ParkerVision (NASDAQ:PRKR) is a development-stage company in the process of commercializing patented radio-frequency (RF) technology in the telecommunications industry that owns over 200 U.S. wireless technology patents. ParkerVision filed a lawsuit versus Qualcomm (NASDAQ:QCOM) on 7/20/11 alleging broad-based infringement of PRKR's technology.
On October 17, 2013, a Florida federal jury found that Qualcomm infringed ParkerVision patents. The jury awarded ParkerVision $173 million in past damages, and awarded ParkerVision a royalty of $0.23 cents per unit on future use by Qualcomm. After the trial, briefs were submitted by both parties arguing post-trial motions on 5/1/14, Judge Dalton held a hearing to allow PRKR and QCOM's attorneys to argue their final post-trial motions, and I attended that hearing. I believe PRKR had a very successful day in court, and that Judge Dalton's statements at the end of the hearing suggest he will uphold the jury's verdict.
The hearing began for 9:00am on May 1st, and ended at 5:00pm. At the end of the day, around 4:50pm, Judge Dalton told the courtroom that,
With respect to ongoing royalties, both the request for prejudgment (past damages) and post judgment (ongoing royalties), that is, the various iterations of the periods for which those damages would apply, I'm certainly going to grant some ongoing royalties [ParkerVision, Inc vs. Qualcomm, Inc., United States District Court, Middle District of Florida, Orlando Division, Docket 3:11-cv-719, May 1 2014, Transcript of Motions Hearing before the Honorable Roy B. Dalton, Jr., page 253]
PRKR will also earn interest on the past damages from the time of initial infringement in 2006 until they are paid. The judge's final words were,
you meet and confer on the issue of the appropriate interest rate and notify me in the 30-day period as to whether or not you've reached an agreement on what that should be. And if you haven't, I'll decide it for you [Ibid, page 256]
Based on the judge's summarizing statements that he will grant royalties and interest, we conclude that, by the end of the hearing, he had decided to reject both of QCOM's remaining requests to find for invalidity and non-infringement.
Immediately prior to those closing remarks from Judge Dalton, Steve Neal, lead attorney for QCOM, appeared to foresee and acknowledge that QCOM will be paying PRKR damages and royalties when, late in the afternoon, between 4:30 and 5:00, he plead with judge:
ParkerVision's implied percentage (royalty) rates are 9.9 percent for standalone receivers and 6.4 percent for transceiver, we would urge that if you're going to use the jury verdict to enter a rate today, we would urge, that it not be enhanced. There are cases identical to this where there's been no enhancement at all. There are cases that have engaged in very modest enhancements of an enhancement of 25 percent of the rates. So, for example, if the rate was 4 percent per unit, it bumped it to 5 percent as a 25-percent enhancement. There are some cases that have been described egregious which have done a 1.75 multiplier. If Your Honor is going to enter a rate now rather than waiting, we think it ought to be in the 4 to 6 percentage rate or the 6 to 9 as shown on the slide I just showed you, and that there should be no enhancement, but if there's any enhancement, it should be minimal [Ibid, page 242]
Also late in the day, around 3:30-4:00, Steven Neil told Judge Dalton that QCOM is,
developing a non-infringing alternative for the smaller, 28 nanometer technology…that is work that is underway, that QCOM is going to pursue that and is attempting to develop non-infringing alternatives[Ibid, page 237]
All of the statements are forward looking. In other words, Mr. Neal seemed to be saying that QCOM DOES NOT have non-infringing alternatives today, but is trying to design non-infringing alternatives for the future.
Observers of the 1st trial might remember the following testimony made under oath by Charles Persico (SVP at QCOM, in charge of all RF, analog and mixed signal platforms, from product definition, design, production, to test engineering. Mr. Persico built the QCOM engineering team from one to over 350 engineers) during the Injunction Hearing:
If we work for 5 years and allocate thousands of man-months of engineering time, we might be able to develop a non-infringing product.
Steven Neal's statement that QCOM is working on a non-infringing alternative seems to confirm Charles Persico's testimony.
