Speculation In The Patent Litigation Segment: Seeking Out The Next Big Stock Movers
There has been a lot of buzz lately about Vringo's (VRNG) patent infringement lawsuit against Google (GOOG). Google's ad placement system and its possible infringement of the Lang/Kosak Relevancy Filtering Technology with patents 420 and 664 are being called into question.
The Lang/Kosak Relevance Filtering Technology has been proven to produce "better" search engine results for user queries. It's my opinion based on the buzz lately that Vringo will likely win its case against Google, barring a settlement prior to a verdict in the case, which is currently more than half way finished.
As an example just how lucrative these types of lawsuits can be for certain companies and their stockholders, VirnetX Holding Corporation (VHC) won a $105 million judgment from Microsoft (MSFT) in 2010 then settled the case for $200 million -- VirnetX asserted Microsoft of infringing the two patents, which are related to communications security.
VirnetX holds 48 patents and patent pending applications all related to 4G communications -- The jury determined the patents infringed on in this particular case were U.S. Patent No. 6,502,135 B1, entitled "Agile Network Protocol for Secure Communications with Assured System Availability" and U.S. Patent No. 7,188,180 B2, entitled "Method for Establishing Secure Communication Link Between Computers of Virtual Private Network."
VirnetX has also brought a new lawsuit against Apple (AAPL) that is scheduled to go to trial in the United States District Court in the Eastern District Of Texas in November of 2012. The patent in question here, U.S. Patent No. 8,051,181, establishes a secure link between two computers in a virtual private network -- VirnetX has said the technology stemmed from work done for the U.S. Central Intelligence Agency. With the trial approaching very soon, traders and investors should keep an eye on both Apple and VirnetX to see how an outcome will have an effect the stock of both companies -- if any.
VirnetX stock is up 700% in three years in large part from its $200M win against Microsoft, and its new lawsuit brought against Apple, notwithstanding its large patent profile related to 4G communications.
In this write-up, I will list 2 companies I feel investors/traders should do due diligence on, as it's my opinion these companies could see some good price appreciation, and could be the next big movers in the segment.
Document Security Systems (DSS)
DSS provides optical anti-counterfeit technology to its clients to protect documents from counterfeiters and identity thieves. As Vringo claims that Google has infringed on its patents, DSS claims in its lawsuit against Coupons.com that coupons has used its technology on billions of Internet generated coupons since 2006. DSS asserts that Coupons.com was a client from 2003 to 2008, purchasing anti-copying paper. Coupons.com allows online shoppers to print coupons from manufacturers and retailers.
The lawsuit originally brought forth 4 claims against coupons.com; breach of contract, misappropriation of trade secrets, unfair competition and unjust enrichment. On August 20th, 2012, the last 2 claims were dismissed by The U.S. District Court for the Western District of New York, with 2 remaining claims moving forward -- breach of contract and misappropriation of trade secrets.
On October 2nd, Document Security Systems and Lexington Technology Group, Inc., a privately-owned company that owns and manages intellectual property assets, announced they planned to merge with each other. The very next day, the newly merged company filed a patent infringement lawsuit against five defendants --Facebook (FB) and Linkedin (LNKD) being the most notable companies named.
With the synergy present between Lexington and DSS, the two parties believe the combined market cap will escalate far higher than if they operated alone. Effective synergy takes place when two companies can achieve a 1+1 = 3 situation where everyone wins -- including shareholders. This takes DSS's patent portfolio into consideration with the strong personnel and experience that Lexington will bring to the table.
For Lexington, this is its second major move. First, it purchased the Bascom Research Portfolio. Included in this portfolio is considered to be a great application for patient medical records. The company is making an investment in developing that application which Hardigan feels is revolutionary technology. Along with the medical space, the portfolio also involves the potentially lucrative area of social networking.
With the DSS deal being its second major move, Lexington has made in effect a strategic acquisition which will transform them from a private company to a public one. This is very similar to what happened at Vringo. Innovate/Protect, Inc. (I/P Inc.) saw the opportunity to quickly become public and work with a company that has far more resources, so they merged with Vringo. Obviously, Vringo was excited to acquire the patent portfolio of I/P Inc., including what is now a large lawsuit against Google among other prominent companies.
The DSS business strategy includes not having a high cash burn while still having huge potential. By incentivizing the other parties by giving them a portion of the returns, Lexington is able to pay reasonable amounts for the opportunities. For the Bascom profile, it paid $2 million to owner/inventor Tom Bascom along with the promise of 10% of the revenue produced. Another reason the company is high on this opportunity is because the portfolio is strongly related to social networking where the profits margins are very high.
The patents that are the subject of the lawsuits are:
U.S. Patent No. 7,111,232 ("the '232 Patent"), entitled Method and system for making document objects available to users of a network
U.S. Patent No. 7,139,974 ("the '974 Patent"), entitled FRAMEWORK FOR MANAGING DOCUMENT OBJECTS STORED ON A NETWORK
U.S. Patent No. 7,389,241 ("the '241 Patent"), entitled METHOD FOR USERS OF A NETWORK TO PROVIDE OTHER USERS WITH ACCESS TO LINK RELATIONSHIPS BETWEEN DOCUMENTS
U.S. Patent No. 7,158,971 ("the '971 Patent"), entitled METHOD FOR SEARCHING DOCUMENT OBJECTS ON A NETWORK
The above bullet points show us clearly why DSS is going after Facebook.
