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Neonode: The lawsuit is alive – with better chances than ever
RESEARCH NOTE
2024-08-28
15:12
Redeye estimates an 85% probability of the Neonode side settling against Samsung in mid-2025, which would give an estimated USD31 per share to Neonode. Further down the road comes Apple, which is more likely to go all the way to trial. A settlement against Samsung would, however, add pressure on Apple (and Google). Redeye estimates that winning in court against Apple can give as much as USD121 per share to Neonode. Redeye thinks chances against Apple are slimmer than against Samsung, and estimates a 20% chance of the Neonode side winning in court against Apple. After that, there is more to chase from not only Google, but likely all smartphone OEMs. Redeye raises its fair value range.
Jesper Von Koch
Last week's ruling about a reversed decision from last year’s Markman hearing was a major victory for Neonode (through its partner Aequitas). While we immediately increased our Base Case from USD4 to USD7 on our first snap-shot impression, we believe we significantly underestimated the full impact of the decision. While we knew that this was likely the case, we did not want to draw too big conclusions too fast. As such, we will go through everything we know in detail in this update.
Let's refresh our memory of where we are
First, let's sum up where we are in the lawsuit:
Aequitas and Neonode signed an agreement in 2019 to let over Neonode's patents to Aequitas. In turn, Neonode would get 50% of the net proceeds that Aequitas would eventually obtain from the patents.
In June 2020, Aequitas sued Apple and Samsung in two separate lawsuits for infringing on Neonode's slide-to-unlock patent (through patents '993 and '879).
Apple and Samsung both requested that IPR processes be held for both patents - testing the validity of each patent. Even as it had not been sued (yet), Google also requested a similar IPR.
While patent '993 did not survive the IPRs, patent '879 survived all. It is typically much easier to win or settle a lawsuit after having survived IPR than it is to survive the IPR itself. As such, the chances of a successful outcome in the lawsuit increased significantly.
After the Markman hearing in July 2023, it was ruled that patent '879 was invalid - despite having survived several IPR processes. The decision was appealed against by the Neonode side.
Last week, on appeal, the Federal Circuit disagreed with the district court's conclusion, thus reversing the decision from the Markman hearing. The decision means that the lawsuits against both Samsung and Apple can proceed.
The typical time from the Markman hearing to trial is 9-13 months, i.e., to the jury trial against Samsung in this case. We believe the countdown for this should start any day from now.
What speaks for and against Neonode against Samsung and Apple - and what about treble damage?
Considering that Google accounts for a very small share of the total volume, we only give our view on Samsung and Apple. As a reminder, if a company knowingly infringes on a patent, 'wilful infringement' is decided, which means 'treble damage', i.e., 3x the initial value.
Below are some important points that we weigh in each lawsuit.
Samsung - Very strong chances, treble damage very likely - we believe in a settlement before next summer
License agreement from 2005 for patent 879: EUR2/unit
Neonode AB went into bankruptcy in 2008. Samsung then stopped paying royalties to Neonode, despite the patent was still owned by Neonode Inc.
Samsung went into a license agreement with Google in 2011 for the swipe function, i.e., Samsung licensed Neonode's patent
Samsung was sued by Apple in 2012, and in its defense, it referred to Neonode and patent '879.
We believe the first point, combined with the second, would be enough to prove willful infringement. The other two just confirm this.
Last, the trial against Samsung will be conducted through a jury trial in Texas. This court is known for favoring "inventors" rather than "big tech" (especially foreign companies). Considering a rather widespread protectionism against Asian companies in the US, perhaps especially in conservative states like Texas, we believe this is a big disadvantage for Samsung. We conclude that Samsung is likely very pressured, and we think it is likely that Samsung will try to reach a settlement before or during next summer.
Apple - Slimmer chances due to California trial, but logic speaks for Neonode
There have been alleged discussions between Apple and Neonode since 2005, i.e., at around the same time Neonode struck its license agreement with Samsung. Apple, however, decided to play hard and started producing its iPhone without any license agreement with Neonode.
