Erich Spangenberg, the founder and owner of IP Navigation Group, who owns a 16.3% stake in Marathon Patent Group Inc. (MARA), is betting that with no end in sight to the three-year depression in the U.S. patent market, the best returns for Marathon’s patent enforcement business in the future will be found in China.
Spangenberg has always had a huge influence on Marathon’s direction because of his friendship with CEO Doug Croxall and his willingness to sell some prime patent portfolios to Marathon for stock and cash. Indeed, Marathon paid $10 million for MedTech Development Deutschland and OrthoPhoenix. About 45% of MedTech is owned or controlled by Spangenberg. Other properties Spangenberg sold to Marathon include Dynamic Advances, which along with its partner Rensselaer Polytechnic Institute recently won a $24.5 million settlement from Apple Inc.
Shares of Marathon have traded between $1.29 and $3.44 over the past year and are currently trading at $2.85. In the second quarter, Marathon posted net income of $7.9 million, or 53 cents a share, compared with a net loss of $4.5 million, or 32 cents a share a year ago. The swing to profitability was driven record second quarter revenue of $34.4 million. The company has said its revenue for the year could exceed $40 million.
To be sure, the Chinese IP court system and European IP courts offer something prized by U.S. patent owners and unavailable in the U.S. courts: injunctions. The U.S. Supreme Court’s ruling in eBay v. MercExchange set the bar so high for injunctive relief to make it all but impossible. Injunctions had been the main tool by which patent owners convinced infringers to settle prior to eBay.
“Erich is one of the brightest guys in the business and perpetually a step ahead of everybody else,” said Don Merino, a partner with Merino IP Consulting based in Taipei. “He was early in on NPEs, was the first to recognize the disaster of the PTAB and already has been active” in laying the groundwork for litigation in China.
PTAB refers to the Patent Trial and Appeal Board, which was set up under the America Invents Act as a cheaper and quicker alternative to challenging patents through inter partes reviews (IPRs) and covered business method reviews (CBMs). The PTAB has typically invalidated about 80% of the claims it reviews and so has developed a reputation as a death panel for patents.
“Near term you’re going to see more litigations of Chinese patents owned by non-Chinese companies against other non-Chinese companies in China,” Merino said. “Going against a Chinese company would be a suicide mission. You wouldn’t just be risking your enforcement action but you’re whole company.”
The outlier of that assessment may be Qualcomm Inc.’s (QCOM) filing of 17 enforcement actions against Meizu Technology Co. Ltd. After paying China’s National Development and Research Council nearly a billion dollars to settle antitrust charges, Qualcomm is in a strong position to prevail against Meizu, he said.
“Marathon has been very active and successful in Germany and I have no doubt it will be successful in China,” said Erick Robinson, a partner with Rouse International in Beijing. “China and Germany are the places to go. In both places you can essentially automatically get an injunction.
“In the German IP courts the injunction is only in Germany and Germany is not as big as the U.S. or as big as China. The other advantage in China is you can block exports and so achieve a worldwide injunction.”
“More and more licensing and operating companies are going to be setting up shop in China.”
Robinson said Marathon is not the only western patent licensing companies close to filing enforcement actions involving Chinese patents against western companies. He said he knows about at least two others also considering such suits and expects one of them to beat Marathon as the first to file in China.
In the meantime, Robinson noted that Marathon and other licensing and operating companies are clearly responding to the example of Qualcomm and others who have filed enforcement actions in China.
He noted that after Qualcomm paid nearly $1 billion to settle antitrust charges brought by China’s NDRC, the company still felt confident enough in its position to file 17 enforcement actions against Meizu Technology Co. Ltd.
“They wouldn’t do that if they didn’t feel confident and then oppo and vivo quickly signed licensing agreements showing Qualcomm was right.”
Samsung Electronics is also involved in patent litigation against Huawei in China.
In addition, Robinson noted that in June Beijing IP Court Judge Gang Feng spoke publicly about how well foreign companies do in China’s IP courts, citing a perfect 63-0 record. “He was rolling out the red carpet for foreigners to file in China. They’re bursting at the seams to welcome westerners.”
The reason behind the welcome may be the Chinese government’s concern about national security issues, he said.
“Foreigners dominate most of their industries. In the semiconductor industry, it’s a national security issue for them. They want to get from 5% market dominance to 70% in 9 years. How are they going to do that? Through their patent system.”
“Every time a western companies loses a patent case, a Chinese company gets a little more marketshare. It’s how China is going to ascend to dominance.”
China has always been maligned for copying other countries inventions. It’s a problem often brought before the World Trade Organization.
“The WTO accuses them of being unfair, so they need a real justification for keeping foreigners out. The answer is patents. That’s why I say China is going to be World War III in the patent wars over handsets. The dispute between Huawei and Samsung is only the first example. Xiaomi is soon going to enter the U.S. market and when they start selling their handsets, they’re going to get sued for patent infringement by Apple and Samsung and then they’ll retaliate by bring infringement actions in China.”
