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SAN FRANCISCO — When the Federal Circuit affirms summary judgment of noninfringement, that’s usually considered bad news for the patent holder.

But SmartMetric Inc., a tiny, publicly traded company that’s been litigating patent claims against Visa Inc. and Mastercard Inc. for the past four years, put a different spin on things. “SmartMetric Wins on Major Points in Its Appeal in the Federal Appeals Court,” it announced in a press release following the April 2012 decision.

This year, as the company returned to the Federal Circuit, it used a slickly produced video to announce the “breaking news” that its claim for $13.4 billion in damages was fully briefed. The Federal Circuit summarily rejected the appeal a few months later, and the stock dropped 40 percent. In seeking attorney fees, Visa and Mastercard are arguing that SmartMetric’s attempts to influence capital markets are part of what makes the case “exceptional.”

Whether lauded for promoting innovation or derided as trolls, there’s little doubt that the patent-licensing industry has thrived for most of the 2000s. Firmly established players such as Interdigital Inc., Rambus and Tessera Technologies Inc. are worth well above $1 billion each. Privately held Intellectual Ventures is said to have raised $6 billion since its founding in 2000.

Success breeds imitation, and new companies have been rushing to enter the space. Companies such as Spherix, Vringo and VirnetX have made their investors hundreds of millions seemingly overnight thanks to litigation victories or big partnership announcements. But all three have crushed investors, too, after big verdicts got wiped out on appeal, splashy headlines faded from memory or shares were diluted by further sales.

The inherent opacity of intellectual property assets, combined with the boom-or-bust nature of litigation, make patent monetization entities a risky bet, especially when the U.S. Supreme Court and Congress are reshaping the playing field. While more established players are dialing back litigation and emphasizing the recurring royalties they negotiate with licensing partners, some of the newer breed are touting litigation prospects in press releases, riding go-go coverage on financial websites and downplaying courtroom losses.

Scott Bornstein, global co-chair of Greenberg Traurig’s patent litigation practice, said he’s been surprised by what seem like brazen press releases from opposing NPEs trumpeting neutral or even unfavorable claim-construction rulings. “What you see is the NPEs tend to do a touchdown celebration at the 50-yard line,” Bornstein said. “I’m still waiting for the first one that says, ‘Wow, we got killed.’ “

GETTING WALL STREET’S ATTENTION

Investor interest in patent monetization has been on the rise for years, but ramped up sharply after Apple, Microsoft and three other tech giants bid $4.5 billion for bankrupt Nortel Networks’ patent portfolio, and Google responded by paying $12.5 billion for Motorola Mobility. The transactions were announced within two months in 2011. “That generated a lot of press and a lot of interest on Wall Street,” said Maulin Shah, managing director of consultancy Envision IP.

Two hedge funds focused on microcap stocks, Hudson Bay Capital and Iroquois Capital Group, are frequent investors in new patent monetization ventures. One Hudson Bay-backed company, Spherix, makes the investor case this way: “Patent monetization is uncorrelated to any known market trends and provides diversification from traditional cyclical investments,” the company stated in a June 2013 investor presentation. Another benefit: “Patent monetization is an unregulated industry sector.”

For early-stage NPEs the usual metrics for valuing assets—sales, cash flow, price-earnings ratios—either aren’t present or are shrouded behind confidentiality agreements. “The business model when you think about it is completely opaque to the normal investor,” Fenwick & West patent litigator J. David Hadden said. “It’s not like they’re making things that can be counted when they’re sold.”

Spherix, for example, reported just $9,000 in revenues for the first three quarters of 2014. But the company is sanguine about litigation prospects around the country. Just last week Spherix reminded investors that it considers Cisco Systems’ infringement “immense” and that it has its sights on $43 billion of Cisco revenues.

How that litigation will play out, particularly if it goes before a jury, is anyone’s guess.

In that scenario, “there are so many variables that go into the stock price that are out of the control of the companies,” said Shah, who works with law firms, operating companies and NPEs. “How good are the claims? How good are the attorneys on the plaintiff side and on the defendant side?”

The result can be extreme volatility. VirnetX, a holder of patents on virtual private networks, was a 12-employee company worth $150 million as recently as 2010. Following nine-figure jury verdicts against Microsoft and Apple, the company’s market cap ballooned to more than $2 billion. But last year another jury ruled that Cisco did not infringe the same patents, and in September the Federal Circuit threw out the Apple award, saying damages had been measured too broadly. The company’s market cap shrank 35 percent the day of the Federal Circuit ruling, and is now back at about $300 million.

“That is one example of a company that they really live and die by the outcome of their litigation campaigns,” Shah said.

With investors burned by some of the newer public NPEs, and with Congress and the Supreme Court on the warpath against NPEs generally, some of the more established players are actively differentiating themselves, in part by dialing back on litigation and emphasizing negotiated deals that offer investors a more predictable, transparent revenue stream.

Tessera general counsel Paul Davis notes that his company recently signed partnerships with Micron Technology, SK Hynix and Samsung Electronics Co. without filing a patent suit. “We’ve got a proven track record that we’re going to take a reasonable approach with folks,” Davis said. Tessera, a 200-employee designer of semiconductor technology, shows investors in its annual reports how much revenue comes from ongoing royalties versus episodic events such as damage awards, he adds.

As for some of the newer entrants, “I think a lot of these companies went public before they were ready to,” Davis said. “They might have great patents,” he said, but to establish their worth in the courtroom, “you need to have a very long [cash] runway to fund that.”

