WiLAN Inc. CEO Jim Skippen can’t afford to lose many more infringement actions after the patent assertion company’s second loss to Apple Inc. in a year on October 1 in U.S. District Court in the Southern District of California.

Shares of Ottawa-based WiLAN fell 39 Canadian cents or 11% to C$3.54 in Toronto Stock Exchange trading on Thursday, Oct. 2 following the announcement that U.S. District Judge Dana Sabraw had issued a ruling Wednesday granting Apple’s motion for summary judgment.

WiLAN had moved for summary judgment on Apple’s invalidity defenses and Apple had moved for summary judgment on invalidity and non-infringement of WiLAN’s U.S. Patent Nos. 8,315,640 and 8,311,040 related to LTE technology.

The company said it is reviewing the decision with its trial counsel and declined to comment further. Skippen declined to be interviewed for this article.

“It’s a setback for them sure. It raises a question of losing two cases against Apple in less than a year about what kind of thinking and planning goes into their litigation strategy,” said Todd Coupland, an analyst for CIBC Worldwide in Toronto, who rates the company a “sector underperform.”

Coupland said he had been valuing the potential licensing fees from the two Apple cases at about $75 million, or about 60 cents a share.

“They tried twice and it hasn’t worked,” he said. “It’s a strategic problem.”

To be sure, the adverse ruling comes almost a year after a jury in a case against Apple in U.S. District Court in the Eastern District of Texas invalidated two of 10 of WiLAN’s core patents for wireless technology.

The company appealed the Oct. 24, 2013 ruling by the court regarding its motion for summary judgment in that case on April 21 after the judge ruled that the two claims were improperly invalidated by the jury. The judge, however, denied other aspects of WiLAN’s motion.

Shares of WiLAN plunged 22.8% after the federal court in the Eastern District of Texas granted Apple’s motion invalidating the patents.

The next day, WiLAN issued a press release highlighting its estimate for backlog, including future fixed payments plus running licensing royalty agreements, totaling between $325 million and $350 million extending for seven years, with the majority to be collected over four years.

Management later reduced its backlog estimate to approximately $300 million in a May conference call and then to a range of $225 million to $325 million in a June presentation for its annual shareholders meeting.

Coupland said the backlog is made up of a number of Wi-Fi and V-chip patent licensing agreements WiLAN signed in 2011 with about 15 companies including Broadcom Corp., Atheros Communications (now owned by Qualcomm Inc.), Intel Corp., Samsung and Marvell.

The backlog has been declining by about $20 million a quarter, he said, and so far WiLAN hasn’t added many new meaningful agreements.

The second reduction in backlog came after WiLAN announced the results of a strategic review conducted by the Canadian investment bank Canaccord Genuity begun after the first adverse Apple ruling in October 2013.

The investment bank’s strategic review considered a possible sale of WiLAN along with options including cash preservation and risk sharing.

Tyler Burns, a representative of WiLAN, said in an email WiLAN is one of the few, if not the only, small to medium size licensing companies with a backlog of licensing revenue it has yet to recognize.

As such, Burns said “it would be more appropriate to view our backlog as an asset to our business, not as a point of criticism.  In fact, I suspect the operations, financial performance and future prospects of many of our peers would change significantly for the better if they had our revenue backlog.”

Burns also noted that WiLAN has stated in regulatory filings since 2006 that it will need to acquire or develop new patents to continue and grow its business.

“We have communicated to the public markets for some time that we have a cash flow allocation model,” he said.

“Under this model we have set a target of investing 40% of cash flow from operations in the acquisition of patent assets (along with 40% in dividends and the remaining 20% in share buybacks/other).  We have been very clear with investors that we need to acquire patents and we have communicated metrics to investors to help them size up the investment that we may make in the future.

As part of its strategic review, WiLAN also decided to switch to a contingency law firm model and to enter agreements with patent holders to share risks in litigation.

Under the new plan, WiLAN may get to keep only about 30% to 40% of any money it wins after sharing an equal amount with its partner and paying 20% to the contingency law firm.

“It sounds like a good idea, not it sounds like a good idea and they’re executing,” CIBC’s Coupland said.

Coupland said Skippen has been making the rounds explaining the new strategy to investors. “I wouldn’t say it’s well accepted.”

The infringement case against Apple “is far from over,” said Stephen Takacsy, chief investment officer of Lester Asset Management who owns WiLAN stock, in an interview.

