Patent Holder Sues McAfee, Gets $25 Million... But May End Up Losing $5 Million Due To Everyone It Has To Pay Off [Update]

from the this-is-fun dept

Wed, Nov 4th 2009 12:51pm — Mike Masnick

A few years ago, we noticed the troubling trend of private equity firms raising capital solely for the purpose of investing in patent lawsuits. Basically, these private equity guys saw the ridiculous awards being handed out to patent holders who did nothing, and realized they wanted in on the game. So they raised funds of hundreds of millions of dollars, and basically approached different small patent holders, examined their patents, and basically promised to bankroll lawsuits against companies who actually did stuff, in exchange for a cut of the winnings. One of the biggest players in this space (perhaps the largest outside of Intellectual Ventures) is Altitude Capital Partners.

Joe Mullin has uncovered some of the details of how Altitude works (and how some of these lawsuits work), because Altitude is upset with the amount of money it got back from one of the patent holders whose lawsuit it "invested" in. Note, here, that it does not appear that Altitude invested in the company in question, DeepNines, but specifically in the lawsuit. Altitude gave DeepNines $8 million for its lawsuit in the structure of a loan. DeepNines sued security firm McAfee and worked out an eventual $25 million settlement. How much did DeepNines actually get? Less than $800,000 -- and even that's in dispute. (Updated in the next paragraph).

Basically, because Altitude had a "model" of what it felt DeepNines should get in a lawsuit, and that model popped out a $200 million award, it felt that it didn't get enough. But the breakdown suggests it did fine. DeepNines paid back the loan at a 10% interest clip, plus another $700,000 as its "contingency fee" on the winnings, adding up to $10.1 million. Then DeepNines ended up having to pay its lawyers at Fish & Richardson over $11 million in fees, plus another $1.25 million to local lawyer (and former federal judge) Robert Parker. DeepNines also had to pay additional expenses for travel and other legal costs, adding up to another $2.1 million. In the end, it was left with less than $800,000. Doesn't seem quite worth the effort. (Update: Good discussion in the comments suggesting that the math here doesn't quite add up, and DeepNines may have actually ended up with about $8.8 million, because you have to add the original $8 million investment to the $25 million in counting in the inflow. That makes sense, so the numbers may be off. I was initially relying on the report claiming $800k was leftover, but it may have actually been higher. The rest of the story does make sense however).

Especially since Altitude is demanding another $5.3 million, saying that DeepNines should have calculated its contingency fee based on the overall award, not after subtracting legal fees. Of course, if it did that, then DeepNines -- despite having "won" $25 million, will have lost nearly $5 million on the overall deal. Be careful who you partner with. This should be a huge warning to any patent holders who think about accepting money from a firm like Altitude. Even a $25 million "win" can turn into a huge loss, if you're not careful.

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Filed Under: lawsuits, money, patents
Companies: altitude capital partners, deepnines, mcafee

24 Comments

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ranon (profile), 4 Nov 2009 @ 1:28pm

Your math is off
Of the $10.1 million paid to Attitude, $8 million was received as a loan earlier. So the total cost will be $2.1 million. Therefore the final profit, will not be $800 thousand, but $8.8 million.
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- Dark Helmet (profile), 4 Nov 2009 @ 1:45pm
  
  Re: Your math is off
  "Of the $10.1 million paid to Attitude, $8 million was received as a loan earlier. So the total cost will be $2.1 million. Therefore the final profit, will not be $800 thousand, but $8.8 million."
  
  I was going to say the same thing, but I truly blow monkey schlong when it comes to math, plus it's late in the day, and I recently gave up coffee (why? Because apparently I enjoy being a complete zombie).
  
  The story still holds water in what a bunch of douchebags ACP are.
  
  Attention dumb fucks: The justice system of America is NOT something to played with for profit, nor invested in. It's for fucking JUSTICE.
  
  All will be well soon....when the only justice is helmeted justice...
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  - DJ (profile), 4 Nov 2009 @ 2:12pm
    
    Re: Re: Your math is off
    $8M + $25M - $10.1M - $11M - $1.25M - $2.1M = $8.5M
    
    If DeepNines gets another $5M, Altitude is still left with a $3.5M profit. Unless you consider that they were given an $8M loan, in which case it's an effective $4.5M LOSS.
    
