It has been quite a busy week in the patent litigation world. On November 7, VirnetX (VHC) kicked Apple’s (AAPL) butt and was awarded $368 million in Federal court in a notoriously plaintiff friendly venue in the sleepy little east Texas town of Tyler, Texas. In another David versus Goliath struggle in Norfolk, Virginia, a federal jury concluded Google (GOOG), as well as AOL, Target (TGT), Gannet Co., and IAC Search and Media infringed on internet search filtering technology held by ring tone company Vringo (VRNG). The total award was only $30 million plus a “running” royalty of 3.5% of a “portion” of Google’s search revenue. This amount is estimated at several million dollars per year until 2016 patent expiration. Upon cursory glance, VirnetX smashed a home run while Vringo made due with a single. You don’t have to go too far under water to see there is much more at work here. Juries are sympathetic to inventors. Creative people should be compensated for their efforts. These verdicts suggest the door is now wide open for Vringo and VirnetX to go after other companies who may be illegitimately using their science. So what appears only a single for Vringo may turn into multiple base hits. VirnetX has pending litigation against such giants as Cisco (CSCO) and Siemens (SI) alleging the same infringement that Apple was just found guilty of. In both of these lawsuits the original patent holders sought the help and expertise of so called “Patent Trolls” to assist them in monetizing their creations. Ken Lang, after acquiring patents he himself filed from previous employer and now defunct search engine LYCOS, is now CTO at Vringo. Edmund Munger, who joined VirnetX, procured the eponymous “Munger patent family” from government contactor Science Application International Corp. (SAIC) where he was previously employed.
Another Interesting Scenario
So let’s have a look at what could be another potential big payday for an innovator, who like so many scientific types, lacks expertise in the recondite world of patent litigation. It all started in October 2001. Steven Brandstetter filed a patent which linked together casino slot machines into one giant interactive screen where multiple players could compete against each other in what is called a “bonus round”. Mr. Brandstetter had conceived a way that casinos can entice players to bet more money in order to qualify for a “bonus round” on a shared screen. The concept was so complex the U.S. Patent and Trademark Office spent almost an entire decade clarifying the precise scope of the invention before finally, in February of 2011, issuing patent 7,892,088 entitled “Gaming Device Having a Second Separate Bonusing Event.” Meanwhile, during these intervening ten years places like Caesars Palace and MGM Grand in Las Vegas may have been using the technology and methodologies defined and protected in Mr. Brandstetter’s hard won patent. After market close on Friday November 2, MGT Capital Investments (MGT), in a lawsuit filed in another plaintiff friendly venue of U.S. District Court for the Southern District of Mississippi, alleges that casino operators Caesars Entertainment Corporation (CZR), MGM Resorts International (MGM), and Penn National Gaming (PENN), as well as slot machine gaming manufacturers WMS Industries (WMS) and Aruze Gaming America, Inc. in violation of patent rights describes in patent number 7,892,088. In the past year inventor Brandstetter allied himself with MGT in an attempt to ascertain his patent claims. Brandstetter has a company called J & S Gaming which will receive 45% of any awarded judgment while MGT has a 55% interest. MGT has hired tier one law firm of Nixon & Vanderhye that has gaming industry litigation experience. MGT is well capitalized for protracted legal battle with $7 million cash and zero debt on its balance sheet.
