Publicly Traded Patent Collectors Plaguing Google, Apple

Publicly Traded Patent Collectors Plaguing Google, Apple

In more than two decades as a publicly-traded company, Spherix Inc. (SPEX) developed diabetes treatments, marketed a low-calorie sweetener and handled campground reservations. Now it’s dealing in something completely different: patents. Two months ago, Spherix merged with North South Holdings Inc., owner of a portfolio of 224 patents. The new Spherix, which calls itself an “intellectual property development company,” is pursuing infringement cases against the likes of T-Mobile US Inc. and buying former Nortel Networks patents from a consortium set up by Microsoft Corp. and Apple (AAPL) Inc.Spherix’s overnight transformation from a struggling scientific research company into a patent collector is the latest step in the race to turn other people’s ideas into dollars. In the past 16 months, at least five U.S. companies have used deals to become publicly traded patent owners, adding the firepower that comes with raising funds in the stock market to lure investors with the potential of a big payday as mobile and Internet technologies proliferate.

“I may be either delusional or naive, but I’m doing this because this is an asset class that is evolving,” said Anthony Hayes, the former chief executive officer of North South, who took the helm of Spherix after the deal. “We’re at a tipping point. The guy who gets it right will have the chance to build something.”

Investors betting on Hayes are not just backing a risky business model. They’re also joining an escalating debate over the practice of buying up patents without making products or developing technology.

FTC’s Plans

The U.S. Federal Trade Commission is planning to examine whether patent monetization helps or hinders innovation. Technology providers including Google Inc. (GOOG) and Adobe Systems Inc. say more needs to be done to curb so-called trolling, in which patent-focused entities send royalty demand letters to hundreds of companies at a time.

Hayes, who previously worked as a trial lawyer, says his model rewards inventors who may otherwise receive no compensation for their ideas. Reverse mergers, where private companies combine with listed entities, can also breathe life into ailing public companies.

Spherix had not generated as much as $2 million in annual revenue in seven years and was burning through cash in an attempt to develop and market drugs. North South was formed a year ago to acquire patents and “monetize those patents through sales, litigation or licensing,” according to its website.

Raising Capital

Earlier this month, Spherix, based in Tysons Corner, Virginia, about 15 miles west of Washington, D.C., raised $2.24 million in a private placement to go after patents in areas like WiFi, cellular communication and antenna technology. The financing almost doubled the company’s cash on hand, based on its reported figure at the end of September.

Patent-licensing firms have targeted companies such as Google, ZTE Corp. (000063) and Apple, which have mobile and cloud products. The rationale is that if they can win, licensing firms can generate sustained royalty revenue on products that big companies sell.

It’s an expensive proposition. Against such competitors, even a small case can require $650,000 in legal fees, with bigger cases costing more, according to a survey by the American Intellectual Property Law Association. Furthermore, a case could take years getting through trial and appeals.

Monetizing Patents

“There’s no way to monetize a patent, no matter how brilliant an inventor you are, without access to capital,” said Ron Epstein, CEO of patent brokerage Epicenter IP Group LLC in Redwood City, California. “Ten years ago, contingency fee lawyers were your only source for capital. Now billions of dollars are looking to invest itself in patent enforcement.”

Public-market investors have to be prepared for a bumpy ride. Spherix, with a market value of $23.6 million, has dropped 11 percent since the merger closed. Vringo Inc. (VRNG), a provider of software for mobile and video applications, has tumbled 19 percent since merging with intellectual property company Innovate/Protect Inc.

Vringo entered the patent market after struggling to build an ad-supported ringtone business. Eighteen months after its June 2010 initial public offering, the stock fell below $1.

Vringo acquired Innovate/Protect in July 2012, and in November was awarded about $30 million from Google and some customers over patented ways to generate ad revenue. Vringo has sold about $75 million in stock to fund the new business and used part of the proceeds to buy telecommunications patents from Nokia Oyj.

Microsoft Deal

In May of this year, it got six telecommunications and data management patents from Microsoft as part of a settlement deal in which Microsoft agreed to pay $1 million plus 5 percent of whatever related royalties Google pays in the future. Vringo shares rose as much as 10 percent on May 30, after the announcement, and closed up 2.6 percent.

“The market reacted very positively and we realized that we could use that liquidity to acquire additional assets,” Andrew Perlman, CEO of the New York-based company, said in an interview. “I’m a big fan of the licensing model. When it works, there’s no better business.”

Vringo’s stock-market value jumped to $235 million at the end of 2012, from $9.9 million a year earlier.

Dig a little deeper and a cautionary tale emerges. In the win against Google, Vringo had sought almost $500 million. When the jury announced a $30 million award, Vringo shares sank 9.6 percent.

Herd Investing

“If you don’t know what you’re doing and you’re investing alongside the herd, that can be a problem,” said Kevin Rivette, a managing partner in the Silicon Valley office of 3LP Advisors LLC, which has advised companies on patent strategies. While there are good patents for investors to back, “Some you look at and say, ‘You’ve got a better chance of finding gold in Palo Alto,’” Rivette said.

A bigger concern may be that businesses are fighting back. Companies like Google and Cisco Systems Inc. (CSCO), which get dozens of royalty demands a year, are pushing the courts and Congress to limit suits that involve common technology, such as wireless networking.

Of the past 12 trials in East Texas, the most popular venue for patent suits, 10 were unsuccessful, according to Michael Smith of law firm Siebman Burg Phillips & Smith LLP in Marshall, Texas.

Since July, Spherix has filed a complaint against T-Mobile for geolocation technology, and infringement lawsuits against VTech Holdings Ltd. and Uniden Corp. for patents related to cordless handsets.

Nortel Patents

The case against Uniden is tied to patents Spherix bought from Rockstar Consortium US LP, a joint venture that Apple and Microsoft created in 2011 to hold some of the Nortel patents acquired for $4.5 billion in 2011.

Document Security Systems Inc. (DSS), based in Rochester, New York, is suing Facebook Inc. and LinkedIn Corp. for infringing technology covering online collaboration. The patents were acquired in a reverse merger with Lexington Technology Group Inc., an intellectual property company. The shares have fallen 33 percent since the deal closed on July 1.

Peter Hardigan, Document Security’s chief operating officer, said investors looking for fast returns have turned away from his company.

“IP investors tend to be very quick on the trigger,” Hardigan said. “We’re building a business and trying to manage it for the long term.”

To contact the reporters on this story: Ian King in San Francisco at ianking@bloomberg.net; Susan Decker in Washington at sdecker1@bloomberg.net