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Greg Miller
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I am an active investor and trader for my own brokerage account. I enjoy the sport of the markets and the challenges it presents every day. I have been reading SEC filings for many years, and I have grown accustomed to the natural resource sector in particular, although I like special situations... More
  • Apple's Hypocritical Attacks On Patent Trolling 1 comment
    Sep 25, 2013 4:04 PM | about stocks: QCOM, SPEX, AAPL

    Apple (NASDAQ:AAPL) has been vocally attacking patent trolls recently, yet its attacks are quintessentially ironic as it has purchased patents for trolling and currently invests in operating patent trolls. Just as Apple's patriotic appeals were undermined after reporters discovered its shameful network of offshore tax havens, Apple's attacks on patent trolling will soon be exposed as another embarrassing hypocrisy once reporters discover how it profits from the exact practice it condemns.

    Patent trolls are companies that own patents and sue for infringement, yet do not use the patents themselves. Also known by the acronym NPEs for Non-Practicing Entities, patent trolls love to attack Apple for patent infringement. The company is currently defending itself against 171 lawsuits and is the most targeted firm by NPEs. As noted in an article with a self-explanatory title, "Tim Cook Complained About Patent Trolls and Today President Obama Called on Congress to Assist U.S. Tech Companies," Apple's CEO Tim Cook claims that patent trolls stifle creativity and limit productivity at his and other American companies. He has urged Congress on multiple occasions to pass legislation limiting the power of patent trolls.

    However, reporters will one day laugh at the irony of Cook's soapboxing. In June 2011, Apple became a member of the Rockstar Consortium which had purchased billions of dollars worth of patents from Nortel, the now defunct telecom giant. Although Apple had legitimate interest in some of these patents for manufacturing and has subsequently acquired subsets for its own use, Rockstar Consortium was implicitly created to monetize its thousands of patents through a variety of means, including suing infringers for damages through NPEs.

    Of course, Apple knew this when it decided to invest upwards of $2.5 billion in Rockstar Consortium. It also knew that this patent monetization entity would use its capital to invest in other patent trolls, which is exactly what it has been doing over the past few months.

    For example, take Rockstar Consortium's million-dollar monetization partnership with Spherix (NASDAQ:SPEX), a patent monetization company led by AmLaw 100 attorney Anthony Hayes. As a member of Rockstar Consortium, Apple has sold non-operating patents to and is a shareholder of Spherix. This is just one example among many of Rockstar Consortium's partnerships with which I am familiar, yet Spherix illustrates my point perfectly. Apple had full knowledge that Spherix would be monetizing its patents through trolling (as well as non-trolling monetization methods, of course), and Apple's membership in Rockstar Consortium is financially synced to the common share price of Spherix.

    Whether humorous or not, investing in Spherix has proven to be a terrific financial decision, and Rockstar Consortium's involvement has certainly done nothing but improve Spherix's appeal for investors. Even before Apple indirectly invested, Spherix's Hayes had been consistently earning triple-digit returns from patent deals while managing a $30 million patent monetization fund compounding 30% annually prior to becoming CEO of Spherix, so he did not need much help. Indeed, his last work with a public company delivered up to 614% returns for shareholders.

    While Cook was making all-American appeals to Congress to limit patent trolling and boosting public support of Apple's creativity, Cook's backdoor investment in Spherix was quintupling due to investment frenzy from the celebrity endorsement of his member Rockstar Consortium. As readers of Seeking Alpha know, within one month of its/his investment, Spherix shares hit a high of $27.87, almost 500% higher than Rockstar Consortium's $5.65 cost basis. I wrote about Spherix on July 23 at $6.26 per share explaining the possibility of a low-float rally but regrettably declining to buy shares myself. Regardless, the irony for Apple was complete.

    Just like the offshore tax haven scandal proved, there is once again no doubt that Apple takes care of its bottom line. Spherix has been a great investment- one of many philosophically contradictory investments that I suspect Apple will continue making in the patent sector. The irony is simply that regardless of how good of an investment Spherix has been, it contradicts Cook's publicity campaign to make Apple look like a victim of patent trolling attacks.

    Apple intimately understands PricewaterhouseCoopers' proclamation of 2012 being a banner year for patent infringement litigation, and its multi-billion dollar expenditures for patents during the past few years suggest that it plans to profit from patent trolling techniques itself. In 2012 alone, patent lawsuit filings jumped 29%, patent applications increased 7.8%, and courts awarded the three largest patent infringement damages of all time. What does Cook think that Apple will do with its patents over the next century? Does he expect investors to believe that Apple will perpetually use its patents solely for internal operations and royalties? No, in 20 years or so, Apple will resort to tactics like those used by neighboring Qualcomm (NASDAQ:QCOM), a former growth company that now depends on patent monetization for half its $115 billion market capitalization.

    Despite how disingenuous Apple's flag-waving while backpocketing profits may be, my opinion is that Congress should limit actual patent trolling. President Obama has endorsed legislation that would add some important restraints to frivolous litigation. Yet in the same breath, not nearly as much of the patent monetization activity occuring today is the "trolling" that Cook would have Americans believe is victimizing innovators.

    The term troll glosses over the important function of companies like Spherix for American inventors. Many inventors who own patents cannot assert their rights in expensive courtrooms or support themselves for years of legal battles. Well-capitalized patent monetization entities like Rockstar Consortium and Spherix serve important roles as defenders of these inventors' rights. They also happen to deliver outsized investment returns to those who catch their early moves. So whether or not Apple is sincere in its stance against patent trolling, I know many investors who could ultimately care less while they focus on the rich alpha available in the sector. Humor and irony aside, I am with them.

    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. I have no business relationship with any company whose stock is mentioned in this article.

    Stocks: QCOM, SPEX, AAPL
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  • Tom Shaughnessy
    , contributor
    Comments (1141) | Send Message
     
    Great write up!
    1 Nov 2013, 03:30 PM Reply Like
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