Dean Becker’s Equitable IP Holding Corp. and Spherix Inc. (SPEX) may have to net $40 million to $120 million, from the enforcement actions they’ve filed this year against alleged infringers of three patents developed by the former Nortel Networks to justify the amount Equitable IP and Spherix are likely spending on the campaign.
Conshohocken, Pennsylvania-Based Equitable IP and Bethesda, Maryland-based Spherix have filed 10 enforcement actions against 13 defendants: ViaSat.; Sprint Corp. and Clearwire Corp.; ATN International, Commnet Wireless and Choice Communications; Cincinnati Bell Inc.; EchoStar Corp.; Frontier Communications Corp.; EMC Corp., Altice NV, Level 3 Communications and TW Telecom Inc.
Spherix voluntarily dismissed the action against Level 3 on July 21, and Equitable’s International License Exchange of America LLC voluntarily dismissed the action against Altice on Aug. 15. That leaves 8 actions still pending.
Enforcement actions, which can take many years to resolve challenges at the Patent Trial and Appeal Board and various appeals, probably cost at least $1 million to $3 million per case, which would mean Equitable IP is spending $8 million to $24 million on the campaign. At the higher end of the range the amount being spent is a significant chunk of the $40 million fund patent brokers say Becker claims to have amassed at Equitable IP.
The $40 million to $120 million range is based on a return multiple of 5 times the money spent, which is standard in patent monetization.
That also doesn’t count the millions of dollars Spherix previously spent for patents it bought from the former Rockstar Consortium. In the second quarter of 2015, Spherix took a $40.3 million charge to write down the value of patents it purchased from Rockstar. The three patents in suit are a small subset of the hundreds of patents Spherix bought from Rockstar.
Under the agreement with Equitable IP, Spherix assigned 186 of its more than 330 patents and applications to Equitable IP, which will pay all maintenance and prosecution fees going forward. Equitable IP agreed to file at least 10 enforcement actions under the agreement. That means Spherix may further assign about 140 additional patents and applications to Equitable IP for monetization.
Patent market observers who spoke on condition of anonymity, have said Becker is well known for being a sales and idea guy rather than an execution guy. Moreover, he is renowned for bragging that he’s never read a patent.
“Dean was highly successful in the patent auction and brokerage business, and helped to pioneer several sales techniques,” said Bruce Berman, CEO of Brody Berman Associates, a New York-based IP advisory firm.
Spherix officials said the $1 million to $3 million estimate of litigation costs and expenses is in the ballpark, depending on the complexity of the case, number of experts, length of trial and several other factors. They said more actions are planned and declined to be more specific. They deferred all other questions to Equitable IP.
Equitable IP’s Becker declined to comment.
The Equitable-Spherix partnership is working with Timothy Devlin, a partner with the Devlin Law Firm in Wilmington, Delaware.
Devlin declined to comment for this article.
Equitable IP and Spherix have said the Equitable IP Program “is designed to cost effectively and rapidly monetize a portion of Spherix’s patent portfolio.”
To be sure, “cost effectively” and “rapidly” are relative terms and patent market observers are skeptical.
“Their litigation costs are the big variable and there’s a lot we don’t know,” said Mark Gober, a senior director at 3LP Advisors in Silicon Valley.
Gober said it’s hard to know what they are spending on each case. “If the cases are on contingency then they aren’t paying much out of pocket and the lawyers will take 30%-40% of the proceeds.”
But he also noted that “many lawyers aren’t taking cases on full contingency anymore, because they find it to be too risky. Partial contingency is more prevalent now. They pay some of the attorneys fees and the attorneys also take a percentage of proceeds but a lower percentage than full contingency.”
The calculations also may not factor in the cost of defending possible petitions for inter partes review before the PTAB, which can run $500,000 to $1 million a piece.
Gober said “part of what goes into the investors return calculus is time-to-money – not just a multiple. A lower multiple might be okay if it’s earned quickly. If the money will take years to earn, a higher multiple is typically required.”
