If U.S. Patent No. 5,490,216, for which Uniloc USA won a settlement from Microsoft Corp. rumored to be about $100 million, is invalidated by any pending inter partes or covered business method review it will reduce the value of its portfolio and possibly force changes to the structure of its $91 million merger with Marathon Patent Group (MARA).

Luxembourg-based Uniloc Luxembourg SA and Los Angeles-based Marathon announced their merger agreement on August 14, hailing it as a way to achieve scale and increase profitability by combining two management teams with impressive track records. Under the agreement, Uniloc shareholders will own 55% of the new company and Marathon holders only 45%.

Uniloc CEO Craig Etchegoyen’s track record includes the settlement from Microsoft in March 2012, which came after a $388 million verdict handed down in the U.S. District Court in Providence, Rhode Island, was thrown out by the Court of Appeals for the Federal Circuit.

The appellate court’s decision also was notable for throwing out the 25% rule of thumb royalty rate used in setting the award. The Federal Circuit ruled that the 25% rule was fundamentally flawed and ordered a new trial on damages. The two companies later settled out of court and the settlement amount was never disclosed.

The ‘216 patent is directed to a software registration system that allows software to run without restrictions only if the system determines the software installation is legitimate. The patent has previously survived two ex parte re-examinations in 2010 and 2013.

“We have been critical of Uniloc from the start,” said David Pratt, managing director of M-CAM, the IP advisory firm based in Charlottesville, Virginia, in an email.

In 2010, M-CAM “identified a plethora of prior art and public domain material of material consequence” to Uniloc’s ‘216 patent, Pratt said.

“It is safe to say that any Uniloc business arrangement should be subject to criticism given these material patent quality shortfalls.”

The number of IPRs being instituted by the PTAB "definitely raises concerns," said Mark Gober, a director at 3LP Advisors, and a shareholder of Marathon in an email.

The ‘216 patent has a total of 20 claims: 5 of which are independent claims (i.e., broadest in scope) and 15 of which are dependent claims (i.e., narrower in scope). It’s possible for the PTAB to invalidate certain claims and not others, which means that even if Uniloc suffers some losses here, other claims could stand. It’s also possible that Uniloc will appeal any adverse decisions that the PTAB hands down.

"An additional concern is that because the ‘216 patent covers a system for software registration which uses algorithms, I wouldn’t be surprised to see Section 101 (patent-eligible subject matter) challenges based on the 2014 Alice Supreme Court ruling, if this hasn’t been raised already." The Alice ruling has created a significant amount of uncertainty in the industry around the enforceability of any patents that relate to software.

The amount of activity around this patent "signals that defendants are afraid of it, and they are looking for as many ways to knock it down as possible," Gober said. In the current environment, defendants have multiple tools at their disposal that can be used to challenge patents.

Marathon must have been aware of these risks going into the deal. In fact, Marathon CEO Doug Croxall’s opening remarks of the August earnings call explicitly referenced the obstacles created by IPRs and Section 101 challenges. Croxall also said in his earnings call that Marathon first met with Uniloc and March, meaning Marathon had months to look at these issues before deciding to announce the deal in August. Presumably Marathon sees more to the deal than just a single patent.

Gober said Marathon suggests that the Uniloc deal brings value from multiple angles. For example, Uniloc’s CEO noted on the earnings call that Uniloc holds roughly 156 worldwide patents and applications. Marathon likely sees the potential for value creation in the broader portfolio.

"Croxall also noted that one of the aspects that’s attractive about Uniloc is the company’s balance sheet. He did not delve into details, but this could be significant given Marathon’s cash position. Finally, Marathon showed in its investor presentation that because the new company will be domiciled in Luxemborg, it expects an effective tax rate of 10% on IP revenues.

"All that said, the deal hasn’t formally closed yet. The deal is expected to close in late 2015 or early 2016, so one never knows what can happen between now and then – perhaps there will be room to negotiate the relative ownership percentages based the results of litigation and PTAB proceedings that occur for both Marathon and Uniloc in the interim."

The latest IPR challenging the ‘216 patent was filed in May by Kofax Inc., a provider of software applications to simplify customer engagement that is based in Irvine, Calif.

Kofax is currently involved in infringement litigation over the ‘216 patent with Uniloc in U.S. District Court in the Eastern District of Texas.

The ‘216 patent also was the subject of IPR2014-01453, which was instituted March 10; IPR2015-01026, which was instituted Aug. 8; IPR2015-00178 which was not instituted; and CBM2014-00183, which also was not instituted.

“Upon reading the disclosure of Ehlmann, one of ordinary skill in the art would have recognized that modifying Wolfe to generate ‘permission codes’ based, in part, on information including a product ID number, as taught by Ehlmann, in addition to machine-specific configuration variables, as taught by Wolfe, is nothing more than simple substitution of one variable in a mathematical formula for another,” the Kofax petition says.

“Wolfe discloses that the vendor-assigned software serial number (akin to Ehlmann’s unique Product No.) is communicated to the central computer.

“Simply substituting a vendor-assigned product number for another number in the basic mathematical formula disclosed in Wolfe would have yielded predictable results; namely, a number that would be hard for a user to guess without knowing the specific formula used to generate that number. Using the serial number instead of one of the hardware configuration variables in the simple mathematical formula for calculating a permission code is nothing more than a design choice.”

Eric Buresh, a partner with Erise IP PA in Overland Park, Kansas, who represents Kofax, couldn’t be reached for comment.

Officials of Uniloc, which is based in Luxembourg but has offices in Plano, Texas, didn’t return a telephone call seeking comment.

Marathon officials declined comment.

A person familiar with Marathon’s position said the combined company will “have 660 plus patents — my guess is it does not matter.”

The U.S. Supreme Court’s ruling in CLS Bank v. Alice Corp., which effectively ended software as a patentable subject matter, is the bigger issue.

“You can only file so many IPRs.”

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