Unfortunately, in my experience, hedge funds often either ignore or minimise the potential impact of IP litigation. Instead, they rely on more traditional and widely understood financial indicators of a company’s health and well being. Even when hedge funds do monitor these cases, they are doing so passively either through research performed by their own in-house team of analysts or through widely disseminated reports generated by the large banks or brokerage houses. This kind of information is often woefully inadequate and provides little, if any, substantive value. In particular, these reports are largely devoid of any in-depth discussion of what is at stake in the litigation as well as any analysis of the respective parties’ chances of success. The failure to aggressively follow and monitor these cases can result in either missing an investment opportunity altogether or overstaying an investment. A few cases illustrate this point:
TiVo v. EchoStar
In 2004, TiVo brought a patent infringement lawsuit in the United States District Court for the Eastern District of Texas, alleging that EchoStar’s DVR system improperly used TiVo’s patented “time warp” technology. TiVo alleged that its time warp technology was revolutionary because it allowed viewers to record one program while watching another. The jury ruled in favour of TiVo finding that EchoStar infringed TiVo’s patents and awarded TiVo damages in the amount of $73,991,964. Immediately following the jury’s verdict, TiVo’s stock jumped over 10%. In January 2008, after a federal appeals court upheld the jury’s verdict, TiVo’s share price increased by more than 28%. On 4th March 2010, the Court of Appeals for the Federal Circuit upheld a lower court’s ruling that EchoStar was in contempt of an injunction order by continuing to sell infringing products and also upheld the lower court’s substantial damage award to TiVo. As a result of this decision by the Court of Appeals, TiVo shares soared nearly 62%. Then, in May 2010, the entire appeals court panel of judges decided to reconsider the case. TiVo’s shares plummeted 40% as a result of that news. A successful prediction of the outcome of these various events would have had a significant impact on the TiVo investor.
CFIT v. VeriSign
In late 2005, a lobby group called the Coalition for ICANN Transparency (CFIT) sued VeriSign and the Internet Corporation for Assigned Names and Numbers (ICANN) for antitrust violations, claiming that a contract extension between VeriSign and ICANN would allow VeriSign to extend its monopoly over the .com and .net domain name registries into adjacent markets. VeriSign moved to dismiss the complaint on the ground that CFIT failed to properly allege a recognised claim for relief. In 2006, the lower court agreed with VeriSign and dismissed CFIT’s complaint in its entirety. As a result of the dismissal, VeriSign’s stock price jumped by about 10%. However, when the US Court of Appeals for the Ninth Circuit subsequently reversed that decision and sent the case back to the lower court, VeriSign’s share price dropped over 16%. The Court of Appeals is now deciding whether the entire panel of appellate judges will hear the case. Diligence relating to the likelihood of success for VeriSign at the lower court level and subsequent setback at the appeals court would have been of particular value to the VeriSign investor.
Micron Technologies v. Rambus
In August 2000, Micron Technologies sued Rambus for, among otherthings, fraud relating to Rambus’s purported failure to disclose certain computer memory technology which was being considered for implementation by certain standard setting organisations. Micron also sought a declaratory judgment that it did not infringe certain Rambus patents and that those patents were invalid and unenforceable. Rambus counterclaimed against Micron for infringement of those same patents. One of the primary arguments made by Micron was that the Rambus patents were unenforceable since Rambus allegedly destroyed certain key documents relating to those patents. In January 2009, following a lengthy stay of the case, the Delaware Court agreed with Micron and held that, as a result of the destruction of those documents by Rambus, Rambus could not enforce its patents against Micron. In the wake of the Court’s decision, shares of Rambus plummeted 39%.
As these examples demonstrate, armed with the right information, hedge funds can take advantage of the volatility and uncertainty inherent in litigation. With a few relatively simple steps, hedge funds can gain an edge over the competition.
Developing an IP strategy
The first step is to conduct an in-depth legal review of the underlying merits of the case. Every substantive paper filed in the case should be analysed carefully with the goal of determining which party has the stronger case and the greater likelihood of success. In addition, a thorough review of the applicable legal precedent (prior case law) should be performed coupled with a review of which party that precedent favours. It is often the case, especially in the technology sector, that the same issues are litigated over again. Since courts are obligated to abide by these earlier decisions, it is important to evaluate the present case in light of prior similar cases. This initial review should not only include which party has a stronger case but also which lawyer is more effective and convincing at articulating his/her client’s position. It may be the case that the law favours one side over the other but the lawyer is simply ineffective at making the argument.
Secondly, while an analysis of the merits of the litigation is important, the real edge is often found by scratching beneath the surface of the litigation and evaluating some of the intangible factors not typically considered when performing diligence of this type. In fact, it is my experience that these intangible factors, more than anything else, can give a hedge fund a leg up in understanding and potentially taking advantage of the uncertainty inherent in litigation. First and foremost, it is vitally important to have a representative with a legal background attend in person as many of the court hearings, arguments and conferences as possible regardless of how inconsequential and mundane those events may seem at first glance. In the event that attending in person is not feasible, copies of transcripts should be obtained and reviewed. The value of the information gleaned from these in-person appearances can be significant. For example, it is often the case that the judge will offer a spontaneous remark about a party’s position or about the merits of the case in general which will not otherwise appear in any of the written materials but can serve as a vital clue as to the judge’s mind set and general impressions of the case. It is not unheard of for a judge to express scepticism about the underlying merits of the case. It may even be possible to detect a noticeable rapport between the judge and an attorney for one of the parties. Not only is information of this sort valuable in evaluating one side’s chances of success but it can provide an important indication as to whether the case will ultimately be settled. Indeed, if one party gets the impression that it is likely to lose, it is more apt to aggressively pursue settlement. Of course, settlement can also have a significant impact on stock price.
It is also critical to learn the personality and demeanour of the judge as well as the manner in which the judge operates his or her courtroom. A recent personal anecdote illustrates this point. I was recently following a case for a client during the course of which I came to learn that the judge was always punctual (to such an extent that on-time meant five minutes early). When the trial date arrived and the judge was not on the bench at the appointed time, it became evident that something was amiss. After about a half-hour of delay, based solely on the judge’s inexplicable and uncharacteristic tardiness, I was able to conclude that parties were likely making a last-minute attempt to settle the case. I was able to report my belief that the case would settle in real time based exclusively on being in the courtroom and knowing the habits of the judge and the client was able to immediately react and make the necessary adjustments to its portfolio. The official announcement that the case was settled did not occur for several hours. This event demonstrates how certain information which, at first glance, may seem inconsequential can actually lead to significant value for the client.
In conclusion, with the right information the institutional investor can greatly mitigate the uncertainty inherent in IP and technology related litigation. What’s more, the litigation can be used as a potentially lucrative investment opportunity.
David Sunshine is a partner and member of the intellectual property practice group at the New York office of Cozen O’Connor. He litigates intellectual property and technology disputes and provides advice to hedge funds and other institutional investors relating to intellectual property and technology litigation.