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IP litigation has been a large part of my investment focus. However I spent many years of my career working within the legal sector of the oil and gas industry. As I reflect on my career I remind others of the great innovations that have come about thru oil and gas research and development.
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  • The Markman Hearing; Potential Coronation Of Patent Kings

    We all look for opportunities and buying windows in the equities we hope to own. Many of my investments are focused on intellectual property stocks or as some like to term "patent plays." Understanding fully the patent process, as well as patent infringement litigation, I began to delve into the financial impacts of equities at various stages of patent litigation, specifically the Markman hearing.

    Let me impute some caveats to this measure. The plaintiffs I use have totally different litigation points and are seeking recompense in different technologies. They do share some common elements of financial history. Prior to Vringo's (VRNG) Markman hearing of June 4, 2012, the company's 10-Q March 2012 income statement revealed only $106,000 in revenue. ParkerVision's (PRKR) recent 10-Q reveals no revenue at all. Lastly, VirnetX (VHC) also reported meager revenues of $33,306 in its March 21, 2009 10-Q.

    The unique limited financial bearing of these companies allows us to better understand the impact of certain events on their market capitalization. The two commanding variables that they all equally share is the causality of having won a positive Markman order in US Federal district court, and a corresponding increase in stock price.

    Markman hearing; the controlling variable in patent litigation enforcement?

    For better or worse one of the last vestiges of the Crown in American Society is the life appointed federal judge. Many argue that the Markman hearing could be construed as a "king maker event," to destitute corporate plaintiffs seeking billion dollar awards. Some of my examples above are testaments to this theory. What is a Markman hearing? The legal function of a Markman hearing is to determine what language the jury will hear when determining whether or not the patents in question will be infringed. The defendants in these situations typically pray the judge to "narrow or focus" the definition of key words within the patent. How the judge rules will determine how the plaintiff and the defendants can best argue their case.

    The plaintiffs want the broadest possible interpretations of its key words making it simple for a Jury to conclude infringement. The defendant reaches for narrow confining definitions typically to enforce the strength of prior patents making the patents in question appear without merit. Obviously this can be a "make or break" event to an under capitalized plaintiff.

    Vringo, ParkerVision and VirnetX all possessed limited revenue operations, prior to receiving their positive Markman hearing orders. On May 23, 2012 Vringo traded at $2.72. On June 4, 2012 the Markman hearing began and the stock value closed at $4.15. Prior to the decision on June 12, 2012 the stock traded at a low of $3.30. One day after the ruling of June 19 Vringo closed at $4.36. The impact of the positive Markman hearing can be seen here as a 60% rise in per share value (May 23 to June 19) with market capitalization going from $185 Million to $292 Million.

    Looking at the ParkerVision price per share results of their Markman hearing, we see an even stronger impact correlation. The judge reached a decision on February 20, 2013. On that day the stock closed at $2.43. The following day ParkerVision closed at $4.21. The impact of that hearing amounted to a 73% rise in shareholder value, with market capitalization going from $201 Million to $348 Million dollars.

    VirnetX has gained the advantage in several of its Markman hearings. This example must be reviewed in a different light as the multiple hearings demonstrate a more pronounced effect on the stock. Winning against Apple (AAPL) on April 25, 2012, the following day the stock goes from $24.58 to $25.25. We see VirnetX going on to win another Markman hearing on August 1, 2012, against Avaya (AVYA) and Siemens (SI). The impact to the stock over 2 days was minimal but still positive, trading at $23.93 to $24.49. Looking back to the very first Markman hearing, we see and even more pronounced effect on the stock. VirnetX won their first Markman hearing against Microsoft (MSFT) on July 30, 2009. On that day the stock traded at $1.48 to $3.00.

    Conclusion: Investors profited off Vringo, ParkerVision's and VirnetX positive Markman orders.