Takacsy, who is based in Montreal, said WiLAN has already appealed the first Apple decision and probably will appeal the second as well.

“We as shareholders expect they’re not going to hit a home run, but I think they might end up signing something with Apple at some point,” he said. “I’m sure Apple’s offered some crumbs.”

Takacsy said CIBC’s Coupland’s $75 million estimated value of the two Apple cases “is in the order of magnitude” he expects.

“If it’s $10 million, WiLAN won’t be interested, but if it’s $200 million Apple won’t be interested.” It’ll probably be somewhere in between, he said.

While Takacsy is optimistic about the Apple case, he is critical of WiLAN’s practice of agreeing to license its patents, while also acquiring patents from the same counterparty.

For example, WiLAN announced in July that it had licensed its wireless technology portfolio to Nokia Networks and also entered an agreement to acquire a portfolio of wireless handset and infrastructure patents from Nokia Networks, all for an undisclosed amount. WiLAN’s June 2014 financial statements show the creation of a liability for future payment obligations of about $24 million related to a patent acquisition from an unnamed party, presumably Nokia Networks.

The deal followed a script used in September 2013 when WiLAN announced a license agreement with Alcatel-Lucent involving CDMA, 3GPP, HSPA, Wi-Fi and LTE technologies, plus the acquisition from Alcatel-Lucent of a portfolio of patents for an unspecified value.

WiLAN’s September 2013 financial statements show the creation of a liability of about $25 million for the acquisition of certain patents, to be determined at a future date, from an unspecified licensing counterparty, presumably Alcatel-Lucent.

Because the patents were to be determined at a future date it wasn’t clear how the $25 million figure was calculated.

In the second quarter of 2013, WiLAN reached a licensing agreement with Samsung over several years for a renewal of licenses for patents used in Samsung’s mobile wireless products and networking infrastructure equipment. The agreement included unspecified patent assignments, and terms were confidential.

WiLAN’s June 2013 financial statements again show the creation of a $28 million liability for payment obligations related to the acquisition of rights to license certain patents, presumably from Samsung.

In addition, WiLAN also has agreed to license its portfolio to several infringers for in-kind consideration, meaning trading licensing agreements for other patents.

The company completed a licensing transaction with Fujitsu Ltd. in October 2007 for an undisclosed amount in cash and 40 communications patents for licenses to all of WiLAN’s patents. It also completed another in kind with Nokia in December 2006 worth about $34 million for telecommunications and ADSL patents.

While such back-to-back and in-kind consideration transactions are not unheard of in the patent monetization business, market observers say WiLAN’s repeated use of them is unusual.

“The way they used to settle licensing agreements by also buying portfolios of patents, I totally hated that,” Takacsy said.

“Aside from the potential accounting shenanigans, I didn’t want them spending capital on new patents. They’re not doing it anymore.”

WiLAN’s Burns said in the email that the terms of Wi-LAN’s patent and license agreements are confidential and declined to comment on them further.

“When looking for patent assets to acquire, we look for quality patents from companies that, among other attributes, have a strong track record of innovation, were early technology leaders in new markets or have enjoyed product leadership positions,” Burns said.

Companies such as Nokia and Alcatel-Lucent, through many years of advanced wireless technology and product development, have established very large portfolios of valuable wireless patents, he said.

“Given our need to continue to acquire wireless technology patents to drive the signing of new and renewal licenses, Nokia and Alcatel-Lucent are excellent companies from whom to acquire patents.

Burns also said that WiLAN’s patent acquisition programs have made positive contributions to its business. He cited DSL-related patents that WiLAN acquired from Nokia in 2006 and Bluetooth-related patents that WiLAN acquired from Proxim in 2010, which contributed to the signing of licenses worth many hundreds of millions of dollars in 2011.

He also cited 4G–related patents that WiLAN acquired from the likes of Nextwave Broadband and Soma Networks, companies that were early leaders in developing 4G wireless technology. He said the acquisition has helped WiLAN establish a portfolio of many hundreds of 4G wireless patents.

“We can say, with confidence, that the value of our 4G wireless portfolio was a key factor in the likes of Cisco Systems and Samsung renewing their license agreements with WiLAN in 2011 and 2013, respectively.  The renewal license that we signed with Samsung in 2013 was the highest value license that WiLAN has ever signed.