Adding to our conviction that QCOM's JMOLs will be denied, during the hearing Doug Cawley, lead attorney for PRKR, reminded the Judge of Mr. Persico's sworn testimony that QCOM's damages expert, Mr. Leonard, was wrong when he had testified that QCOM already had an existing alternative to PRKR's technology. So the testimony to the jury through Mr. Leonard, and the interrogatory answer stood that Qualcomm was stating under oath that they had a no infringing alternative and it was ZIF. But then Mr. Persico took the stand before Your Honor, outside the presence of the jury, and said the opposite. And the next slide we see, he testified:
Q. Do you agree or disagree that the IFR-3000 [the ZIF chip] is an available, acceptable no infringing alternative?
A. I disagree.
Q. And do you agree or disagree that the RFR6000 or any of Qualcomm's ZIF products is an available, acceptable no infringing alternative?
A. I disagree. [Ibid, page 221-222]
In short, Your Honor, Qualcomm has either misrepresented the facts to the jury when it was convenient to say that of course they had an easy no infringing substitute and the damages should be low, or has misled Your Honor when it testified at the injunction hearing that this is not a non- infringing substitute. In the context of an ongoing royalty, we believe that Your Honor should find that they have no infringing substitute, as Mr. Persico testified, and therefore the royalty rate should be increased… the rate should also be increased over that found by the jury because that infringement is now incontestably willful. [Ibid, page 222]
Working backward in time on May, 1st, between 11:00 and 12:00, the Court discussed a very technical issue upon which QCOM seems to have pinned its hopes on a successful JMOL surrounding Claim 23 of 6061551 patent: An apparatus for down-converting a carrier signal to a lower frequency signal, comprising:
· An energy transfer signal generator;
· A switch module controlled by said energy transfer signal generator; and
· A storage module coupled to said switch module;
Wherein said storage module receives non-negligible amounts of energy transferred from a carrier signal at an aliasing rate that is substantially equal to a frequency of the carrier signal plus or minus a frequency of the lower frequency signal, divided by "N" where "N" represents a harmonic or sub-harmonic of the carrier signal, wherein a lower frequency signal is generated from the transferred energy.
Another SA author concluded his review of this discussion by saying
If the baseband signal coming out of the capacitor is in fact the same baseband being generated before the capacitor, this should be a non-infringing alternative technology. Quite simply, it would be the end of the case because of the way the Markman defined the claim terms.
The statement is simply wrong: It is well known to engineering students, let alone practicing electrical engineers, that the capacitor changes the input signal, so the input and output of the capacitor cannot be the same baseband signal. The Court and ParkerVision's attorney both recognize this point in the transcript.
The jury had found that QCOM infringed Claim 23 of the '551 patent. The claim had been fully discussed during the trial by PRKR's expert witnesses, QCOM presented no contrary evidence whatsoever, just attorney rhetoric on cross exam, and the jurors had 100% of the evidence upon which to base their finding of infringement as a matter of Fact. PRKR's attorney Josh Budwin clearly reminded the Court during the Hearing that both Dr. Prucnal (professor of electrical engineering at Princeton and Fellow of the IEEE) and David Sorrells (PRKR's CTO and a named inventor on all of the patents-in-suit) testified as expert witnesses, and both showed the jury how QCOM's products infringe PRKR's patents by walking the jury through each element of each claim that was asserted (including Claim 23). QUALCOMM NEVER offered either an expert witness or a company witness to counter PRKR's expert's testimony of infringement. Based upon Judge Dalton's jury instructions, if an expert testifies as to his ultimate opinion based upon his review of the underlying evidence, and the other side fails to cross-examine him, then that expert's testimony is prima facie evidence of infringement
In lieu of reminding Judge Dalton of the testimony, QCOM's attorney Tim Tetter said during the hearing, that in his opinion, Dr. Prucnal made two points of conflicting testimony regarding Claim 23 of the '551 patent, causing Judge Dalton to ask for clarity. Mr. Budwin explained that while PRKR does not agree with QCOM's characterization, this is not an issue for the following reasons.
· First, the law is clear that the jury may choose to believe none, part or all of any expert testimony. Therefore, the jury could come to their conclusion based on any combination of some, all or none of Sorrells' testimony as well as some, or all or none of Prucnal's testimony. Furthermore, Budwin explained that the jury's duty is to determine if each element of the claims were in fact performed by the infringing product, and the definition of each claim is guided by the terms in the claim construction ruling. IT DOES NOT MATTER what attorney rhetoric was spoken by QCOM's attorney during the Hearing: infringement is a matter of facts, and those facts are based exclusively on the claims asserted, and the definition of terms in the claims construction,
· Plaintiff's experts tend to heavily weigh upon authentic technical evidence produced by the alleged infringer (or their experts) since these design documents are developed by those who actually constructed the infringing products. During the trial, QCOM mistakenly added one such document into evidence, a design schematic page produced by Qualcomm's own expert Dr. Fox. As testified to by ParkerVision's expert, this design schematic shows QCOM's products performing energy sampling, i.e. infringement by QCOM, and is likely the reason that QCOM's attorneys chose to not call their own expert (Dr. Fox), and consequently to not put on any defense for infringement. Clearly, having their own expert support Qualcomm's infringement would have been the death knell of their case.
