Netlist - High stakes patent litigation

Netlist is taking on giants Google and SK Hynix and finds itself with the upper hand.

THESIS

Note: This is outside our normal focus on biotech stocks. A member of another forum we are part of brought this stock to our attention. We got interested in the stock for its strong risk-reward profile. Netlist (OTC: NLST) is suing several large manufacturers of server memory products for infringement of its patents. Most notably, Google, SK Hynix, and Inphi.

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RESEARCH

This is straight from the investor portion of Netlist’s website describing the company’s mission: Netlist provides high-performance SSDs and modular memory subsystems to enterprise customers in diverse industries. The Company's NVMe SSD portfolio provides industry-leading performance offered in multiple capacities and form factors. HybriDIMM, Netlist's next-generation storage class memory product, addresses the growing need for real-time analytics in Big Data applications, in-memory databases, high-performance computing and advanced data storage solutions. Netlist also manufactures a line of specialty and legacy memory products to storage customers, appliance customers, system builders and cloud and datacenter customers. Netlist holds a portfolio of patents in the areas of server memory, hybrid memory, storage class memory, rank multiplication and load reduction.

Netlist has been in litigation with Google since 2009 over allegations that Google infringed upon Netlist’s seminal 912 patent. It is a hardware patent for processing commands in an LRDIMM memory module using rank multiplication. Google signed an NDA to take a look at it. It passed on using the technology described in the patent. Netlist alleges that Google infringed the patent by building servers using the 912 patent technology. Netlist sued Google on December 2009 in the US District Court for the Northern District of California. The judge in the case ordered a random cross section of servers to be examined which showed that Google indeed was using technology described in the 912 patent. Google then asserted that the patent was invalid. In 2010 Google requested an Inter Partes Reexamination of the 912 patent by the USPTO’s (United States Patent and Trademark Office) PTAB (Patent Trial and Appeal Board). While the reexamination was going on the Northern District Court granted a joint request made by both companies to stay the 912 patent infringement lawsuit until the USPTO made its findings. On January 2019 the PTAB upheld the validity of Netlist’s 912 patent. In April 2019 Google appealed this decision to the United States Court of Appeals for the Federal Circuit. In June 2020 the US Court of Appeals upheld the PTAB’s decision on the validity of the 912 patent. Because of the Covid-19 pandemic Google was granted a 6 month extension to decide if it wanted to appeal this decision to the United States Supreme Court. Google did not choose to appeal. On February 16, 2021 Netlist moved to lift the stay in the Northern District of California so the patent infringement lawsuit could continue. The Court granted the request and ordered that both Netlist and Google shall appear for a telephone Case Management Conference on March 11, 2021. At least 7 calendar days prior to the conference, the parties shall meet and confer and file a Joint Case Management Conference Settlement that sets forth the status of the case and proposes a schedule.

So why is the 912 patent a big deal? It is a seminal patent. A seminal patent is defined as a patent that describes an invention so impactful that it creates or shifts the technology space. Netlist believes that the teachings of the 912 patent can be found in various DDR3 and DDR4 server DIMMs (Dual Inline Memory Module) as well as future products that will be produced under the DDR5 server DIMM standards currently being established by the industry. Furthermore, Netlist asserts that the 912 patent enabled Google to build servers with high capacity and rapid memory that allowed said servers to store an entire Oracle database in memory which allowed lightning fast search results. The 912 patent played a large part in Google’s dominance in search. Right now, it is not a question whether Google infringed the 912 patent. That has already been established. Now, Google is at the stage where it can settle with Netlist or go to a jury trial to determine damages. As for the damages, Netlist will most likely use a hedonic pricing model to determine the damages. Hedonic pricing looks at both the product itself (internal factors) and the environment (external factors) in determining pricing. In this case Netlist will argue that the 912 patent established Google’s dominance in search, which allowed monopolist profits that funded Google’s entire ecosystem. While at the same time, Google’s infringement of the patent prevented Netlist from establishing itself in the server memory marketplace. Netlist will most likely seek billions in damages. Also, the prospect of treble damages is in play as Netlist will allege willful infringement on Google’s part. The most likely scenario is Google will settle the case rather than risk going in front of a jury. A settlement would include a large lump sum plus licensing of the patent going forward.

Netlist also sued Inphi for infringement of the 912 patent in the US District Court for the Central District of California. That case was also stayed pending the Court of Appeals decision, and now that the 912 patent was upheld it is expected Netlist will resume court proceedings once it is finished with the Google case.

On March 2020 Netlist filed a patent infringement lawsuit against SK Hynix in the US District Court for the Western District of Texas based on the infringement of Netlist’s 218, 523, and 595 patents in SK Hynix’s RDIMM and LRDIMM server memory products. SK Hynix petitioned the United States Court of Appeals for the Federal Circuit (“CAFC”) to change the venue from Texas to California. This petition was denied and the case will be tried in Texas. The Markman hearing was set for March 4, 2021 with Jury trial set for July 6, 2021. The Western District of Texas is notorious for being very pro-patent holder friendly. Recently, on March 2, 2021 in this very same court under the same judge that will be preceding over the Netlist case, Intel was found guilty of infringing on two of VSLI’s patents and the jury awarded $2.1B in damages.

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CONCLUSION

We don’t claim to be an expert on Netlist’s product portfolio and its prospect for success selling its products to the market. We are a shareholder for the short term prospects of major patent wins against giants such as Google, SK Hynix, Inphi (for now) and many more (in the future). We anticipate that once Netlist either settles or wins cases against these three defendants other infringers will quickly move to settle. Netlist will have established itself as a necessary licensor for pretty much any high speed server memory product, much like Qualcomm did with its patents in cellular technology.

We see Netlist becoming a very lucrative gatekeeper. The shares are still greatly underpriced at $1.50 as of March 2, 2021, but that won’t last long as the market becomes aware of Netlist and its strong position in the lawsuits it is currently engaged in. Large settlements or jury awards will quickly drive the share price up as the market cap currently is only roughly $300M. There is also a poison pill set in place at the price of $6.56 which would come into play in the event of a hostile takeover attempt. Even though Netlist finds itself in a strong legal position, remember that this is still a speculative microcap stock.

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Disclosure: I am/we are long NLST. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

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I have not received any form of compensation from the companies that I have written about in this article, nor have I received any form of compensation from company affiliates or other company shareholders.