The Markman Note: Rovi on the Ropes?
Apr. 2, 2015 (Mimesis Law) — It was a wild week at the intersection of investing and intellectual property, with four big litigation-induced moves in some names that we have been monitoring for a while. Welcome to the second issue of the Markman Note, where we take a look at how the market reacts to patent litigation events, and try to anticipate what the next catalysts will be. Hopefully you have had a chance to catch our first video HERE on one of the biggest patent stories of the year so far, Marvell’s billion dollar appeals court oral argument, the subject of our Big Story in last week’s Note. Finally, we want your feedback and suggestions, so feel free to send it along to firstname.lastname@example.org or to @markmanadvisors on Twitter. Questions are welcome as well, as we think a Q&A component could be a great addition to our project.
The Big Story: Rovi on the Ropes?
We knew the claim construction/summary judgment hearing in Rovi’s pending patent case against Netflix would be an important one, but were surprised at how big a reaction the market had to a negative report issued on the day of the hearing. The market reaction makes it very clear that this is a critical case for Rovi to win, and the company is pulling out all the stops to make sure that the market understands that there is more to the Rovi story, as you can see here.
Why is this case so important to investors? When you think about Rovi’s remaining big targets for licensing their extensive patent portfolio, Amazon and Netflix lead the list. And with Amazon bloodying Rovi’s nose earlier last year, the importance of the pending Netflix case becomes even more magnified. Even though Rovi has a large patent portfolio, as a practical matter, suing on even 3-4 patents can become unwieldy, so most patent plaintiffs pick their “best” patents and use those as the tip of the spear to convince a defendant to take a license to the broader portfolio. But if the defendant can blunt that tip, as Netflix is trying to do with its 101/Alice challenges to the asserted Rovi patents, it makes that grand “portfolio license” a much dimmer prospect. That is why Judge Hamilton’s handling of the issue will be so important for investors in Rovi. We will continue to monitor this case very closely for a decision on the critical patent eligibility (aka Section 101 or “Alice”) challenges raised by Netflix against the asserted Rovi patents.
Rovi is a worthy subject for the Big Story because in many ways the company is a microcosm of the market realities faced by major patent holders dependent on licensing revenue for their financial performance. The Supreme Court’s Alice decision alone has impacted the market for many such companies, and this latest salvo in the Netflix case has put Rovi squarely within the same cross-hairs. For better or worse, it looks like Rovi’s story will be dominated by developments in both the Netflix case, and their upcoming “re-negotiations” of their baseline patent licensing deals. With reports of activist agitation heating up as well there is a lot to binge watch here…
Recent Patent Litigation-Influenced Moves
OTIV (On Track Innovations): Decision on Summary Judgment in Pending T-Mobile Patent Case
OTIV’s case against T-Mobile is one we have been following for a while. It involves OTIV’s ‘043 Patent, and is directed to NFC-technology found in modern smartphones. A while back, OTIV had obtained a favorable claim construction (Markman) ruling, and after the parties filed summary judgment motions, the case went into a bit of a hiatus while the Judge considered the motions. As you can see from the chart, the various pending motions were decided mostly in OTIV’s favor (clean wins on the liability issues, albeit with a negative damages-related ruling) and the market reacted favorably almost immediately.
This case is considered a bellwether for OTIV’s patent monetization prospects, and the upcoming case phases that will culminate in the trial will be of great interest to investors. Yet another example of how District Court decisions can be unexpected (at least in terms of when a decision will issue) catalysts that significantly benefit a stock. Absent settlement, trial is now within OTIV’s sights and we will be watching closely for that mysterious, yet all important piece of information — the damages demand. When that information becomes available, it will help put the potential market impact of this case in greater focus. In the meantime, shareholders seem to be enjoying the good news, and crossing of another mountain pass on the long slog to trial…
IMMR (Immersion): Settlement on the proverbial “courthouse steps” with HTC
Always nice to see an eleventh hour settlement.
IMMR’s resolution of its case against HTC was good for some positive momentum, at least until investors came to realize that there was no short-term way of knowing what the value of the settlement was. Which is a common problem for investors in patent situations. Settlements are great, since they drive revenue, but they can wreak havoc with an investors expected timetable (since a settlement can happen at any time, as IMMR showed) and often contain significant confidential elements — the amount being the most important piece of information that is frequently hidden at the time of signing.
As for settlements that happen late in the game, such as on the courthouse steps, it is important to look at the relative positioning of the parties. In this case, IMMR may have made a calculated decision that it would be better off taking whatever “secret money” HTC was willing to offer, rather than risking an outright loss at trial — or a negative investor reaction to a meager jury award even if they were successful. It will be interesting to see who the next target for IMMR is, and whether the market rewards them for taking on a new round of litigation asserting their patents. We have some guesses…
NLST (Netlist): Hellish Jury Verdict in Diablo Trade Secret/Breach of Contract Trial
Talk about getting pitched down into Hades. Netlist investors had a rough day last week, as a jury verdict in the company’s high-stakes case against Diablo for trade secret misappropriation and breach of contract went against Netlist. The verdict was surprising for many, as Netlist had all the momentum — and an injunction in place — heading into the trial. This situation was a good reminder of how important IP issues can be for certain companies, and why having “boots on the ground” to cover important hearings and trials is often a worthwhile expense for investors. And why trying to predict jury verdicts can be a fool’s game, so it is important to be as timely as possible in terms of “getting the news” and having a trading plan in place no matter what that news is.
Interestingly, this Netlist situation unfolded with a lot of confusion on the investor side, as many refused to believe that the company had actually lost the trial. At this point, Netlist investors can only hope that the company’s patent litigation activity can be a positive catalyst going forward — we are watching that situation carefully…
The Week(s) Ahead — Expected Events:
MRVL – Carnegie Mellon University v. Marvell Semiconductor, Court of Appeals for the Federal Circuit hearing on 4/7/2015.
It is important at the turn of the month to check the upcoming CAFC oral arguments schedule at, in order to determine whether any appeals of interest to investors have been docketed for oral argument. Considering how difficult it is to get a decent hotel room in Washington D.C. sometimes, the more time you have to get your travel set up — the better.
Disclosures and Disclaimers:
Nothing in this material is intended to constitute legal or investment advice of any kind, nor is any of this material based on any non-public information of any kind. In addition to my work at Markman Advisors, I also am a name partner at a NYC-based intellectual property litigation boutique firm, Kroub Silbersher & Kolmykov PLLC. Markman Advisors is affiliated with a Houston-based investment management firm, Perdix Capital Management, which may have existing or potential positions relating to situations discussed in this material. Markman Advisors also provides consulting services to buy-side investors, including hedge funds and family offices, that may also have or enter into positions relating to situations discussed in this material. Questions or comments can be directed to me at email@example.com. All suggestions are welcome.
Main image via Flickr/Miemo Penttinen.