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 thereof).
"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 opportunity.
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