A PATENT ON GOOGLE

Two years ago, Innovate/Protect was the story stock of the patent-licensing industry. Founded by the owners and developers of the Lycos search engine patents, and backed by Hudson Bay, Innovate/Protect went public in 2012 by merging with Vringo, an undistinguished ringtone app company.

Innovate/Protect was in the midst of asserting its patents against Google, AOL and others when the merger was announced in March 2012. Over the next few weeks financial blogger and Vringo investor James Altucher wrote a column for TechCrunch headlined “Why Google Might Be Going to $0″ and Mark Cuban took a 7 percent stake. The stock price doubled to about $4.

Hudson Bay had launched Innovate/Protect in June 2011 with a $1.8 million equity investment and a $3 million loan to acquire the Lycos patents. In less than a year, Innovate/Protect’s interest in Vringo was worth more than $100 million, though by then Hudson Bay had exited most of its position.

Things looked promising as trial approached. Vringo defeated Google’s motion for summary judgment, then sold another $45 million of stock two days later. But trial was disappointing. Vringo won on infringement but was awarded only $30 million and a 3.5 percent running royalty—much less than the $493 million that Vringo and its investors had been seeking. Then last summer the roof caved in, as a divided panel of the Federal Circuit invalidated the Vringo patents as obvious, sending the share price down 70 percent to about $1, about half its worth at the time of the merger.

Vringo forthrightly reported Aug. 15 that the Federal Circuit reversed the jury verdict and held its patent claims invalid. Since then the company has mounted a full-court press, reporting Aug. 20 and again Sept. 2 that it intended to seek en banc review, on Oct. 7 that it had hired David Boies of Boies, Schiller & Flexner, on Oct. 15 that it had submitted its petition for en banc review and on Oct. 20 that the Federal Circuit asked Google to respond.

The Federal Circuit’s decision “cannot be reconciled with the fact that eight different examiners at the U.S. Patent and Trademark Office, the jury that heard evidence in this case for over two weeks, the U.S. district court judge who presided over the trial, and the dissenting judge at the Federal Circuit all concluded that the patents are valid and should be upheld,” Boies is quoted as saying in the Oct. 15 news release.

As of press time the en banc petition remained pending at the Federal Circuit. Investor relations representatives for Vringo and Hudson Bay did not immediately respond to requests for comment.

ROCKSTAR PARTNERSHIP

Like Vringo, Spherix is backed by Hudson Bay and underwent a reverse merger. Its origin story is a partnership with the Apple-backed Rockstar consortium. Following its merger last year, Spherix announced it had acquired seven patents from Rockstar, and that Rockstar had become a shareholder. “We expect to bring our first action against known infringers within 30-60 days,” the company’s CEO at the time—Sichenzia Ross Friedman Ference partner Harvey Kesner—announced.

The partnership with Rockstar, and Apple by extension, generated heat on financial and IP blogs, and Spherix’s stock price more than tripled over the next two weeks to $21.70.

The full extent of the partnership is a little hazy. Spherix listed Rockstar as a 28 percent corporate owner in a January 27 investor presentation, emblazoning the logos of Apple, Microsoft and other Rockstar corporate parents on its slides. But in an April 9 letter to the SEC, the company stated that because of restrictions on Rockstar’s preferred stock, Rockstar can’t own more than 5 percent of the company.

So far, Spherix’s litigation hasn’t developed much traction, and the stock price has fallen below $1.50. And it’s been a bumpy ride down. When patent reform efforts failed in Congress in May, CEO Anthony Hayes announced that would “remove some of the uncertainty which has been clouding our industry,” and the stock soared 96 percent. Two days later the company filed to sell $20 million of its preferred shares, slicing the stock price 40 percent.

More recently the company has been updating seemingly routine litigation developments. “Spherix Completes Technology Tutorial to Court. Next Key Date November 21st,” the company announced last month.

Brett Maas of Hayden IR, who advises Spherix on investor relations, said shareholders who aren’t familiar with patent litigation have encouraged him to provide a road map to the process. “I have received many emails from our investor base thanking me and the company for keeping them informed—whether the news is positive or if the news states a delay or reschedule of a trial date,” he said.

In August, when Spherix dismissed a patent suit it had filed against AT&T—a suit highlighted in its January 2014 investor presentation—there was no press release. “The matter has now been resolved,” the company noted in its latest quarterly earnings release, which reported only $2,000 in new revenues.

THE BUSINESS OF LITIGATION

Paul Hastings securities partner William Sullivan said that, generally speaking, a press release need only be truthful and not misleading. Updates about every twist and turn in litigation might seem like overkill, but they may be reasonable when a company’s fortunes are tied to the courtroom. “It may be relevant to the business because they’re in the business of litigation,” he said.

Meanwhile, some patent lawyers wonder about the appetite for further investment in early-stage NPEs. Recent Supreme Court decisions on patent eligibility and fee shifting have disturbed the landscape, and Congress is considered likely to take up additional reform measures next year, possibly including increased transparency in patent ownership.

“If I were an investor in NPE litigation—which I would never be, especially as the world looks today—I would be extremely hesitant,” Greenberg Traurig’s Bornstein said. “You could see a very rosy outlook change quite quickly.”

“The current climate in 2014, it’s changed quite a bit from recent years,” Envision IP’s Shah said. Until all the changes have played out, “I think many institutional investors, they may be waiting on the sideline before pumping any more money into these companies to fund more litigation or to acquire more patents.”

Contact the reporter at sgraham@alm.com.