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  • Patent Troll Investors Beware

    On May 19, 2015 Legal News Line reported that Global Tel*Link (GTL) filed 10 petitions at the Patent Trial and Appeals Board (PTAB) against Dallas-based Securus Technologies Inc. (STI).  According to the report, the filing included “seven inter partes reviews, two post-grant reviews and one covered business method review challenging nine additional Securus Technologies Inc. patents and 209 additional patent claims.”

    This isn’t the first time GTL and Securus have come to blows.  Last year, GTL challenged 8 Securus patents, and the above referenced article concludes that “the PTAB already has found that there is “reasonable likelihood” that GTL will prevail in proving all of the 146 claims in those patents are invalid”  in the current filing.  Yowza.

    K Street Eyes (KSE) found this dispute interesting for a couple of reasons:

    • Congress is actively looking to pass the so-called PATENT Act in the near future that would make it easier for impacted companies to fight back — and potentially collect back court fees (et. al) — from companies that have incorporated this practice into their business model.  Given that the current Chairmen of both the House and Senate Judiciary Committees support the legislation there is a better than average chance of this legislation becoming law in 2015 ( US News did a good report on the subject here); and

    • Prison and criminal justice reform and the costs associated with it have come under the microscope nationally.  It’s being discussed in the newspapers, town halls, think tanks, both houses of Congress and even on the 2016 Presidential trail.  This has been especially true in jurisdictions that have seen police and sheriff offices act more like tax collectors than law enforcement agencies. The scrutiny of the Ferguson Police Department is, perhaps, one of the most notable recent examples.

    The question remains, what does this mean for companies like Securus that service the prison industries and for the markets interested in this space.  First, it’s important to highlight that many of these businesses are not publicly traded, so day-trading may not be an option for investors.  However, many of these smaller companies are heavily invested in by the PE industry (like Securus) and frequently require cash infusions from the Street, i.e. “you.”  That’s what caught KSE’s attention regarding Securus in the first place.  Going to the market for additional funds is just another form of investment in a business line that is highly regulated, reliant on a shrinking budget environment at the federal and state levels, and is closely watched hot button in the courts, affected families and more specifically, the U.S. Congress.

    KSE has no idea what the value of these patents are to Securus, nor how much of their business model is dependent on them.  However, a simple Google Search shows Securus is sue-happy (Red Flag #1), and, if proven a patent troll, clearly the type of entity Congress loathes and is hoping tighten the reigns on with the PATENT Act (Red Flag #2).  While KSE is not entirely sure about the current status, STI appears to have tussled frequently with the FCC regarding over-billing (Red Flag #3).  Interestingly enough, again found with a simple Google Search, Securus is currently seeking additional debt resources from the Street (Red Flag #4).  In a document filed in April of 2015 (according to the Google Search) with the New York Public Service Commission by Securus’ VP, General Counsel & Secretary, Dennis Reinhold, Securus is seeking $205/mln in new debt instruments.  Bringing their total debt load up to $845/mln.  From the NYPSC filing:

    “Petitioner now seeks authority to permit STl to enter into an amendment to said previously deemed-approved financing arrangements, which would increase the aggregate principal amount thereof from $640.0 million to up to $845.0 million, and to issue long term debt instruments up to the newly authorized amount.”

    How big is STI?  What is their debt vs. EBITDA?  What happens to their earnings if the PTAB slaps them hard?  What happens if they get caught up in the aggressive push for strong patent reform in Congress, which we understand will move this session of Congress on a bipartisan basis?  How many lawsuits is STI involved in currently?  What happens if the FCC once again takes a dim view to the industry’s billing practices and holds rates constant over a longer period of time or even lowers them on companies like STI?  Would you invest more money into a company that has just recently been accused of being a patent troll with anecdotal evidence leaning on the side of them losing at the PTAB and a business practice that Congress has a keen eye on stamping out?  At a minimum, KSE is pretty certain the more activity by Congress, press stories talking about over-billing, patent trolling and lawsuits will undoubtedly also catch the attention of state procurement officers who may become leery of the press attention STI and others are drawing to themselves over a multitude of issues.

    Ultimately, given the intense focus on the industry from a political-macro perspective, the cost of investing in a company like Securus should not come cheaply because the road ahead looks very bumpy for them — even if they are doing nothing wrong — as competitors call their bluff, prison industry budgets tighten and Congress looks to make the patent resolution process more effective and costly to those who abuse the system. Which is good for everyone, but mostly for the U.S. taxpayers.


    K Street Eyes

    K Street Eyes

    K Street Eyes is an expert in all things shady and humorous.

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