Understanding the InterDigital Patent Dispute

Implications: Investors in IDCC have long worried that, even if the firm has good patents, it will be years until Nokia and Samsung pay their first penny.  That is why this week's news about intense settlement negotiations caused a stock spike.  But it is also why InterDigital has to be cautious when it talks about the up-coming ITC case with Samsung and the newly scheduled arbitration with Nokia.

Analysis: InterDigital would like for its investors to believe that it is the next Qualcomm.  Like QCOM, after all, InterDigital has declared an enormous number of patents as essential to 3G telephone standards; and, like QCOM, IDCC's primary model is to license those patents and earn a substantial royalty stream.

One problem with the analogy, of course, is that IDCC's patent portfolio is likely much weaker than QCOM's.  Expert reports indicate that IDCC has dramatically overstated the importance of its patents to the relevant standards, and indeed two cases currently underway are based on the very allegation that IDCC in essence commits fraud by disclosing (say) 300 patents as essential when in fact (say) 8 actually are.

In one way, however, the analogy between IDCC and QCOM is true: for both firms, a big concern is whether the legal system can drive potential infringers to pay up soon rather than paying up only after years and years of litigation.  For IDCC, the problem already played out once with respect to 2G technologies; indeed, right now, Samsung is still disputing the exact amount of money it owes for 2G, even while Samsung and IDCC litigate 3G as well.

All this explains why the bad news this week (that the Nokia ITC fight is now delayed, likely at least a year and maybe much more, in favor of arbitration) nevertheless led to a stock spike: IDCC announced the bad news but, in that same announcement, told everyone that settlement negotiations were seriously underway.  Never mind the reality that, if there is a deal now, it will be very favorable to NOK given (a) the newly possible delay and (b) NOK's win a few months ago in Europe; it seems that investors more care that some money finally shows up in the Nokia account, than they do about the size of the payment or what that really tells us about the strength of IDCC's portfolio.

What to watch?  If there is no settlement with NOK, the next step for NOK is to go to arbitration, and for Samsung is to possibly continue the fight at the ITC but this time as the sole defendant.  Even if Samsung loses later this year, however, expect further appeals before any checks can be cashed. 

What to think about?  One issue firmly on the agenda is whether the five patents currently at issue at the ITC represent the tip of the iceberg or are, instead, the entire iceberg itself.  That is, the ITC case has one meaning if it is the first fight of many, and another if IDCC really only has those five patents.