Burns said WiLAN has communicated to the public markets through investor presentations, investor conference calls and press releases that it believes its current licensing programs, including patents that it acquired as well as patents brought to WiLAN by partners, will generate many hundreds of millions of dollars in incremental revenue for WiLAN.

“Patents that we will acquire in the future are sure to add to the potential revenue that our business can generate.”

He added that acquiring patents from companies taking licenses is a common industry practice.  Peer companies, including Acacia Research and Conversant (formerly, MOSAID Technologies) have purchased patents from companies with whom they have signed licenses.

“This is not surprising since there is sometimes a great arbitrage opportunity between a licensor and a patent rich licensee in which the licensee will be very interested in selling patents to offset the license price, often at a price that is very attractive to the licensor.

“We remain proud of our acquisitions and acquisition strategy and believe it has helped the company and its investors significantly,” Burns said.  “All of our financial transactions have been reviewed by our independent auditors PricewaterhouseCoopers and we stand behind them.”

“I’m not at all sure the patents they bought are worth what they said they were,” Lester Asset Management’s Takacsy said. “You can’t trust the audits either. I don’t put to much faith in the value of the patents on the balance sheet.”

Takacsy remains optimistic about WiLAN’s business since its strategic review.

Today, when WiLAN announces a licensing agreement, it first recoups capital expenses and pays the company’s law firm a success fee before splitting the rest of the licensing fee with the original owner of the patent, he said.

The split of the licensing fees varies deal to deal, he said.

“It’s like distributing movies,” he said. “They’re going to get a much higher return on capital.”

The company is “just correcting stupid mistakes of the past,” he said.

In the meantime, WiLAN has generated some $500 million in revenue since 2006 from several patents in its portfolio from when it was a technology company and not a monetizer of patents.

The company claims in investor presentations to have generated a 70% compound annual growth rate from 2006 to 2013. The growth occurred between 2010 and 2011 when it won the licensing agreements for its homegrown patents and its revenue doubled from $49.2 million to $105.8 million. Since then, the company’s revenue has averaged about $88.1 million in 2012 and 2013.

In the first six months of 2014, WiLAN’s revenue was $51.6 million and its net income was $9.6 million, or 8 cents a share. The company also had cash and cash equivalents of $138.6 million as of June 30.

The company is expected to report third quarter 2014 earnings of 11 cents a share.

“They’re gushing with cash because they have such a huge backlog,” Takacsy said.

The company should be able to replenish its backlog by renewing licenses that expire and increasing prices by throwing in other patents that licensees also may be infringing upon, he said.

By renewing expiring licenses at higher rates by adding in other patents, WiLAN is taking a page out of the playbook of the former MOSAID Technologies, which is where WiLAN’s Skippen worked before he came to the company, he said.

“They’re very confident they have some clout to renew” at higher rates, he said.

“They’re taking more of a volume approach to their backlog and not relying on a few home runs,” he said.

“The environment’s changed. The amounts aren’t as high.”

Takacsy said he doesn’t consider WiLAN “to be a patent troll, compared with some of the others.”

Takacsy said WiLAN’s original technology, which enabled wireless signals to get around the line of sight problem that breaks up signals, is used everywhere and has real value.

“If the stock stays this cheap for much longer, they are a sitting duck for a hostile take-over by the likes of Interdigital or Acacia, who could easily justify C$5+ per share,” Takacsy added.

WiLAN did publicly explore a potential sale of the company, among other options, during its strategic alternatives review announced in October 2013 and concluded in May 2014. During that process, which did not result in a publicly disclosed bid to acquire the company, shares of WiLAN traded in a range of C$3.19 to C$3.67 on the Toronto Stock Exchange.

To be sure, some analysts say the problem with the take-out thesis is that many of the hypothetical acquirers may have existing term licenses with companies that WiLAN is suing.

Generally that means that if Interdigital acquired WiLAN, then Interdigital’s licensees would get licenses to WiLAN’s patents. Indeed some of WiLAN’s licenses might provide that any patents owned by an “affiliate” of WiLAN’s are also licensed.

That could create a scenario in which if Interdigital or some other company acquired WiLAN, then WiLAN’s licensees get a license to Interdigital’s patents as well.

To contact the reporter responsible for this story please call Dan Lonkevich at 707 318-7899 or by email at dan@thepatentinvestor.com