Motorola (then owned by Google) sued Apple in 2012. In its defense, Apple brought up Neonode’s patent '879 and two representatives from Neonode (Joseph Shain and Thomas Eriksson). Hence, Apple was well aware of the infringing of Neonode’s patent.
In 2013, Apple applied for its own slide/swipe patent. This patent application was, however, denied with reference made to patent '879. I.e., the decision implied that patent '879 already covered everything that Apple aimed for with its patent.
In 2017 or 2018, Apple and Neonode discussed a transaction of Neonode's patents. Apple initially showed interest but eventually decided to decline after six months.
From these four points, we deem it likely that Apple has committed wilful infringement, i.e., would have to pay treble damage.
However, Apple's trial will be located in California, which is known to favor 'big tech' rather than inventors like in Texas. One reason why may be that Apple and other 'big tech' account for almost all patent lawsuits in California, which means that Apple indirectly finances the whole court system in California. This surely creates a bias, meaning that 'big tech' is favored rather than inventors. This definitely reduces Neonode's chances of either winning or settling against Apple. Apple is also known for going all the way to court, i.e., not settling.
Big sums at play
The sum that Neonode will get is determined by the following parameters:
Volume: Number of units sold infringing the patent
Price: the value per infringing unit that should be paid
Treble damage or not: knowingly infringing 3x the total value
Neonode's share of the profit: after lawyer costs and profit sharing
Naturally, our valuation range will also be determined by the probabilities that we set on the various outcomes.
Volume: The patent covers units sold in the between 2014-2025 - Globally for Apple but likely/possibly only the USA for Samsung
Lawsuit covers units sold between June 2014 and December 2025
The lawsuit can only claim damages from units produced up to 6 years back from a lawsuit in June’20, i.e., start date of the concerned products is June 2014.
Generally, a patent lasts 20 years from its invention date. However, if the application takes a long time, the patent time can be extended, which was made for patent '879, which was extended by c3 years.
Patent '879's official invention date is December 10th, 2002. This date counts as the starting date. This makes patent '879 valid until December 10th, 2025. The total time available for a lawsuit is thus 11.5 years, starting in June’14 and ending in December ’25.
Phones, tablets and likely smartwatches
The interface for products involved includes devices with the Home Bar or Control Bar, iOS 13 or later, as well as iOS 8 or later having a third-party keyboard function including the swipe function. This definitely includes smartphones and tablets, but likely also smartwatches.
Global volumes for Apple - uncertain if global or only USA for Samsung
Typically, the products included in a lawsuit with US-based patents are 'products made in, used in, sold to, offered for sale in, and imported to the USA'. We believe this is practically the same as products sold in the USA.
However, there is an exception that would include infringement on global volumes and not just the volumes sold in the country in which the patent is valid. This exception is applicable if the software that infringes the patent is developed in the USA then internally transferred, and then sold internationally (for US patents).
Considering Apple's software development department is in the US, Neonode (through Aequitas) could sue Apple for its global sales. This could also impact an eventual lawsuit against Alphabet, as its operating system, Android, is sold globally.
Most Samsung phones also run on Android, implying that Samsung could also be included in this exception on global volumes. However, Android is developed by Google/Alphabet, implying that it is not Samsung's own development of the software that occurs in the USA. As such, we are uncertain whether Samsung's included volumes will be global or only for the USA. For now, we choose to be conservative and only include USA volumes for Samsung, but global volumes for Apple.
700m units for Samsung, and 2,500m units for Apple
The total number of sold units between 2014-2024 for Samsung, Apple, and Google for the respective categories in the USA are as follows:
Source: Statista, Counterpoint Research, IDC, Gartner, Canalys
Global volumes per product category and company are almost 3x compared to USA only, see below:
Source: Statista, IDC, Gartner, and Counterpoint Research
As stated, we apply USA volumes for Samsung and global volumes for Apple. Note that the above figures are only for 2014-2024, i.e., they do not include 2025. Adding c10% to the volume, we arrive at 700m units for Samsung and 2,500m units for Apple.
