opportunity.

While Maxim's initial strategy seems to have minimized this risk, the pursuit of institutional investors would seem to carry risk of its own. These institutions generally hold the power to invest their clients' money, and the research analysts attending the conference calls help make recommendations. Unfortunately, lawyers typically advise employees not to make direct contact with someone that is suing the company. If the existence of litigation cuts off communication with a significant portion of the investment community, the ultimate consequences could far outweigh the proceeds generated from the litigation. Whatever Maxim's end-strategy with its patent enforcement campaign, it hopefully accounts for this risk.

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.