As such, he said Equitable IP and Spherix may need to generate revenue of much more than $40 million to $120 million from these 8 actions.
They also may have to file a number of additional enforcement actions based on alleged infringement of other patents.
“I’m guessing they will look to file as many as possible.”
A patent market observer who spoke on condition of anonymity, said Becker’s strategy “is to rattle the saber with deep pockets and hope the other side settles early. The big challenge is he may be spreading his peanut butter a little thin. If everybody fights he’ll run out of money. If the other side senses that they’ll press you.”
In securities filings, Spherix has been up front about the high costs and risks of litigation.
“The company anticipates that legal fees which are not included in contingency fee arrangements, experts and other expenses will be material and could have an adverse effect on its financial condition and results of operations if its efforts to monetize its patents are unsuccessful.
“In addition, the costs of enforcing the company’s patent rights may exceed its recoveries from such enforcement activities. Accordingly, in order for the company to generate a profit from its patent enforcement and monetization activities, the revenues from such enforcement and monetization activities must be high enough to offset both the cash outlays and the contingent fees payable from such revenues, including any profit sharing arrangements with inventors or prior owners of the patents. The company’s failure to monetize its patent assets or the occurrence of unforeseen circumstances that could have a negative impact on the company’s liquidity could significantly harm its business.”
Early last month, Spherix said in a filing it may have to take a material impairment charge related to its collaboration agreement with Equitable IP.
The company also raised $2.5 million from an underwritten public offering priced at a 25% discount to the closing price on Tuesday, Aug. 2
The patents in the first 10 suits are U.S. Patent No. RE40,999, entitled “VLAN Frame Format;” U.S. Patent No. 6,970,461, entitled “Access Control Enhancements for Delivery of Video and Other Service;” and U.S. Patent No. 7,478,167, entitled “Resource Allocation Using An Auto-Discovery Mechanism For Provider Provisioned Layer-2 and Layer-3 Virtual Private Networks.”
Spherix on its own has generated little revenue from its limited enforcement actions filed against Cisco Systems, Verizon Services Corp., Uniden Corp., Juniper Networks and VTech Telecommunications Ltd.
The company and Cisco agreed to dismiss their infringement dispute in December 2015.
A U.S. District Court in Alexandria, Virginia ruled against Spherix and in favor of Verizon in their infringement dispute in July 2015.
The company is appealing the PTAB decision invalidating the patent at issue in its action against Uniden to the Court of Appeals for the Federal Circuit.
In October 2015, the company settled with Huawei for only $295,000.
Spherix did reach two agreements with RPX Corp. (RPXC), the patent aggregator and provider of litigation loss control services, the first of which cancelled $5 million in redemptions of preferred convertible securities that were due in December 2015. More recently, Spherix netted $4.36 million in cash and cancellation of of 381,967 shares of Series H convertible preferred stock from the second transaction.
Spherix had cash and cash equivalents of only $392,000 and marketable securities of $5.67 million as of June 30, 2016. The company posted a second quarter net loss of $2.08 million, or $9.61 a share, versus a loss of $40.3 million, or $26.76 a share, a year ago.
Patent market observers expressed skepticism that Becker’s participation will make much of a difference.
“If Spherix is okay with small settlements, then their enforcement strategy is fine,” said Gober. “But this strategy won’t generate big dollars in the near term. No company will pay a huge settlement without putting up a fight for years.”
Gober said the odds of generating big dollars long-term are probably better than the odds in the short term.
“A huge settlement in the short term is out of the question, particularly for a U.S.-based strategy with essentially no injunction threat for NPEs in district courts. It’s hard to say what the odds are in the long term. IPRs, jury verdicts, and appeals are difficult to predict. On top of that, one never knows how the legal and regulatory tides will change over the course of a lengthy litigation.”
—To reach the reporter responsible for this story please contact Dan Lonkevich at 707 318-7899 or at firstname.lastname@example.org