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Inventors Take A Bite Out Of Apple

|About: Marathon Patent Group, Inc. (MARA)
Summary

Apple is viewed as one of the world’s foremost technology innovators, recent jury verdicts for $1.5B in patent infringement damages call into question the authenticity of some of their innovation.

Three underdogs have recently been victorious in challenging Apple in court.

A fourth trial starts on May 2nd with a major university as plaintiff and has the potential to land a similar blow to Apple.

May 2nd trial involves technology for Apple’s key revenue driver “Siri".

Apple’s public perception and brand image possibly becoming compromised.

When it came to innovation, Apple (NASDAQ:AAPL) co-founder Steve Jobs used to talk about skating to where the puck will be, a figure of speech borrowed from hockey involving anticipating the key action, and avoiding the late hit. Instead of relying on what the customer says they want based on a market research survey, Jobs insisted on defining needs that consumers didn't know they had.

Apple is often deservedly celebrated for its technology innovation; however it has recently been paying a costly price by getting caught with its hand in the proverbial patent cookie jar.

In three recent patent court jury trials, Apple has been slapped with nearly $1.5 billion of patent infringement damages causing some to begin to ask, is at least some of Apple's picture of innovation possibly more of an illusion. The vast majority of patents owned by Apple were granted in the last ten years and Apple really started ramping up filings around the launch of the original iPhone. Prior to the year 2000, Apple had received roughly less than 1000 of their current total of over 10,000 granted patents. This fact may help explain why Apple is exposed to many of these lawsuits since they couldn't patent what already had been patented.

Just yesterday, a federal jury in Texas ordered Apple to pay VirnetX Holding Corp. (NYSEMKT: VHC) more than $625 million for patent infringement for Apple's use in its VPN on Demand feature, FaceTime system, and iMessage system. In fact, the jury seemed to want to send Apple a message as it awarded VirnetX $93 million more than it was asking for going into the trail.

In October 2015, Apple was ordered to pay the University of Wisconsin's intellectual property management arm $234 million in damages for infringing on one of its processor patents. This came after a jury found Apple guilty of infringing on intellectual property owned by the Wisconsin Alumni Research Foundation (WARF) when it used patented technology in its A7, A8, and A8X processors included in the 2013 and 2014 iPhone and iPad lineup.

Apple previously tried to convince the U.S. Patent and Trademark Office to review the patent's validity, but in April the agency rejected the bid. The University with its large war chest of dollars filed an additional lawsuit targeting newer Apple processors and this lawsuit is currently in process.

Prior to that in February of 2015, a Texas jury ordered Apple to pay $532.9 million after finding that the company's iTunes software infringed three patents of privately held Smartflash LLC. Smartflash owns three patents related to data storage and payment management. The Tyler, Texas, company alleged that, in 2000, patent co-inventor Patrick Racz shared his ideas with Augustin Farrugia, then a member of the tech company Gemplus International SA. Mr. Farrugia is now a senior director at Apple.

The jury found that Apple had willfully infringed all three patents, and that Apple hadn't proven the patents were invalid.

Unfortunately for Apple, the claims of patent infringement keep coming. On January 28, 2016, Marathon Patent Group (NASDAQ: MARA), announced that its patent infringement trial against Apple is set to begin on May 2, 2016. The suit alleges that Apple's Siri personal assistant, available on such devices as iPhones and iPads, infringes the claims of a patent held by Rensselaer Polytechnic Institute and Dynamic Advances LLC (a wholly-owned Marathon subsidiary). Marathon's press release also contains information included in the Court's January 20th order showing two different damages models from an expert - one model that calculates damages at $420 million; and, one model that calculates damages between $175 million - $200 million. Ironically, these large damage figures don't even fully account for what the current damage figures could really be considering they were calculated in 2014, and the patent doesn't expire until 2021. Since this patent is a key to the Natural Language it appears unlikely Apple could try to invent around it. One must also wonder if this technology is also present and being used in other handset manufactures too offering similar other "Siri-like" functionality. My best guess is Apple represents at most roughly half of the overall market. Apple has repeatedly challenged the RPI patent including requesting institution of inter partes review. In December of 2014, the PTAB denied the Petitioner's request for relief in the form of a second rehearing of the decision not to institute inter partes review. In particular, the Board concluded that Petitioner's Notice had failed to show sufficient basis for a second request for rehearing.

The key with any IP company is trying to figure out the companies valuation. VirnetX started this year at around $2. Positive news on this case made it quickly double and the recent win had the stock doubling again. With a $625 million verdict VirnetX has climbed to a market cap of over $350 million. Which says investors are discounting the award by around 50%.

So what could Marathon be worth? First investors need to understand that Marathon has always been a different type of IP company. Management has been building a wide portfolio of Intellectual Property that has consistently increased year over year revenues. They are growing a solid company that does not rely on single case events like VirnetX. The current market cap is under $40 million. Just the current Apple case has had experts estimate possible damages of $175 million to $420 million. This does not include future damages since the patent does not expire for another 5 years. Using an average of these two give a possible award of $300 million. Using a market cap estimate of a 50% discount like VirnetX would give a market cap for just the Apple case of $150 million or roughly $10/share. Add in the additional 7 years of damages and that could easily double the price again. Keep in mind that is only one of many cases which gives investors a warm feeling that there is not much downside but a huge upside with the price currently sitting under $2.5.

While Apple can certainly maintain their claim as an innovator, and they undoubtedly are in many regards, these recent and substantial jury awards clearly illustrate that Apple has in fact been engaging, at least in some case, in the unauthorized use of others patented technology, and profiting handsomely from it. Ironically, all three of these patents involve a technology completely foundational to some of Apple's most high growth and profitable market segments. One must wonder, absent this essential theft of certain others technology, would the company have ultimately experienced the same growth and windfall profits of recent years?

In closing, Apple itself states, "Apple's 100,000 employees are dedicated to making the best products on earth, and to leaving the world better than we found it." One can only wonder based on the recent rash of jury awards totaling almost $1.5 Billion for infringing others patents renders the statement slightly disingenuous.

While ultimately a billion or two dollars is nothing to Apple with its $38 billion in cash on its balance sheet, their bigger concern should be the growing public awareness of these types of situations. Apple's most invaluable asset is its brand and how consumers perceive them. That positive perception is virtually priceless, worth hundreds of billions. I'd argue these recent suits and their resulting outcome as detrimental to that perception.

Stay tuned, May 2nd where Apple again will go in front of jury with a major university as the plaintiff. What do lawyers often say? "Let your conscience be your guide". Are you listening Tim Cook?

Disclosure: I am/we are long MARA.

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.