    Not exactly what one would consider a "savvy investment".
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    - Dark Helmet (profile), 4 Nov 2009 @ 2:18pm
      
      Re: Re: Re: Your math is off
      But the point is that aren't they theoretically starting the lawsuite +8M from the loan? Surely that was used to pay 8M in costs of the lawsuit, so you need to take that loan into account, no?
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    - Bubba Gump (profile), 4 Nov 2009 @ 2:20pm
      
      Re: Re: Re: Your math is off
      I hate to beat a dead horse, but can ONE of you ACTUALLY get the math right?
      
      +$8M (original loan to DeepNines)
      +$25M (settlement)
      -$10.1M (payment back to Altitude)
      -$11M (F&R fees)
      -$1.25M (local lawyer)
      -$2.1M (travel and other)
      ------------------------------
      $8.55M net to DeepNines
      
      -$5.3M (Altitude asks for more money)
      ------------------------------
      $3.25M profit (still not bad considering it's more than zero and put a bunch of worthless lawyers to work for who knows how long)
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      - Bubba Gump (profile), 4 Nov 2009 @ 2:22pm
        
        Re: Re: Re: Re: Your math is off
        Oh, and here are the numbers for Altitude:
        
        -$8M (lent to Deepnines)
        +$10.1M (paid back by Deepnines)
        ---------------------------
        +$2.1M (look, PROFIT!!)
        
        +$5.3M (Altitude asks for more)
        ---------------------------
        +$7.4M (look, even MORE profit!!)
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        Bubba Gump (profile), 4 Nov 2009 @ 2:23pm
        
        Re: Re: Re: Re: Re: Your math is off
        Never let it be said that geeks can do addition when a for loop will do just as well.
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      - Dark Helmet (profile), 4 Nov 2009 @ 2:24pm
        
        Re: Re: Re: Re: Your math is off
        Right, that's where my math took me as well...
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      - Anonymous Coward, 4 Nov 2009 @ 3:34pm
        
        Re: Re: Re: Re: Your math is off
        you guys are forgetting that the lawyers might have run through the original $8 million already on top of thier $11 million bill
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      - Marcus Carab (profile), 4 Nov 2009 @ 3:40pm
        
        Re: Re: Re: Re: Your math is off
        Agreed. I've read it over several times and I can't figure out what's up. Mike, can you weigh in on this?
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      - Kazi, 5 Nov 2009 @ 8:06am
        
        Re: Re: Re: Re: Your math is off
        The 8 mill is a loss and i think part of the 11 or so million paid to the lawyers ...
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- Kazi, 4 Nov 2009 @ 2:16pm
  
  Re: Your math is off
  I think you're confusing the 800,000 DeepNines is left with from the 25,000,000 received from the lawsuit with the 800,000 paid in interest to Altitude on the 8,000,000 loan.
  
  8,000,000 - loan
  ~800,000 - interest 10%
  700,000 - contingency fee
  (Somehow the above adds to 10.1 million paid to Altitude)
  
  11,000,000 - lawyer fees
  1,250,000 - local lawyer who is former federal judge
  (Above are law fees)
  
  2,100,000 - misc charges
  (Some traveling expenses, etc)
  
  End profit: 800.000 (For DeepNines) from 25,000,000 winnings in lawsuit and an extra lawsuit that might cost 5,000,000 when the company has about 7,000,000 or so in total assests (The 7 mill is from the link ... it was 6, 7, or 8 ... not sure which so picked the 7)
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- kevjohn, 4 Nov 2009 @ 3:57pm
  
  Re: Your math is off
  *yawn*
  
  Here's the equation: Money + Lawyer = No Money (with a little Debt thrown in to boot).
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- Mike Masnick (profile), 4 Nov 2009 @ 3:58pm
  
  Re: Your math is off
  Of the $10.1 million paid to Attitude, $8 million was received as a loan earlier. So the total cost will be $2.1 million. Therefore the final profit, will not be $800 thousand, but $8.8 million.
  