According to Lexington Technology Group CEO Will Rosellini:
"We strongly believe that Facebook, LinkedIn and the other defendants are infringing our patents. Our pioneering technology was patented as early as 2001-long before the advent of Facebook, LinkedIn and other social and business networks-and covers key aspects of online collaboration and relationship linking."
According to another Seeking Alpha writer, at a conservative 1.5% royalty rate, this could produce anywhere from $110 million to $330 million in damages. With a market cap of around $61 million, this type of cash would certainly increase shareholder value.
This could be significant for DSS in that it could be a breakthrough that could have a domino effect. A lawsuit win here should create somewhat of a precedent and add strong validity to other patent infringement claims that the company could engage in. Until a company or a person realizes its first big achievement, there will always exist a bit of doubt of a successful outcome. Should DSS prove its case, the company would gain additional resources, confidence from the market, greater financial strength, and a track record of success. In addition, companies that DSS will be going after down the road should be much more willing to settle for higher dollar figures from the leverage created that a breakthrough settlement would create here.
Also an important factor here for DSS and Lexington will be to keep these cases in the state of Virginia where litigation moves swiftly. For District courts, at .93 years on average it boasts the quickest time from suit filing to trial in America -- the last thing stockholders want is a case like this to drag along.
MGT Capital Investments, Inc. (AMEX:MGT)
MGT Capital Investments, Inc. is a holding company which is led by MGT, the parent company. The assets controlled by MGT include wholly-owned subsidiary MGT Capital Investments (UK) Limited. Also included is Medicsight Ltd, along with its wholly-owned subsidiaries and majority-owned subsidiary MGT Gaming, Inc. MGT Capital Investments acquired a majority interest in MGT Gaming, Inc. on May 24, 2012 -- MGT Gaming holds certain intellectual property patents focused in the casino gaming sector.
MGT also holds Medicsight, which is a medical technology company focusing on medical imaging software development and medical hardware devices. The Company developed and is commercializing Computer-Aided Detection ("CAD") applications that analyze Computer Tomography ("CT") scans to assist radiologists in the early detection and measurement of colorectal polyps. The CAD software received a CE Mark in 2009, which allows for sales in the European Union. In 2011, Medicsight's software also received clearance from the U.S. Food and Drug Administration. The Company has also developed an automated CO medical inflation device and associated disposable tubing (MedicCO LON) that is being commercialized via a global distributor. The Company continues to explore all strategic alternatives with respect to its majority interest in Medicsight Limited, including sale or license of its global patent portfolio.
The company recently announced a financing deal which consists of two agreements with various institutional investors providing $5.9 million of capital in support of the Company's strategy to monetize intellectual property. Also in part, the financing was done to assure the company remained compliant with the listing requirements of the NYSE exchange. I became aware of this financing after I saw the stock double in a few days, and stocks normally do not make this type of move on financing alone.
MGT is analyzing potential acquisition opportunities in healthcare marketing and technology, as well as various intellectual property assets. As stated above, on May 24th, 2012, the Company announced the completion of the acquisition of U.S. Patent #7,892,088, entitled "Gaming Device Having a Second Separate Bonusing Event." This invention relates to gaming systems linked to an interactive sign, and includes all filed continuation patents.
The Company recently announced that it has retained Nixon & Vanderhye P.C., a nationally recognized IP litigation law firm, to direct the process of enforcing the Company's ownership rights derived from this patent. So, although MGT has no known lawsuits filed at this time, but it's clear to me its intention is to move in that direction as they have retained the IP litigation firm.
Looking over the company's website, searching for more clues to the recent price action after a financing deal, I believe I found a bullet point from its website that could be the possible reason why the stock has performed so well lately:
Patent acquisition strategy designed to obtain control of assets with a focus on risk mitigation and large potential upside. First property provides large recovery estimate from infringement by casinos and slot machine manufacturers.
After watching the stock trade for a couple of days, it seems there is little willingness to sell. If the company is planning to enforce its casino gaming profile via a lawsuit soon, the stock can move very high and very fast based on its very low trading float and under 4M outstanding shares. My speculation with MGT relies on casino gaming, and the massive amount of money casino gaming generates world wide.
As highlighted in bold black, MGT has makes it clear it believes its gaming patent is being infringed upon.
The United States casino gaming revenue alone, as of 2011, is over $35B. With the stock's low market cap coming in under $25M, any potential successful lawsuit that seeks damages of merely a micro portion of this revenue could mean a very large increase in stock price.
With the recent hiring of an IP litigation law firm to direct the process of enforcing the Company's ownership rights of its patent mentioned above, notwithstanding MGT's press release that flatly states the intention of recent capital raise to monetize intellectual property,
put together with the recent stock price surge and next to no selling into it, I would expect a lawsuit to be filed soon to enforce its patent profile concerning Casino gaming.
DSS and MGT are in the beginning stages of enforcing their patent profiles. DSS has already filed suits while it seems like a good bet to me that MGT will be doing so soon as well.
While patent enforcement trades based on speculation are risky, they can be extremely rewarding as we've seen with Vringo and Virnetx. DSS and MGT could carry such a reward for both traders and investors who enjoy higher risk, higher reward scenarios.
Disclosure: Mr. Matusow is Long MGT.
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Source: BioMedReports via Thomson Reuters ONE