Western licensing companies like Marathon, who have been maligned as trolls in the U.S. will help the government accomplish its goal of carving out market share for Chinese companies, he said.
“They’ll help by setting up partnerships with Chinese companies and universities. You can be as creative as you want to be. It’s the Wild East. It’s similar to what happened in Silicon Valley in the 1970s.”
In the meantime, Marathon has talked extensively about its continuing enforcement efforts in Europe and its intention to soon launch enforcement actions in China. Two recent deals brokered by Spangenberg suggest where those enforcement actions are heading.
Earlier this month, Marathon acquired two portfolios including 307 worldwide patents from Siemens AG and certain of its affiliates. The first portfolio of 221 patents relate to W-CDMA and GSM cellular technology and cover all the major global economies including China, France, Germany, the U.K. and the U.S.
Marathon noted that many of the patent families being acquired from Siemens have been declared to be Standard Essential Patents with the European Telecommunications Standard Institute and/or the Association of Radio Industries and Businesses related to Long Term Evolution, Universal Mobile Telecommunications System, and/or General Packet Radio Service.
The second portfolio of 86 patents relates to Internet-of-Things (IOT) technology. The company said the portfolio's subject matter is directed toward self-healing control networks for building automation systems. The patents are relevant to wireless mesh networks for use in IOT, and enable simple commissioning, application level security, simplified bridging, and end-to-end IP security. The technology can support a wide variety of IOT enabled devices including lighting, sensors, appliances, security and more.
The company didn’t disclose the full terms of the transaction including things like revenue sharing, though it noted in a filing that it paid $250,000 in cash to Siemens for the IOT portfolio.
Marathon officials said on a conference call with analysts and investors earlier this month that the deal with Siemens is twofold and involves an outright purchase and a partnership.
Marathon officials said the Siemens patents are 50% U.S. and 50% other including Continent Asia and Continent Europe.
Croxall said there are some existing licenses on one of the portfolios acquired from Siemens, though none not the other. He provided no other details.
“It's fresh. And we obviously we can't go into the details of who is licensed, but we still have a lot – we still have a lot ahead of us even in that portfolio and obviously other one is completely Greenfield.”
Croxall added that Marathon intends to file the first wave of cases well before the end of the year, “if not imminently.”
Indeed, he noted that the Siemens portfolios provide Marathon with enforcement opportunities against about 50 companies.
He also noted that the strategic relationship Marathon entered with a large fund and another Fortune 50 Global company, both of which weren’t identified, may hold even more promise than the Siemens transaction.
Marathon’s Luxembourg subsidiary PG Technologies S.a.r.l. entered into the relationship with the fund and the Fortune Global 50 company to manage, commercialize and monetize approximately 10,000 patents all within a particular industry vertical.
The relationship with the Global Fortune 50 company “is even – I think a magnitude greater than what we've done with Siemens,” he said.
Moreover, Croxall said Marathon has "a lot of other opportunities in the pipeline that look like the opportunity with the Global Fortune 50 Company, as well as the Siemens transaction."
The company’s interest in acquiring new patent portfolios stands in sharp contrast to that of rival Acacia Research Corp. (ACTG), which prefers to spend its cash on non-IP related investments such as a $50 million investment in Veritone Inc., a cloud-based Artificial Intelligence analytics company.
Marathon officials also emphasized how the company is benefiting from the three-year depression in the patent market, both in the U.S. and in foreign jurisdictions.
“A transaction like these four years ago I suspect would have cost the company like Marathon tens of millions of dollars,” said CFO Frank Knuettel II. “We did not pay that. And it's really the expertise of the team and the relationship that the team has developed with this particular Fortune 50 Company, that has really carried the water.”
Croxall and Knuettel described the situation for Marathon driven in large part by Spangenberg’s connections as “opening the flood gates” and “transformational. This definitely has the potential to be very transformational for Marathon and frankly for the company that we're working with.”
For his part, Croxall said on the conference call that all three of Marathon’s recent deals including the two portfolios acquired from Siemens and the deal with the Fortune 50 Global company “have what we think are very strong patents in” China.
“And frankly, we've been looking for an entry into the Chinese market, and now we have more than one. So, we are actively pursuing the right partners there, both litigation team and other partners, local universities and research, R&D labs and we've been busy over the summer in making relationships and starting to track down who the right really is. We're not 100% there, but we're certainly along way along that path. And I suspect, it is my hope and belief, that we will have cases on file before the next earnings call in November.”
Croxall said China is “a great market,” where intellectual property is being taken very seriously. In China we think they have a knowledge-based economy to a large part and that's growing….And we're going to go see how valuable our patents are in that market.”
—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899