  Hmmmm. Good point. I didn't do the math. I was just relying on Mullin's reporting, which claims DeepNines was left with just $800k. It could be that his math was off, or that there were other expenses not accounted for. I'll update the post though.
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  - ranon (profile), 5 Nov 2009 @ 2:25am
    
    Re: Re: Your math is off
    Thanks for the update.
    
    This story gives us a good idea of the economics of a patent lawsuit.
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vyvyan, 4 Nov 2009 @ 1:31pm

pwn3d!
perfect example. Now they can use that $800,000 to hire a lawyer and file bankruptcy.
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Designerfx (profile), 4 Nov 2009 @ 1:33pm

federal judge?
that federal judge part caught my interest. Would this be in good ole texass?
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Lucretious, 4 Nov 2009 @ 3:29pm

I don't care how much one respects trial attorneys, there is not a single human being (or office) alive in that line of work that deserves 11 million.

sorry if that sounds shallow and reactionary but it's the truth.
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- Eldakka (profile), 4 Nov 2009 @ 7:19pm
  
  Re:
  Not knowing the full details, but how long did the case go on for and how many people were involved?
  
  Could have a law firm with 4-10 lawyers working on the case for 3-4 years, plus their expenses (travel, expert witnesses, etc etc).
  
  Let's say 8 laywers working on average each 15 hours/week over 4 years. 15*8*52*4 = ~25000 hours. Which gives $440/hour average. Some of those could be partners ($600+ hour) or more junior lawyers ($150/hour). This doesn't even cover expenses such as travel, hotel bills, expert witnesses, document discovery, 3rd party investigators (PI's, expert witnesses, researchers) and so on. Which would probably bring the average down from $440/hour to closer to $300/hour. Of course, the actual lawyer themselves don't see that hourly figure, as the firm takes a cut of that so the lawyer would probably be lucky to see 1/2 that hourly rate. Still pretty excessive tho. But I wouldn't be complaining if someone would pay me $200-$300/hour, hell, I'd be happy with $100
  
  Of course, if this was a 2 man law firm that worked on this for 2 years, then $11mill is a tad excessive ;)
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Not again, 4 Nov 2009 @ 5:16pm

Oh look - a bubble
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staff3, 6 Nov 2009 @ 8:49am

stop the shilling!!!
"...troubling trend of private equity firms raising capital solely for the purpose of investing in patent lawsuits."

What's wrong with that? Without funding from these firms or others few inventors have a chance at benefiting from their discoveries. You need to get your head out of your...
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Vic kley, 6 Nov 2009 @ 9:20am

McAfee serial infringer loses again
Mike,

Thanks so much for showing your concern about very small companies and Individual Inventors! We really appreciate your article and suggestion that we be very careful with the downside allocation of an enforcement litigation deal with willing backers like Altitude. Too bad the system does not make serial infringers like McAfee pay the legal costs of a suit which can pass the Summary Judgement test (that is the subject claimed is not on its face a meritless suit).

Individual Inventors need to band together so that when no alternative but litigation is left to enforce a patent, they can get help with example deals and lists of litigation investors.
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Joe Mullin, 6 Nov 2009 @ 12:20pm

Numbers in my story
Thanks all for the interest and discussion about the numbers. To be clear, I'm reporting on the money that's being argued about in the Altitude Nines v. DeepNines lawsuit, which both sides refer to as "Net IP Revenue" and "Gross IP Revenue" -- in other words, how the $25 million should get divided up. So when I wrote that DeepNines "wound up with less than $800,000," that is DeepNines' own calculation of how much it got out of that $25 million. DeepNines also took out loans, including $8 million from Altitude, to fund the litigation, which I mentioned in the story. Because the documents in my possession don't clearly show what happened to that money, I'm not speculating about the company's overall financial condition. I've added a few documents to the post that show more clearly where I got the numbers I used in the story (scroll to bottom) -- http://bit.ly/3M0Zv0
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Gena777 (profile), 12 Nov 2009 @ 8:37am

Government intervention
Patent litigation has, indeed, become big business and (for major players, at least) potentially a lucrative investment. Therefore, it is probably unrealistic to expect patent holders and trolls to police themselves, since they have a disincentive to do so. It may be wise for the administration to exert at least a little pressure on major interested parties, so that the situation does not swing too far out of balance and we remain mindful that the underlying constitutional purpose of the patent system is to foster innovation.
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