    The result of the Markman hearings, to the plaintiffs, were positive in all these examples. In the VirnetX example we saw the first Markman order as having the highest positive price per share increase. Since Vringo and ParkerVision have not engaged in multiple Markman hearings, we cannot accurately assess if the primary hearing is indeed the most impacting. Not to despair, I have faith that more lawsuits are on the way.

    The negative effects of a positive Markman?

    Enter Activision Blizzard (ATVI). This gaming software titan, with sales exceeding $4.86 Billion, owns popular titles such as the Call of Duty, and World of Warcraft franchises just to name a couple. Looking closer at Activision it becomes incredibly obvious that this is a cash cow of epic proportions. For 2012 on the same $4.86 billion, they earned $1.149 billion in net income. There's a lot of profit at Activision and with zero debt and $4.38 billion in cash many investors are taking notice. This giant may have stepped into a costly briar patch. A very small IP company could become a very big thorn in the ATVI profitability model. Worlds, Inc (OTCQB:WDDD). This pre-Markman hearing example has many investors wondering what the potential infringement award will be. Worlds' hearing is scheduled for June 27, 2013. The lawsuit alleges that two of Activision Blizzard Inc.'s massively multi-player online role-playing games (MMORPG), World of Warcraft and Call of Duty, are directly infringing on a suite of patents (6,219,045; 7,181,690; 7,493,558; 7,945,856; 8,082,501; 8,145,998 & 8,161,385) owned by World Inc.'s collectively known as "System and Method for Enabling Users to Interact in a Virtual Space." These patents describe how to generate a virtual three-dimensional space designed to enable multiple users to interact in real time. Furthermore, the lawsuit claims that these patents describe the exact same virtual architecture utilized by Massive Multi-Player Online Games (MMORPG) in general. Potential loss exposure to Activision's billion dollar franchise could be tremendous, based in part by Worlds charges of willful infringement. Worlds have further charged over 50 separate claims of infringement making it very difficult for Activision to come out unscathed. If ATVI doesn't defend well in the upcoming Markman it is possible that ATVI will have negative effects visited upon its market capitalization, pending a Markman order in this case.

    Investing on the Markman

    Is this a new trading philosophy? I think not as hedge funds and venture capitalists like Hudson Bay Capital and Iroquois Capital have hit the ground running looking for these "pre-Markman hearing" patent plays. Both companies recently announced on February 13 and 14 respectively, that they had taken a stake in Spherix (SPEX). Notably Spherix, has no revenues and has yet to file any patent litigation but trades with the premise that they will. Following the money, offensively and defensively, it may be wise to consider evaluating pre-Markman patent plays for a place in the speculative part of your portfolio.

    Disclaimer: This is not legal advice and you should not invest in any of these equities without doing your own due diligence.

    Disclosure: I am long OTCQB:WDDD, VRNG.

    Tags: WDDD, VRNG, VHC, PRKR, SPEX
    Mar 13 10:16 AM | Link | 2 Comments
  • Windstream: A Dividend Trap

    I've been watching this Telco for a very long time. Studying its mergers monitoring its growth plans. My best conclusion here is best expressed by the analogy of a developing nation fighting wars with Superpowers on multiple fronts, eventually they will lose. Windstreams growth is not in copper and not residential. Its in Business Enterprise. There the company is under assault by literally everyone. The companies they acquired, PAETEC, NUVOX and USLEC all operated under the mindset that being cheaper than the ILEC, i.e.. ATT (T), Verizon (VZ) Centurylink (CTL) will win you business. Now that the ILECS have decided enough marketshare has been lost Windstream is no longer priced to win. In fact they are higher in some markets than the ILEC. Furthermore the Cable Operators have gotten heavy into the game and are basically offering similar services at a margin that Windstream can not successfully operate in. As more business migrates to these companies Windstreams balance sheet will suffer and undoubtedly so will the dividend. Decrease your holdings here and don't get caught in a dividend adjustment as there will be no future top line improvement to bail you out.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: WIN, T, VZ
    Mar 02 8:14 PM | Link | Comment!
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