A recent court ruling stands to shake up the entire patent-troll sector. Although some declines have been witnessed already, the true nature of this situation has yet to be realized, offering short sellers a rare opportunity to ride stocks to the ground. Recently, the Supreme Court ruled that patent suits should be filed in the state where the defendant is incorporated, and not in the location of the plaintiff's choosing, as was the previous practice. The ruling will bar many patent owners from bringing forth cases in the Eastern District of Texas, a patent-friendly jurisdiction where more than one-third of all infringement lawsuits are now filed. This puts an end to a majority of cases that sought refuge there in order to gain an advantage and claim victory. It's about time the patent trolls got trolled on.
This is a GREAT Thing for the Tech Industry
Patent trolls don't add anything to the economy because they don't produce any goods or provide any services. Their entire existence is based around income produced from lawsuits. These lawsuits are typically settled out of court. Since these cases usually cost millions of dollars in litigation and legal fees, they are often handled this way. A company is much more willing to pay $100,000 to quickly end an issue that could potentially cost millions, even if it is arguably one they shouldn't have had to deal with in the first place.
Software patents in the last decade have skyrocketed. The reason being is that machine/mechanical patents are fairly specific, yet software patents are usually very vague. This leads to claims later down the road on the patent when future technologies that are relative get invented and incorporated into the vague wording and terminology of the original patent. Essentially, something basic that gets patented in the software world can have potentially endless possibilities of interpretation just a couple of years later.
Patent lawsuits cost companies a ton of cash. That is why 90% of these cases get settled out of court for a fraction of the cost. The point is that this type of practice still costs companies money that should have never been an expense in the first place, reducing margins and profits. This ruling won't remove patent cases from the court entirely, it will just remove many of the headaches and nuisances that plagued the previous environment. If you hold a valid patent, and someone infringes on that patent, there should be repercussions. That is not the case here, and a reason why it is being brought up (and hopefully stopped) in the courts.
Arguably, patents are needed. However, when companies buy patents to profit from, instead of protect, the innovations they have rights to, they tend to push the patent and its wording as far as possible. For example, basic gestures like swiping to unlock your iPhone are patented. This prevents smaller players from entering the market and builds a fake "moat" around the patent holder. In addition to the current tech industry, start-ups should be rejoicing at the change in the ruling.
Change of Environment and Attitude
On top of there being resistance in the courts, patent trolls have been facing increased pressure from some of the companies they are trying to take to court. This is the direction Newegg's chief legal officer, Lee Cheng, decided to take back in 2007: Not settle with patent trolls….EVER. This has even resulted in bounties being placed on these patent-troll companies in retaliation. A similar practice exists in the software world, where white-hat hackers are asked to find bugs and exploits in exchange for money. The process was slightly tweaked to offer incentive to anyone that is able to invalidate their patents. Cloudflare took this approach with Project Jengo, trying to invalidate an entire company's portfolio of patents for cash rewards. This is its livelihood and money maker. If companies attack in a retaliatory manner, the patent trolls have nothing to fire back with. It would seem they need to walk lightly with Cloudflare, doubling down on its bet and effort earlier this week.
H.R. 3309: Innovation Act
There has been a bill floating around for quite a while now called H.R. 3309. It aims to make patent trolls more accountable entities. This would include covering the cost of legal fees if they lose, deterring them from approaching the case unless they had proper grounds on which to proceed, along with giving companies a reason to actually bring them to court instead of settling. It would also require that these companies be more transparent about the true nature and focus of their business, something that is undoubtedly lacking currently. This bill had passed in the house overwhelmingly, but didn't even make it to a vote in the senate. It would seem the influence of the patent troll lobbyists in Washington is still strong; however, the bill is making its rounds again. Contact your local, state, and federal representatives!
The License On Transfer Network is a non-profit entity that was started specifically to fight patent trolls, or Patent Assertion Entities (PAEs) as they are officially known. While the effort is aimed at preventing patent trolling in its entirety, the system isn't perfect. It is a start and one that will hopefully be expanded and improved in the future.
The Bubble Has (Finally) Burst
With that, I am officially calling an end to the ridiculous party these jokers have tried to throw with non-alcoholic beer and stale snacks. Their business model was objectionable from the beginning, and these companies deserve to go under. Patents have a place in time, history, and the economy. This was not the place, and not how their power should have been applied.
As mentioned, this is much more than just one court ruling. This is a break-point of events that have long been in motion. The number of lawsuits filed by the patent trolls seems to have hit its peak in 2015. Combined with the legal ruling and implications, I would be extremely surprised if it even comes close to that number again in the future. Furthermore, these companies aren't winning these cases as often as before. In 2017, patent owners won 70% of the cases and got almost 40% knocked out in the initial round.
Who To Short?
There is no single target here. This is a sector-wide meltdown that has been long overdue. Find a company that's entire existence is patent litigation and short it. Even companies like Marathon Patent Group (NASDAQ:MARA), which claim to be one of the "legit" patent companies, have seen horrendous declines since the announcement of the ruling.
To be more specific, I would encourage readers to target groups that thrive in the tech patent sector. A few noteworthy companies that come to mind are those of Acacia Research (NASDAQ:ACTG), Rambus (NASDAQ:RMBS), Interdigital (NASDAQ:IDCC), and IBM (NYSE:IBM).
Type "mother of all patent trolls" in Google. The first page should be littered with the Acacia name, and with good reason. Acacia Research constantly claims infringement of rights, even by companies like Apple (NASDAQ:AAPL). It has been having a hard time in the market lately, thanks to a grim outlook of the company's future in China due to losing a large client, ZTE (OTCPK:ZTCOY). This should be seen as the least of the company's future problems since a 2010 Bloomberg article noted that "Acacia has filed at least 337 patent-related lawsuits in its 18 years." The combination of forward outlook and legal restriction should send this stock much lower.
While the company has vehemently denied the claim of being a patent troll, the fruits of its labor speak volumes about the type of company that Rambus has evolved into. Ever since 2000, the company has entered into heated battles with big name companies like Samsung (OTC:SSNLF) and Hynix (OTC:HXSCF), claiming that it owned virtually every memory tech under the sun. Additionally, it has been aggressively acquiring technology patents. In essence, RAMBUS is a "has-been" and "could-have-been" in the tech world.
Interdigital, "an 'innovator' of 3G/4G wireless solutions", is another name worth eyeing up. While it argues that it also creates its own products, an estimated portfolio of 20,000 patents isn't persuading anyone. Nokia (NYSE:NOK), Samsung, RIM (BBRY), ZTE and Huawei are just some of the names that this company tries to battle in the courts.
This is my wildcard call out. With Warren Buffett partially leaving the stock as well, this could be a great alarm to an IBM investor to exit their positions and ring the register. What does the Oracle know that you don't? Additionally, those liking IBM might find it wise to sell and re-buy at a lower entry point. The company has been buying back stock and accumulating patents. PC Magazine even published an article titled, "IBM is the World's Biggest Patent Troll." IBM isn't the same company it once was.
While this court ruling is certainly a step in the right direction for almost everyone involved (except for the patent trolls of course), it goes without saying that our system isn't perfect, and this is more or less a Band-Aid on bigger problem that needs to be fixed eventually. Band-Aids aren't exactly effective at healing broken bones. Either way, this looks like the certain end for the annoyance known as the patent troll. While I have highlighted some companies that stand to be negatively impacted by the ruling, it is certainly not an exhaustive list.
Disclosure: I/we 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.
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