Of general interest on the patent frontier...
Patently Lucrative?
By John Rubino
Special to TheStreet.com
4/27/01 4:07 PM ET
Wild as they were, the 1990s were just a prelude. The real creative destruction is just beginning, as optical networks, genomics, fuel cells and all the rest hit the market, changing and/or eliminating whatever they touch. Which is another way of saying that a new wave of intellectual property (IP) is about to create a new generation of supercompanies.
This, in turn, implies that certain crucial patents are the keys to the kingdom. Find them and you've got the next batch of winners, right? Well, yes, with one caveat: The strongest patents in the world don't do you any good unless you defend them, and even then it's not a sure thing. Big companies with deep pockets frequently just take what they want on the assumption that they can intimidate, outspend or simply outlast a patent's legitimate owner.
On the other hand, a little company that fights and wins on a crucial patent gains twice: in cash, since the violator generally has to pay for its sins, and in legitimacy, since any other company that might need that IP has an incentive to pay up to avoid a fight.
So a portfolio of companies waging big, winnable patent fights would provide some thrills, though as far as I can tell, no one is tracking and analyzing patent litigation in this way. Two interesting cases do come to mind, though.
Energy Conversion Devices (ENER:Nasdaq) "is like Al Gore -- they've invented everything," says David Schoenwald, manager of the New Alternatives fund, which TSC wrote about last year.
That's only a slight exaggeration. Thanks to founder Stanford Ovshinsky's groundbreaking work on ovonics, the science of disordered and amorphous materials, Energy Conversion now has basic patents covering -- among other things -- advanced batteries, hydrogen storage, fuel cells, photovoltaics and read/write DVDs. Unfortunately, it's never been able to turn this world-class IP into world-class profits. "They've been losing money for about 40 years," says Schoenwald, and this year won't end the streak.
But next year might. Energy Conversion's revenue is surging as its inventions start to gain commercial traction. And in March, the company went after Matsushita, alleging that the Japanese electronics giant has been making nickel-metal hydride batteries that infringe on its patents. The suit asks for $50 million in damages and a ban on battery imports.
Currently, says Marvin Siskind, Energy Conversion's patent attorney, "100% of the world's [nickel-metal hydride battery] production is based on our patents," and 28 companies currently pay various kinds of fees. So no other violators will have to fall into line if Energy Conversion prevails against Matsushita. And though $50 million would be nice, it's only about 10% of the company's market cap.
Instead, the real value of a win might be to show the investment community that Energy Conversion intends to start exploiting its IP more aggressively.
Interdigital Communications (IDCC:Nasdaq) , meanwhile, is nearing the end of one of the stranger patent battles you're likely to see. I'm long this one.
The story begins back in 1993, with Interdigital's development of some promising wireless patents. Because the company was so tiny and obscure, cell-phone giants Motorola (MOT:NYSE) and Ericsson (ERICY:Nasdaq ADR) simply ignored it, making phones that seemed to incorporate Interdigital's IP without paying royalties. David sued the Goliaths, and in the ensuing eight years the following has happened:
In what Interdigital fans call a travesty of justice, Motorola convinced a nontech-savvy jury that it was in the right, and won its case.
Interdigital sent the patents in question back to the U.S. patent office for reexamination. Two years later they were approved again.
In Germany, Interdigital fought a similar battle with Alcatel (ALA:NYSE ADR) and Siemens (SI:NYSE ADR) , in which the two giants protested the issuance of Interdigital's original patents and lost.
In Sweden -- Ericsson's home country -- Interdigital applied for the same patents, and, despite Ericsson's protests, won.
A Special Master appointed to analyze the Ericsson case came back with a report that -- according to several money managers who had their legal staff take a look -- comes down squarely in Interdigital's favor.
Probably no one outside the litigants' legal departments knows this case better than Jim Lurgio, a private investor in Interdigital who has been hosting Interdigital discussion groups on various sites since 1997. He's biased, obviously, but he's clearly happy about the way things are going. "They're both trying to walk out with a smile on their face," he says. But whatever form the final deal takes, "Ericsson stands to lose a ton."
How does he define a ton? Well, in the original suit against Motorola, Interdigital asked for 5% of gross phone sales and 3.5% on infrastructure. Ericsson is the world's biggest wireless infrastructure company and until recently was the third-biggest handset maker. And the suit covers most of the 1990s. I'd say that qualifies as a ton.
Another clue is buried in the footnotes of Ericsson's most recent 10K, which show a "contingent liability" of $2.5 billion. Much of this could be earmarked for other things; there's no way to know at this point. But given Interdigital's market cap of less than $700 million, anything close to the numbers being tossed around would have a huge impact.
As I said, it's hard to find, much less analyze this kind of thing, but the gain is worth the pain. So send in your favorite patent litigation plays to me at rubinoja@yahoo.com and I'll see about doing a follow-up column in a month or two >> |