Price per unit: €2/unit from the license agreement sets the bar
The license agreement with Samsung shows that Samsung agreed to pay Neonode EUR2 per unit, equal to USD2.4 per unit at the time and USD2.2 to today’s exchange rate.
Price pressure on smartphone components weighs down, but inflation could weigh up price per unit
Ever since the first smartphones were commercialized, there has been price pressure on the ingoing components. This argues for the EUR2 in 2005 being worth less today. However, whereas this is true for unpatented and replaceable hardware components, it might not be the case for patented solution that include a combination of hardware and software.
Also, as the pricing of components is often set as a share of the selling price, and the prices of smartphones have risen since 2005. This should act as a cushion for holding up the value per unit.
The Neonode side argues that the baseline should be EUR2.0 and then adjust for inflation. However, we think the development of the price of smartphone components is more accurate than general inflation as a whole.
Treble damage 3x the value per unit
By law, it is considered much worse for a company to infringe on a patent knowingly, i.e., if the infringer knew about the existing patent and yet infringed on it. This is called ‘willful infringement’ and results in so-called “treble damages.”
Treble damages have the potential to triple the sum involved. For example, if a company sues another for infringing on 1bn units with a royalty fee per unit of USD2, the lawsuit asks for USD2bn. Then, if the judge or jury rules that it was a willful infringement, the total claim increases to up to 3x the initial sum, thus up to USD6 bn.
As stated, we believe Samsung will be dealt treble damage. While the case is not as clear for Apple, we still believe the evidence to be good enough to prove it.
We estimate USD7.2 for phones, USD4.8 for tablets, and USD4.0 for smartwatches for Samsung - and one third for Apple
Samsung
For Samsung, we choose to use EUR2 per unit as our baseline. We think this is logical and also something that a Jury would be likely to do. Considering that the value per unit is often set as a share of the total price of the item that infringes, different values should be set for the various product types. A smartphone was the product that was thought of in the license agreement, considering that neither tablets nor smartwatches existed at the time.
According to Statista, IDC, and Gartner, the midpoint of Samsung’s mid-range smartphones is USD450, compared to USD300 for tablets and USD250 for smartwatches. As such, we use EUR2 per smartphone as a baseline, EUR1.33 for tablets and EUR1.11.
We also believe it to be reasonable to use the USD/EUR exchange rate of 2005, which was USD1.2/EUR1. Our applied baseline value then becomes USD2.4 for smartphones, USD1.6 for tablets, and USD1.3 for smartwatches.
Applying a full 3x treble damage to the Samsung, the value becomes USD7.2 for smartphones, USD4.8 for tablets, and USD4.0 for smartwatches.
Apple
There is no license agreement for Apple that supports a certain price point. We believe this weighs heavy, and we thus apply a 67% discount compared to Samsung's prices. Regarding treble damage, we believe the chances are good, though not as good as against Samsung. We still think the evidence weighs heavy enough and choose to apply treble damage.
Applying a 1/3 of the baseline value of Samsung, as well as treble damage, the value becomes USD2.4 for smartphones, USD1.6 for tablets, and USD1.3 for smartwatches.
Neonode will get an estimated 34% of gross proceeds after all costs and tax
In 2019, patent specialist Aequitas signed an agreement with Neonode to overtake Neonode's patents '879 and '993. The agreement implied that Aequitas would try to monetize the patents in any way and that Neonode would get 50% of the 'net proceeds'.
'Net proceeds' is 'gross proceeds' less costs associated with the lawsuit, i.e., costs for lawyers. Gross proceeds are the eventual sum obtained if winning or settling any of the lawsuits. We assume the law firm will take 15% of gross proceeds, leaving 85% to share between Aequitas and Neonode, i.e., 42.5% each. After deducting a 21% tax on net income, Neonode gets 33.6% of gross proceeds.
