Neonode: A Potential Patent Play?

Neonode (NEON) has a very well developed business. They have been on a role recently, providing solutions for many large companies. With Neonode creeping ever closer towards profitability, it seems as though Neonode is well positioned as a company. However, there is the possibility that they would become even more well positioned, through the exploitation of their patent portfolio. Neonode holds some seminal patents, which could provide a very lucrative stream of revenue, should Neonode choose to start focusing on enforcement activities. To be clear, we are not talking about destroying the underlying business at Neonode, but simply choosing to essentially add an IP enforcement wing onto the current business model.

A very interesting development has been the fact that Neonode patented slide to unlock technology...three years before Apple (APPL). The fact that Neonode also commercially deployed this technology would only serve to strengthen the claims in Neonode's enforcement activities. For those of you who are unfamiliar with the patent litigation arena, let's take a step back. Neonode's patent would have priority over Apple's, as Neonode's is older and therefore the assumption is that Neonode had the idea before Apple. Even more interesting is the idea that a court in the UK in 2011 declared Apple's slide to unlock technology invalid, citing Neonode's 2004 phone which deployed slide to unlock technology. This would also mean that Apple knew about Neonode's invention, as they are now aware that Neonode deployed a similar device before Apple. As a matter of fact in Apple's recent patent application for slide to unlock technology they cited Neonode's patent. This is also important because that would mean that Apple was well aware of the issuance of Neonode's patent.This could open Apple up to the status of willful infringer under the law, which would substantially increase damages should a verdict come in against Apple. In February of 2012, Neonode was issued their patent. They were issued this patent, having initially filed for the patent in 2002, well in advance of Apple. This would make the patent relatively recent, which is always good in the field of IP litigation. The more recently the patent was issued, the longer until the expiration of the patent. Now, why would anyone care about the expiration date of a patent, well the answer is due to future royalties. Should Neonode sue they would undoubtedly seek future royalties for Apple's continued infringement. This would mean that Apple would either have to change their technology, or continue to pay Neonode a set royalty on sales until the expiration of Neonode's patent.

More significantly, Neonode has the pieces lined up for a potential IP litigation front. In their conference call they mentioned that "our Patent Counsel, Quinn Emanuel is in the later stages of independently evaluating our patents and helping us developing our IP strategy." This would suggest that Neonode is also seeing the value in the IP litigation front. Also of note is the fact that Quinn Emanuel is representing Neonode, Quinn Emanuel is a tier one lawfirm in patent litigation. What is even more compelling is that Quinn Emanuel advertises itself as trial lawyers, so why would a bunch of trial lawyers be coming together at Neonode? The logical conclusion is that Neonode is getting its proverbial ducks in a row to sue someone. Who we cannot really be sure, however, they have a large patent portfolio protecting their underlying technology platform. With lawyers like Quinn Emanuel working for Neonode, it is safe to expect that Neonode will soon be attempting to monetize some of their IP portfolio, as they should.

What makes Neonode an even more compelling IP investment is the fact that Neonode has a strong underlying business. This is very valued in the world of patent monetization, for examples look at the underlying businesses at Document Security (DSS) or the creation of one at MGT Capital (MGT.OB). This would help to provide a sort of cushion should Neondoe not be successful in its patent monetization case. It would essentially provide a base valuation, a luxury not present at some other monetization companies such as Vringo (VRNG). Furthermore, Neonode could be very successful as Quinn Emanuel claims to have a win rate of over 90%, odds like this have to be attractive to any investor in the monetization industry. Neonode is clearly very well positioned should it want to monetize its patents, to go along with its underlying business.

Neonode already has a very successful underlying business, and would be able to branch off into also licensing its IP portfolio. It is interesting, as the amount of IP related lawsuits seems to be soaring in the United States recently. Neonode could be experimenting with possibly shifting towards filing patent infringement lawsuits.