Mr. Budwin reminded Judge Dalton about Dr. Fox's schematic in the following exchange that occurred around 11:15:
So I'm trying to find out where in the record is there evidence that the signal coming out of the storage capacitor is, in fact, a lower frequency signal than the signal that went in, and I'm not going to call it a baseband signal because I know that's in dispute.
The storage module receives non-negligible amounts of energy transferred from a carrier signal. That energy is used to generate the baseband or the lower frequency signal. So, Your Honor will remember that there was a lot of discussion about this schematic page (Dr. Fox's schematic) that shows the mixer and the circle with the X at trial. Here's what you've got. You've got your RF signal coming in, a portion of that RF signal sampled by the switches. And what that means is that only a portion of the energy from the incoming signal is going to be visible at the output of the switches. Because you're doing sampling here, the output is a lower frequency signal because it only contains a portion of the energy on the incoming RF signal. That is exactly what the design document showed, 0.25 in, it gets sampled here, comes out at 0.11. That means that by the sampling process, the signal is going to be of a lower frequency than the signal as compared before the sampling process. And that's consistent with the demonstrative that Dr. Prucnal showed from Dr. Fox's report….This is another view of the same thing that we've just seen. You've got an incoming RF signal, that's what's shown here and here, L and A, it's the same as the prior document. And the opening and the closing of these switches is being controlled by the LO control signal we see down here. So when a control signal goes high, a sample of energy, that's what's shown here, the red, goes through the switch, that's what shown on this red line, and into the capacitor. That's what being depicted and that's what being explained in Dr. Prucnal's testimony about this demonstrative. This here is the switch output. So here's your input to the switches and here's the output. The output is a sample of the energy that went in. It is of a lower frequency than what went in. That energy which comes from the carrier signal then gets stored in the capacitors here. That's why the line which Dr. Fox drew is shown stopping at the entrance to the capacitor, which is in turn used to generate the baseband signal of the claims, the one that's generated from the energy transferred from the carrier signal. So I'll submit, Your Honor, that the testimony that Dr. Prucnal gave on direct is sufficient to meet our prima facie burden. Any alleged admissions that came in on cross-examination were either taken out of context, as I showed, or don't support or require the entry of a judgment as a matter of law.
There's a case, even if you were to find that Dr. Prucnal's direct and cross-examinations were in direct conflict with each other, which we don't think is the case, it's the jury's job to weigh that testimony. It's a question of fact. And that's what they did, and that's consistent with how Your Honor instructed the jury, that it was their role to evaluate the issues of fact and decide what weight, if any, to place on any given witnesses' testimony, they can credit some, they can credit all, and it's their decision. If the expert testifies as to his ultimate opinion as the reasons and the other side fails to cross-examine, him, that expert's testimony is prima facie evidence of Infringement. [Ibid, page 105-106]
There was no competing theory of non-infringement presented by Qualcomm. Instead, Mr. Teeter in his rhetoric on May 1st described QCOM's implementation operates as a "double balanced mixer". This attorney statement was NEVER supported by ANY QCOM expert testimony, and is therefore not evidence which the jury could use as part of its decision making processes used to arrive at the verdict. It would stand to reason that IF QCOM had PROOF of this approach, i.e. that is how their chips ACTUALLY function, then QCOM would have enthusiastically presented that evidence at trial to the jury via one or more expert witnesses, but they never did.
Finally, the question of whether PRKR's patents are valid didn't have much discussion as QCOM's burden was to show that there was a prior art reference that contemplated every element of all 11 claims that the jury considered. There was no such reference suggested during the hearing, indicating QCOM has conceded the jury's ruling that all of PRKR's patents are valid, and will stand.
In summary, what did PRKR share with the jury to prove that QCOM is an infringer in Case One?