Samsung settlement worth USD31/share - win against Apple worth USD121/share
Putting everything together, we arrive at the following value of the various outcomes:
Source: Redeye research
We assume gross proceeds for Samsung will be USD4.7bn and USD5.6bn for Apple if the Neonode side wins in court. A settlement with Samsung, which we think is highly likely, at 30% of the total value, would give Neonode USD500m (or USD31 per share) after tax. We also estimate that winning in court against Apple would give Neonode USD1.9bn after all costs and taxes, equivalent to USD121 per share.
This total estimated gross proceeds of USD10bn should be compared to the conversation between Neonode founder Magnus Görtz and Philip Graves from Aequitas' law firm HBSS - which pointed at a total value of USD50bn. See below:
Source: Stockholm Tingsrätt
What about Neonode's chances of settling or winning the lawsuits?
Statistics say that 95-97% of all lawsuits that come this far are settled
According to "IP Litigation in the US" from 2016 by Wilson Sonsini Goodrich & Rosati, 95-97% of all cases that have passed the Markman hearing are settled. See below for a screenshot of page 34.
Source:
IP Litigation in the US, WSGR
According to Williams Mullen, citing PWC Patent Litigation Study from 2017, the trial success rates of patent holders are 52% with bench trials and 74% with juries. Considering that this is a jury trial, the statistical probability of either settling or winning the lawsuit against Samsung is 98.7% (95% + (1 - 95%) * 74%).
The same source indicates c80% probability of settlement
The same study also shows this table:
Source:
IP Litigation in the US, WSGR
This says 69% of cases reach settlement. It also states that 8.3% are dismissed after claim construction (IPR). Of the remaining 91.7%, the 69% settlement rate makes up 75%. However, this is before Markman hearing, which should add a few percentage points.
Considering that we are not certain of why the first picture should 'win' over the second one, we choose to apply an 85% probability of Neonode reaching a settlement against Samsung.
What happens now?
Now, a seven-month-long 'discovery' phase against Samsung will begin—just awaiting the judge's order. In this phase, lawyers will go through old documents, e-mails, etc., that would prove Samsung's guilt of infringing on Neonode's patent. After that, when Samsung's lawyers know what they are up against, we believe they will try to reach a settlement with Neonode. We believe a settlement could come sometime during Q2 next year. If Samsung does not settle, a jury trial is likely sometime around August or September next year.
For Apple, we are still unsure of whether a separate Markman hearing will take place or not. If so, we are unsure of what possible angle Apple may take as all angles to attack patent '879 have likely already been tried. Anyway, we expect the Apple lawsuit to be lagging that of Samsung by around six months.
Raising fair value range
Samsung worth USD20 per share today
In our new Base Case, we assume an 85% probability of the Neonode side reaching a settlement with Samsung. We also assume a settlement would happen at 30% of the gross proceeds (USD4.7bn), implying proceeds of almost USD500m (USD31 per share) to Neonode after all costs and tax. Applying a probability of 85%, a payout in c1.5 years out, and an annual required rate of return of 20%, this gives us a value today of almost USD20.
Apple worth USD17 per share today
In our new Base Case, we assume a 20% probability of the Neonode side winning in court against Apple. We estimate that a win against Apple would give gross proceeds of USD5.6bn, and almost USD1.9bn (USD121 per share) to Neonode after all costs and tax. Applying a 20% probability, a payout c2 years out, and a required rate of return of 20% per year gives us a value today of almost USD17.
New Base Case at USD37 per share - Bull Case at USD109
Adding the value of Samsung and Apple, we reach our new Base Case of USD37 per share.
For our Bull Case, we estimate settling at 30% of the total value against Samsung and winning in court against Apple. This gives a combined value of USD109 per share.