Let’s Do Some Arithmetic
The gaming industry is, for lack of a better word, huge. Gambling may be the world’s second oldest profession. According to the American Gaming Association 63% of all casino revenues in the US come from slot machines and total 2011 casino revenues were $36 billion. But this only represents the net dollars that come into the casinos: The amounts actually wagered are many multiples of this number. There are over 800,000 slot machines in the U.S. and right now a minimum of 3,000 and perhaps 10,000, and growing, are allegedly patent infringing group slot machines. Per my conversation with MGT CEO Mr. Robert Ladd each "linked" slot machine takes in approximatley $3,000 in revenue per day. If MGT is able to achieve a 1% royalty of the daily revenues, then on the low side this equates to royalties starting at $33 million per year and over $100 million on the upper end. These are just United States figures. A lawsuit that goes global makes the numbers even more astronomical. If group slot machines and the “bonus round” component are growing at 20% per year, by year 4 these figures have more than doubled and by year eight the numbers may be in the hundreds of millions per year. The patent life began running at the filing date in October 2001 and remains in force for 20 years. So there are slightly less than 11 years of claims available from the issue date in February 2011. The lawsuit seeks other damages in addition to a request for treble damages for “willful patent infringement”. These linked slot machines are some of the biggest attractions in a casino. It takes what was once a solitary endeavor and transforms it into an interactive sport. The gaming industry tends to upgrade equipment in seven year cycles. 2001 was the last full upgrade cycle. Due to the recession in 2008, many casinos chose to forgo modernizing to later dates. Interactive slot machines one of the latest crazes in the gaming world. Many of the old single play, one arm bandits may be likely to be replaced with this popular new technology.
What Are These Games Called
If you have ever been to a casino, you have undoubtedly seen the games mentioned in the lawsuit. MGM and Caesars operate some of the largest casinos in the world, including the Bellagio, Luxor, Excalibur, Mirage, Harrah's, Bally's, Rio, Aria, and Monte Carlo. All of these casinos contain pods of linked slot machines sharing an interactive, overheard sign.
- Battleship
- Clue
- Paradise Fishing
- Great and Powerful Oz
- Reel'em In Compete to Win
- Pirate Battle
For a detailed explanation of Paradise Fishing click the link below:
For a video demonstration of Paradise Fishing click the link below:
http://www.casinoenterprisemanagement.com/video-library/g2e-2010-aruze-gaming
Always Some Risk
The obvious risk is you go to trial and lose…….always a possibility. While 95% of all these types of cases settle before trial, I wonder if that’s true for high profile cases like this one. The press was predicting Google would settle for maybe hundreds of millions with Vringo, especially as the judge found in favor of Vringo at the Markman rulings. Google fought and was only found liable to the tune of $15.9 million and a much lesser amount for future royalties……this may be considered a win for Google. Markman hearings will occur within nine months of lawsuit filing. The judge will rule on what evidence is admissible at trial. Often if a settlement is to occur, it is in this time period.
At the end of trading on Friday MGT had a paltry market capitalization of $17.4 million. With 2.9 million shares outstanding this arrives at the $6.00 per share closing price. MDT has a number of warrants exercisable around $3 which would bring the number of shares fully diluted (assuming all warrants are exercised) to 8.4 million shares. If all warrants were exercised then total balance sheet cash increases to over $21 million. One method analysts often compare is the valuation recovery ratio. If you think that $200 million is a reasonable amount that MGT could win then the ratio would be 17.4/200 or about 8.7% of potential recovery. If the number is $300 million then the ratio is only 5.8%......$75 million is 23.2% and so on. In 2010 VirnetX had a market value of $100 million before it settled patent litigation with Microsoft for $200 million for an after the fact ratio of 50%. Is this case different than the Google/Vringo battle? Google already had a search engine and some technology that did advertising differentiation, so the royalty award of 3.5% of “certain” search revenues reflects that Google had good search business and Vringo just enhanced it. The “certain” revenues clause obviously relates to only a very small percentage of Google and AOL revenues because its estimated value is only “several million dollars” per year. In the case of MGT against the casinos, without Mr. Brandstetter’s patent (assuming there is infringement), there is no interactive slot machine business, period. Then if, and I it is a big if, a judge and jury can be shown that the relative importance of the MGT patent to casino operations is proportionally much greater than that of Vringo patent to Google, maybe the royalty could be more significant.
It seems to me the odds are better than playing a slot machine.
DISCLAIMER: This article is not a reccomendation to buy or sell MGT, VRNG, or VHC. I have no positions in MGT, VRNG, or VHC and no plans to initiate any. I have no postions in any gaming stocks and no plans to initiate any. I do have long term positions in some of large cap stocks mentioned such as CSCO and MSFT. I have short put positions in AAPL and SI.