· Dr. Prucnal reviewed QCOM's own, internal, schematics of the infringing chips and related documentation, and testified his conclusions to the jury.
· Mr. Sorrells testified to the jury about his review of the reverse engineering "teardown report" of the QSC 6270 cell phone product, as well as of QCOM's own publicly available conference paper of that chip which initially revealed QCOM's infringement to PRKR.
· Mr. Budwin showed the jury that in interrogatories QCOM stated that there are no appreciable differences between the QSC 6270 and the other infringing products.
· Mr. Budwin also reminded Judge Dalton that QCOM's own expert witness, Professor Fox, had created a schematic of a timing diagram, entered into evidence, of QCOM's chip clearly showing that QCOM's downconverters are sampling downconverters, and therefore cannot be double balance mixers.
As a post-script to the events of May 1st, a few minutes after 5:00 on the courtroom steps, Doug Cawley handed Steve Neal a copy of the just-filed lawsuit accusing QCOM and HTC of broadly violating 7 patents (which are all different from the patents in Case One), with more than 200 claims, in QCOM's baseband processor. Ironically, QCOM's attorneys had spent much of the mid-afternoon session arguing that its damages in the 1st trial should be reduced because its customers place the vast majority of value when purchasing its products on the baseband chip, not on the receiver (the subject of the first lawsuit). A receiver chip sells for about $4 per unit, while a baseband chips sells for about $20-$30. That argument is now on the record and may be used in the upcoming 2nd trial.
QCOM has 30 days after Judge Dalton's final JMOL rulings within which to file an appeal. Assuming they do so, the appeal process should run its course in 9-12 months. PRKR had $25m of net cash on the balance sheet as of 3/31/14, more than enough to see it through the appeal process and when PRKR wins, the company will be due approximately $300m of gross cash ($173m from the verdict, $103m from 18 months of running royalties at $0.23/unit and the balance in pre & post judgment interest income). Assuming McCool, Smith earns 15% of the initial damages windfall, or $26m, and taking into account the tax shield provided by PRKR's $295m accumulated deficit, the company would have about $2.85 a share in net cash.
Meanwhile, the company has said on its quarterly earnings conference calls that it is in late-stage negotiations with many infringing companies other than QCOM to enter into licensing deals based upon a running royalty. On 2/5/14, the compensation committee put in place an award program wherein if it generates at least $50m of net cash in a single year, not including cash provided by financing activities, then a bonus pool of 6% of that cash will be established for employees. Parker has an annual cash overhead of about $16m, implying the company expected to earn at least $66m of royalty revenue this year, and collect the associated accounts receivable, when this plan was put into place just three months ago.
Based upon Street research, QCOM is expected to sell about 300m chips this year, all of which infringe based upon the jury verdict in the 1st trial, and about 330m next year. At $0.23 per unit, that equates to about EPS of $0.50 in 2015 from just Case One. Assuming a 15 P/E, and adding in the net cash, we arrive at a price target of about $11.00. All revenue from licensing deals would be additive to these figures, as would revenue from winning Case Two.
The damages in Case Two will be multiples greater than in the first case because not only did infringement of the patents in the 2nd case begin in 2006 (i.e. a huge number of units have shipped since then), but also the QCOM products in this case sell for $20-$30 per unit vs. the approximate $4/unit in Case One. Applying the same 6% royalty rate awarded by the jury in Case One to an average selling price of $25 per unit in Case Two, produces approximately $1.50/unit due to PRKR in both past damages AND ongoing royalties for Case Two. QCOM will sell about 300m chipsets this year, and the jury determined that virtually all of those infringe the patents in Case One. The infringing chips in Case Two include its baseband processors, QCOM's bread & butter product. Assuming virtually all of the chips infringe the Case 2 patents, and applying the $1.50 per unit in royalties, QCOM would owe PRKR $450m a year in ongoing royalties for the life of the patents, which extend out into the mid-2020s. PRKR has about 96 million shares outstanding, so under these assumptions Case Two would produce about $4.70 per share in annual revenue for PRKR.
[Author's Note: This article makes numerous references to the transcript in the May 1, 2014 post-trial motions hearing in the trial of ParkerVision vs. Qualcomm. There is no public link to the transcript, but it is available for purchase from Ms. Sandra Tremel, U.S. District Court, 401 W. Central BLvd., Orlando, FL 32801-0460, for $234.30]
Disclosure: I am long PRKR. 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.