During the last 15 years there has been a dramatic increase in
patent litigation due primarily to the rapid growth of advanced
technology and the desire to protect and enforce intellectual
property. Over this period, we have witnessed the effect of the
uncertainty created by complex patent litigation in the wide swings
in the stock prices of the companies affected by the litigation.
Publicly traded companies on the forefront of technology innovation
use their patent portfolios to initiate courtroom battles with
their competitors, battles that were traditionally fought in the
product marketplace. While IP litigation can scare away even the
most savvy investors, with the right diligence and litigation
monitoring, investors can use litigation to their advantage.
An example is the recent TiVo v. EchoStar case. In
2004, TiVo brought a patent infringement lawsuit in the U.S.
District Court for the Eastern District of Texas, alleging that
EchoStar's DVR system improperly used TiVo's patented
"time warp" technology. In 2006, the jury ruled in favor
of TiVo and awarded TiVo $73,991,964 in damages. Immediately
following the verdict, TiVo's stock jumped more than 10
percent. In January 2008, after the jury's verdict was upheld
on appeal, TiVo's stock price increased more than 28 percent.
Finally, when the appeals court upheld a lower court's ruling
that EchoStar had violated a court order by continuing to sell
infringing products, TiVo shares soared nearly 62 percent.
There are many examples like TiVo in which an
understanding of the underlying merits of a case and its likely
outcome can provide institutional investors with a significant edge
over their competitors. Unfortunately, the potential impact of
litigation is often either minimized or overlooked altogether in
favor of more traditional and widely understood financial
indicators of a company's health and stability (or lack
"For litigation due diligence to be of real value to
investors, the first critical step is to conduct an in-depth legal
review of the merits of the case."
For litigation due diligence to be of real value to investors,
the first critical step is to conduct an in-depth legal review of
the merits of the case. Every substantive court filing in the case
should be analyzed carefully with the goal of determining which
party has the stronger case and the greater likelihood of success
on the merits. 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 favors.
Furthermore, while an analysis of the merits of the litigation
is important, the real edge is often found by digging beneath the
surface and evaluating the intangible factors that often go
unnoticed. These intangible factors can often provide an advantage
in capitalizing on the uncertainty inherent in litigation. First
and foremost, it is vitally important for the institutional
investor to have a representative with a legal background attend
in person as many of the court hearings as possible
regardless of how inconsequential those hearings may seem. The
value of attending these hearings cannot be overstated. For
example, a judge may offer a spontaneous remark about a party's
position or the merits of the case that will not appear in any
written material but may serve as a vital clue to the judge's
general impressions of the case and how he or she is likely to rule
on the issues presented. Likewise, it may become apparent that the
judge has established a good rapport with the attorneys of one
party and while this should have no effect on the outcome of the
case it may have a significant impact on the other party's
desire to settle.
It is essential to learn the personality, demeanor and habits of
the judge. A recent personal anecdote illustrates this point. While
following a case for a client, I discerned that the judge hearing
the client's case was always punctual, so much so that
"on-time" meant five minutes early. So, when the trial
date arrived and the judge was not on the bench at the appointed
time, it was clear to me that the judge's absence was
significant. After an hour's delay, and based solely on the
judge's uncharacteristic tardiness, I advised the client that
it was likely that the parties were progressing towards settlement.
With this knowledge the client was able to react in real time and
make appropriate adjustments to its portfolio. As anticipated, the
case settled and the market reacted the next day following the
public announcement of the settlement.
Armed with the right information, not only can institutional
investors mitigate the uncertainty inherent in technology
litigation, but they can also use it as an investment
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