Tessera Technologies Inc. (TSRA), the technology licensing company run by CEO Tom Lacey, is betting tens of millions of dollars this year on a multiple jurisdictional patent enforcement campaign against Broadcom and its affiliates and customers at a time when Tessera's revenue is declining and its expenses are rising.
San Jose, California-based Tessera earlier this week filed a complaint against Broadcom, seven affiliates and seven Broadcom customers with the U.S. International Trade Commission seeking an exclusionary order. Tessera also filed two enforcement actions against Broadcom et al in U.S. District Court in Wilmington, Delaware seeking damages. The ITC complaint and enforcement actions involve 7 patents covering semiconductor packaging and circuitry. In addition, Tessera filed enforcement actions in Germany and the Netherlands involving a European patent.
Similar campaigns such as by FORM Holdings Corp., formerly known as Vringo, against ZTE Corp. have not yielded a return on the investment. Indeed, after spending some $50 million on a multiple jurisdictional war with the Chinese telecom company, FORM reached only a $21.5 million settlement in December. To be sure, FORM never filed a complaint with the ITC and at the height of the battle didn’t have the track record of licensing successes that Tessera has had.
Tessera’s revenue has been on the decline over the past two years and into 2016. In the first quarter, the company’s revenue fell to $60 million from $79.9 million. The company posted revenue of $273.3 million in 2015, compared with $278.9 million in 2014 and $168.8 million in 2013.
In comparison, Tessera’s litigation expenses increased to $6.55 million from $4.5 million in the first quarter of 2016. Prior to that, the company’s litigation expenses had declined over the past three years to $14.1 million in 2015, compared with $25.1 million in 2014 and $60.3 million in 2013.
"The complaints Tessera filed in Delaware indicate they are bringing a high caliber of diligence and mindfulness to this campaign, and demonstrate the company is gearing up for a big fight," said Zach Silbersher, a managing partner with Markman Advisors, a New York-based IP consulting firm.
Silbersher said in the U.S. injunctions are unlikely to be available.
While Tessera "will not likely face Alice challenges on these patents, Broadcom is likely investigating IPRs," he said. "That is why Tessera's tactic to pursue litigation in Europe is smart, because there they can leverage the greater potential of an injunction. That said, as more companies venture across the Atlantic to enforce patents, there are indications that the EU may be leaning towards making injunctions harder."
Indeed, he noted that although just 10 years ago, injunctions were more easily attainable in the U.S. for patent-holders who successfully enforced their IP, "that changed as the number of non-practicing entity suits increased."
He said it "will be interesting to watch, over the lifespan of Tessera’s patent campaign against Broadcom, whether the EU responds to litigation brought by 'invention-plus-licensing' businesses by tightening the screws on what it takes for injunctive relief."
Lacey declined to comment for this story. He said on a conference call with analysts and investors that the company expects its litigation expenses to increase to about $26 million this year, which is at the high end of the guidance it has given, which is 4% to 10% of revenue.
"The legal budget is extreme, I do not see the company deploying this much capital," said Conner Mowles, the former CFO of Dominion Harbor Group. "Based on Broadcom's segment reporting I see eighty million dollars as the damages ceiling in this situation. The risk adjusted return is not attractive. Sometimes companies like Tessera have to make individual uneconomic decisions in order to preserve the integrity of their business model and show potential licensees they aren't afraid to be aggressive."
Tessera’s selling general and administrative expenses have been steadily falling to $43.6 million in 2015, compared with $47.2 million in 2014 and $62.6 million in 2013.
Like InterDigital, Tessera also spends significantly on research and development in order to make its innovations as attractive as possible to potential customers. In 2015, Tessera spent $32.18 million on research and development, versus $32.27 million in 2014 and $28 .06 million in 2013.
Lacey said on the conference call that the enforcement campaign against Broadcom was “significant and material” for Tessera. He said the campaign was well planned and had been in the offing for a year. Indeed, he said preparations for the campaign and accounted for the increase in litigation expenses in the second half of 2015 and first quarter of this year.
“We first reached out to Broadcom several years ago to explore technical collaboration on semiconductor technology development, and subsequently on licensing our intellectual property," he said in a Q&A published on Tessera's website.
“During our discussions with Broadcom prior to its merger with Avago, we presented Broadcom with what we believe to be strong evidence that many of its products are using our patented technologies, and we made a licensing proposal with financial terms approximately one year ago.
“Unfortunately, despite our professional approach and persistent efforts, our repeated requests to engage with Broadcom’s business executives were rebuffed, and it is our belief that Broadcom intentionally stalled the discussions while continuing to use our intellectual property.
“After the Broadcom merger with Avago, we established a relationship at senior levels with the new Broadcom. Our hope was that we could negotiate a fair and reasonable license agreement that would enable our two companies to work together,instead of spending resources in litigation.Although discussions have been more encouraging
under the new Broadcom leadership,we haven’t made the progress needed, and accordingly we determined that it was appropriate to take the actions we announced today.”
