If you like David versus Goliath stories, you’ll like 01 Communique Laboratory Inc. (1.48-0.11-6.92%) The little software maker is battling multibillion-dollar giant Citrix (46.520.220.48%)over a patent and, so far, winning.
The road is long yet, but if 01 makes it, the payoff for investors will be enormous.
The Mississauga company was founded in 1992 and won an important patent in the summer of 2005. The patent governs communication between PCs over the Internet without having to adjust firewall settings – an important feature because it cuts down on the hassle of getting computers to talk to each other. It’s the kind of technology that can be used, for example, if you sign on to your computer from somewhere else.
01 Communique alleges that Citrix has been infringing on its patent since it was granted, and 01 sued five years ago. The so-called Markman hearing, in which the terms and definitions are argued, was held in 2006 and 2007, and 01 Communique won 19 of the 20 arguments.
The next step was a review of the patent by the U.S. patent office, which has just finished. The office issued the patent in the first place but 3,000 are issued every week and mistakes are often made. In this case, the finding was that the patent is valid. This was an important win for a couple of reasons. First, Citrix was allowed to submit its best reasons for nullifying the patent, which it did, and still lost the battle.
Second, all of the patent claims were upheld in the re-examination. This is rare; it happens only 8 per cent of the time.
So to the layman’s eye, at least, 01 Communique is cruising through this long process. Patent infringement and litigation is widespread, and a patent is only as valuable as your ability to defend it, which can cost millions upon millions of dollars. It appears that 01’s case is going very well.
But it’s far from over. Citrix, which declined to discuss the matter, can appeal. Whether it does or not, there are still more steps, but if it loses the appeal or decides not to (unlikely in my view), 01 is very close to damages.
And what do they look like? The little company has next to no revenue, having spent most of its resources fighting Citrix in court instead of the marketplace.
Citrix has first-quarter online revenue – the sales that largely come from the use of the disputed technology – of $85-million (U.S.). Total sales were $414-million but online is growing the fastest, by about 18 per cent. And this revenue is very high margin, so the profits would be fat.
Should 01 Communique prevail, it would be entitled to compensation based on Citrix’s past revenues. It might also win an injunction that stops Citrix from using the technology. And Citrix would have to strike a deal if it wants to keep using the patent. If the judge finds that the infringement was willful, damages are multiplied.
It’s not clear how the court will rule. The lawyers are optimistic but not predicting anything. There’s no benefit to making promises. Investors, though, are more sanguine: 01’s shares tripled in value when the validity of the patent was announced.
If 01’s case is totally successful, though, investors are going to make a lot of money. The company’s market capitalization is only $32-million (Canadian). Citrix’s $85-million in revenue that I mentioned earlier is only one quarter’s worth. This case goes back five years. Royalties on those past sales alone, which Citrix might have to pay, would easily be bigger by a fat multiple of the market cap today.
The trouble is handicapping the odds. It’s hard to do with such cases because they’re all unique. Citrix’s stock wasn’t hurt by the announcement, but then again it has a market cap of more than $8-billion (U.S.). But anyone willing to roll up his sleeves and root around for useful comparables, and brave enough to make the wager, stands to do very well if it works out.