Dallas patent fight targets Ericsson Inc.
Jeremy Feiler and Jeff Bounds Staff Writers
PLANO -- An 8-year patent battle in Dallas pitting InterDigital Communications Corp. against one of the world's biggest cellphone makers, Ericsson Inc., has moved into mediation and may be headed to eventual settlement.
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January 8, 2003
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Some InterDigital investors hope the result could lead to more than $1 billion in damages, adding about $17 a share to a stock whose shares now are worth around $7. That, however, is a stretch by most analysts' accounts, who believe a settlement would be closer to $100 million or so.
The case centers on digital cellphone technology developed in the early 1990s by InterDigital, a King of Prussia, Pa., wireless technology developer. In September 1993, InterDigital claimed in a lawsuit that Sweden-based Ericsson, which has its U.S. headquarters in Plano, infringed on eight of its patents.
As a result, InterDigital is demanding that Ericsson pay it royalties on those patents. Ericsson, it alleges, made far more cellphones based on InterDigital's patents than anyone else in the world.
InterDigital is asking for about 5% of Ericsson's handset sales and 3.5% of its infrastructure sales going back to the early 1990s.
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Were InterDigital to achieve that objective, the damages would be huge and devastating to Ericsson. Last year alone, about 67% of Ericsson's sales, or $19.5 billion, came from infrastructure, while handset sales accounted for nearly 19.3%, or $5.6 billion.
While infrastructure sales will be down in 2001, those systems "comprise about four out of five dollars coming in the door," says Todd Bernier, a stock analyst at Morningstar. "It's the reason to buy Ericsson."
Ericsson denies it has done anything wrong and has countersued, alleging InterDigital hasn't invented anything new. A European appeals court upheld InterDigital's patents in 1998.
Neither party would discuss the case.
"We are under an obligation of complete confidentiality and are not in a position to talk about any events that have occurred recently," said Howard Goldberg, InterDigital's CEO. "We are looking forward to the day that there is closure on this event one way or another. We feel very comfortable with our position."
All the proceedings, which have taken place in a federal court in Dallas, have been sealed except for a special master's final report, which InterDigital (Nasdaq: IDCC) released in September 2000. The report appeared to indicate the suit was going in InterDigital's favor.
Now the two parties are engaged in mediation, administered by a female rabbi with a track record of success in ending long-standing legal disputes.
The U.S. Patent Office reaffirmed InterDigital's patents in proceedings that, at one point, put the litigation on hold for nearly two years. Another big wireless company, Qualcomm, used the same tactic in a 1999 patent case against Ericsson, forcing the company into an out-of-court settlement.
"Intuitively, I think they're going to settle. There's definite interest in settling by both parties," said Joel Achramowicz, a managing director of research in Pennsylvani-based PMG Capital's San Francisco office, who rates InterDigital a "buy."
He believes a settlement would lie in the $100 million range, and pointed to InterDigital's $70 million settlement deal in a similar case against cellphone maker Nokia in 1998.
Swatting a fly
Bernier, the Morningstar analyst, says a settlement in that range would be do-able for Ericsson, despite a series of financial problems it has experienced in the last year.
The company, which employs around 2,300 in the Metroplex, has announced plans to cut 20,000 jobs this year, and analysts expect more cuts in the wake of what they believe was a horrid third quarter. Ericsson is merging its phone operations into a joint venture with Sony Corp. of Japan.
Ericsson's American Depositary Receipts, which trade on Nasdaq under the symbol "ERICY," were selling for $3.56 Wednesday, down 78% from their 52-week high of $16.26.
But "you're still talking about a huge company," Bernier says. "Seventy million dollars to $100 million is a rounding error for this company. ... Sometimes you've got to ruin some paper to swat a fly."
According to some observers, InterDigital may accept less for a chance to work with Ericsson as a development partner, which could prove a lot more valuable to it over time. Any chance of Ericsson attempting a hostile takeover to avoid paying damages also has been discounted. Such an attempt could activate InterDigital's $250 per share "poison pill," in which Ericsson would have to pay InterDigital shareholders $13.9 billion, unless it could force a shareholder vote in its favor.
Meantime, another analyst who follows InterDigital believes a multibillion-dollar settlement "is outside the range of probable scenarios. I don't think that number's in the ballpark," said Tom Carpenter, senior technology analyst with Hilliard Lyons, a Louisville, Ky.-based investment bank who also rates InterDigital at "buy." "There's multiple scenarios on what could happen. I suspect both parties want to give mediation a shot."
A resolution could lead to an agreement to license InterDigital's technology going forward, Carpenter said, though it probably would include payment for past infringement.
Ericsson reportedly offered InterDigital $100 million to settle several years ago, but the Pennsylvania company declined. With the rapid rise in cellphone use and owed royalties, a court decision or settlement now could lead to damages several times that amount, observers believe.
According to some investors, Ericsson, in a 1999 restructuring, dismissed a number of executives who could substantiate claims of conspiracy by Ericsson and others to infringe on InterDigital's patents. They also claim that InterDigital's lawyers identified the executives and took their depositions.
Telco's `Rodney Dangerfield'
When it's not in court, InterDigital has been working to become a leading developer of "third-generation," or 3G, broadband cellphone technology to transform cellphones into all-purpose remote controls.
"As we look at the consequences of the shakeout in the marketplace, such as cutting research and development, we see great opportunity for InterDigital," Goldberg, the CEO, said.
Some people don't put much stock in that assertion -- to the distress of current shareholders.
"InterDigital is the Rodney Dangerfield of telecommunications stocks," says David T. DeWitt, president and research manager of DeWitt Investment Research & Management Inc. in Wayne, Pa., which holds 700,000 InterDigital shares worth about $4.78 million and has invested in the company since 1990.
InterDigital's propensity to file patent suits has also created skepticism about the company in investment circles. "InterDigital tends to sue a lot of companies. They generally get paid off to go away," says Brian Modoff, a wireless-equipment analyst at Deutsche Bank that follows Ericsson.
InterDigital hasn't won every time it's gone to court.
It lost a patent-infringement lawuit in March 1995 against Motorola Inc., for example. In that suit, Motorola's lawyers showed an InterDigital mock-up of a late 1980s cellphone, asking the jury to compare the technology based on the cellphone's appearance rather than its circuits. The jury decided nothing new had been invented.
Shortly after that trial, patent-infringement cases were taken out of juries' hands and placed before experts called "special masters." Once the expert deems an idea patentable and finds that an infringement occurred, he or she makes a recommendation to the federal judge, who then tells the jury whether the patents in question are valid and deals with other technical issues. The jury then determines damages.
InterDigital, meanwhile, wants to deter short-term investors who look for public companies that could benefit from a major patent-lawsuit victory of the sort that occurred 121 years ago.
What happened then? The shares of American Bell Telephone Co. soared from $50 to $1,000 on the New York Stock Exchange in one week in 1880, turning Alexander Graham Bell and his financial backers into overnight millionaires.
The cause? Telegraph communications titan Western Union Co. withdrew its legal challenge to American Bell's telephone patent.
Contact DBJ writer Jeff Bounds at jbounds@bizjournals.com or (214) 706-7122. Feiler, a staff writer at the Philadelphia Business Journal, an affiliated publication, can be reached at jfeiler@bizjournals.com.
© 2001 American City Business Journals Inc.
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