In the Q&A, Tessera also noted that the actions take only involved the alleged infringement by the pre-merged Broadcom and not by post-merger Broadcom, which would include alleged infringement by Avago. The company noted that its complaints do not specifically identify any of the legacy Avago products. “The precise parameters of our infringement proofs and requested relief will be determined as the cases move forward.”
During the conference call, Lacey identified Broadcom as one of at least two so-called "greenfield" customers it was pursuing for a licensing agreement. He noted that the action against Broadcom wouldn’t affect discussions with the others because the cases were unique.
Tessera has been one of the few technology licensing companies to have success in recent years in bringing in consistent licensing revenue, said Mark Gober, senior director of 3LP Advisors, in the IP advisory firm’s Silicon Valley office.
Tessera “must view Broadcom as a significant source of potential revenue,” Gober said.
“Licensing companies always prefer to avoid litigation,” Gober said. “This is last resort litigation. When licensing companies are facing dwindling revenue and recalcitrant licensees, they are forced to litigate.”
Gober said Tessera has historically been quite successful in its aggressive approach to litigation.
“The reason they became so successful was some of their early litigation,” Gober said. “They were able to strike big licensing deals because people know they know how to litigate and succeed.”
Gober said Tessera saw its market value almost quadruple after winning settlements from Hynix, Samsung and Matsushita in 2005.
Indeed, shares of Tessera soared above $45 a share in 2005 after the wins against Hynix, Samsung and Matsushita. They touched a high of $45.88 on May 9, 2007 before falling to a low of $8.83 on Dec. 4, 2008. Since then, the shares rebounded above to $40 in 2014. Today, they are trading at around $31.42 a share, giving Tessera a market valuation of $1.54 billion.
Tessera’s litigation successes came more than a decade ago, and well before the America Invents Act created the inter partes review and covered business method review processes to challenge weak patents.
Moreover, the U.S. Supreme Court has set the bar for injunctions so high as to put them out of reach for most patent owners. In addition, the high court’s Mayo and Alice decisions pared back what is considered patentable subject matter, rendering many software and business method patents unpatentable.
The patents at issue in Tessera’s enforcement campaign all have to do with semiconductor packaging and circuitry, which Gober said means they shouldn’t have a problem with Mayo and Alice.
“They’re going for injunctive jurisdictions. Pre-AIA they weren’t doing an ITC, Germany and Netherlands combination. This is new ground for them. This is going to apply pressure on Broadcom.”
Gober said another thing that may work in Tessera’s favor is that Broadcom recently was acquired by Avago. He said Avago may prove more willing to negotiate than Broadcom.
During the conference call, however, Lacey said he personally reached out to Broadcom’s new owners to gauge their interest in a settlement and was once again rebuffed.
Other patent licensing companies have pursued ITC complaints and enforcement actions in Europe with little to show for it so far.
ParkerVision (PRKR) earlier this year turned to the ITC for injunctive relief. So far, the ITC has yet to rule.
Unwired Planet (UPIP) and Marathon Patent Group (MARA) also have turned the focus of their enforcement actions to foreign jurisdictions because of the realization that the U.S. has become unfriendly to patent owners and especially non-practicing entities.
While Unwired Planet and Marathon have had some success in European jurisdictions winning findings of infringement and validity, they’ve yet to win an award or to be paid a single penny.
In an recent investor presentation, Los Angeles-based Marathon highlighted several of the advantages of pursuing patent infringement campaigns in Europe. The company first noted that “court ordered injunctions are available and are a powerful weapon against infringing parties.”
Marathon also noted that infringing parties can’t launch patentable subject matter challenges based on the Alice decision. In addition, IPRs under the AIA aren’t available in Europe. Moreover, issues of validity and infringement are handled separately in Europe. Finally, the company noted that “the patent litigation process in Europe tends to be quicker and less expensive than in the United States.”
Representatives of Broadcom and Avago didn’t respond to an emailed request for comment.
The patents at issue in the ITC case are U.S. Patent Nos. 6856,007, 6,849,946 and 6,133,136. The same patents are at issue in the first of the actions filed in federal court in Wilmington, Delaware. In the second action filed in Wilmington, Delaware, the patents in suit are U.S. Patent Nos. 6,284,563, 6,954,001, 5,666,046 and 6,043,699.
The actions in the courts in Germany and the Netherlands concern European patent EP1,186,034 B4, which is the counterpart to U.S. Patent No., 6,133,136, one of the three asserted at the ITC.
The eight patents at issue represent less than 1% of the more than 4,000 patents in Tessera’s portfolio.
In the two actions filed in the federal court in Wilmington, Delaware, Tessera is represented by Brian Farnan and Michael Farnan, partners with Farnan LLP in Wilmington, Delaware.
Tessera said it expects a decision in the ITC case and German action in the first half of 2017. The company said it expects a resolution of the Dutch case in the second or third quarters of 2017. The company said it expects an initial decision in the federal court in Wilmington, Delaware in 2018 or later.
—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at email@example.com