TiVo Bump Shows How Hedge Fund Lawyers Gain Edge in CourtSusan Decker and Kelly Bit
Tom Claps headed to Texas to scope out developments as TiVo Inc.’s trial against Google Inc.’s Motorola Mobility unit neared, with as much as $1 billion at stake over rights to digital-video-recorder technology.
Calling the court clerk June 6 for the location of a hearing, he was told it was off: the case was settled. Understanding the significance, the former Skadden Arps litigator, who joined Susquehanna Financial Group two years ago as a legal analyst, fired off a note that prompted a spike in TiVo shares and baffled other investors in the absence of news.
It was an example of how some hedge funds and other sophisticated investors with stakes in companies involved in patent litigation trade on their legal expertise and may have access other investors don’t to market-moving developments.
“Rich people can get access to the court with an earlier trade before the journalists even have time to publish the results,” said Dan Ravicher, executive director of the Public Patent Foundation in New York and a frequent trader on litigation news. “It’s fundamentally unfair. Life’s unfair, but I’m going to do what’s best for me.”
While patent lawsuits and filings are public information and trials are open, meaning there’s nothing illegal in what these investors do, they often take place at courts in far-flung locations like Texarkana, Texas, where the TiVo trial was supposed to begin today.
Lawyers employed or paid by investors can attend hearings to glean hints of where a case is going or learn of rulings made from the bench before they are posted on the court’s public docket. They can send instant word of verdicts from the courtroom and interpret arcane matters of patent law most investors wouldn’t understand.
In some courts, lawyers are the only people allowed to use mobile devices and laptops.
Investors may spend a few thousand dollars for the lawyers to look at the case and give opinions on the courts and judges involved, said David Sunshine, a lawyer with Cozen O’Connor in New York who advises hedge funds on litigation. Or they may pay $100,000 or more to have someone monitor each step of the case, including attending hearings.
“They’re willing to spend money because these cases move stock prices and the movements of the stock price is worth a lot of money,” Sunshine said.
It’s a step beyond some investors’ practices of setting up computer algorithms that react automatically to a court ruling - - buying shares if an appeals court affirms a decision, for instance, without looking at the opinion.
“We’ve seen an increased sophistication, particularly with investors in the technology space, with how legal can impact fundamentals,” said Nick Rodelli, head of Legal Edge Research at the Center for Financial Research and Analysis in Rockville, Maryland. “Separately, there are some pure event-driven companies where, by and large, the market value is determined on legal outcomes.”
Claps, the Susquehanna analyst, said in an e-mail that he picks cases to watch based on factors including “the financial impact of the case on the litigants and the particular industry in general, and the impact of the case on other pending litigation.”
Scoggin Capital Management LP, a $1.5 billion New York based event-driven hedge fund, often makes wagers on or against companies in patent litigation.
“These patent trials can be very complicated,” Anish Monga, a Scoggin portfolio manager and a former lawyer at Cravath Swaine & Moore, said in an interview.
“A lot of times the patents are written by engineers using industry jargon. It’s sometimes hard for a lay person on a jury to understand the intricacies, and that needs to factor into the analysis.”
This kind of betting occurs on every type of litigation, and the options on some companies can reach historic highs before a trial or other big event.
Patent cases can be particularly rich for stock swings. TiVo, based in San Jose, California, soared 62 percent in March 2010 when it won an appellate ruling in its longstanding fight with Dish Network Corp. and then plunged 42 percent two months later when the appeals court said it would reconsider.
“I put none of the blame on the people who do it,” said Ravicher, who’s gone to courts himself to get the information first. “I put the blame on judges.”
All patent cases are in federal courts, where the judiciary’s policy making arm, the Judicial Conference, opposes cameras in civil cases, said Karen Redmond, spokesman for administrative office of the courts.
A pilot program in 14 courts records certain proceedings with the information available later. None allow live-streaming of proceedings.
The types of cases that attract attention tend to be in what Ravicher calls the “sweet spot” between big companies whose stocks rarely move on litigation news, like Apple Inc. or Samsung Electronics Co., and tiny companies that would be vulnerable to wild swings if a hedge fund were to start buying shares.
“The opportunities are sometimes larger in the smaller companies because as a percentage of market cap, these matter,” Scoggin’s Monga said. “If a company with a $300 million market cap wins $100 million, it means more than if Samsung wins $100 million.”
Investors consider where the case is located -- eastern Texas is considered a friendly forum for patent owners while other courts can take years before a trial is held, for instance -- and whether the case will be decided by a judge or a jury.
Verdicts can be difficult to predict and investors bet on both sides. VirnetX Holding Corp., a Nevada-based company that owns patents on virtual-private networks, rose 28 percent after winning a $368 million verdict against Apple Inc. in 2012. It dropped 28 percent when a jury found no infringement in a case against Cisco Systems Inc.
Sometimes when a company wins a trial, the stock falls, like the 9.6 percent drop in New York-based Vringo Inc. shares when a jury awarded it $30 million against Google Inc. and its customers. The company was seeking $493 million.
Being first is no guarantee of being right. The day after the 8.3 percent jump on news that TiVo had settled its legal battle, the shares plunged 19 percent because investors believed $490 million payout wasn’t enough.
Ravicher said he trades on events in patent litigation to fund what he calls his “passion” -- searching out questionable patents asserted against entire industries and asking the U.S. Patent and Trademark Office to cancel them. He said he may start a hedge fund to trade on patent litigation.
“I’m still figuring this out, too,” he said. “I just think I’m less ignorant than the next guy.”