Value Hive Podcast

Judd Arnold: TSA, US Government, and a Fund Analyst Walk Into A Bar

Fri Dec 22 2023

lawsuitpatent infringementgovernment incompetencesettlement attemptsCOVID impact

Description

This episode discusses a lawsuit against the United States government involving court documents, patent infringements, venture capital, and the TSA. The story revolves around an investment in Security Point Holdings or Security Point Media, which had a patent for airport security bins with advertising. The host shares personal experiences as a young hedge fund manager receiving investment ideas from others. The government's handling of the case is criticized, and there are insights into settlement attempts and the impact of COVID on the lawsuit.

Insights

The government's incompetence and strategic blunders

The government made strategic blunders by fighting against Security Point's attorney's fees claim. There is a law that allows for attorney's fees if litigation against the government takes more than 10 years or is deemed unjustified.

The plaintiff's victory in the trial

Despite rejecting settlement offers, the plaintiff ultimately won the trial in 2016. The ruling in this case was unusually long at 37 pages and ranked among the top percentile for length of decisions in the court of federal claims.

The government's incompetence and lack of convincing evidence

The government failed to meet its burden of providing convincing evidence against the patent. The judge strongly favors the plaintiff, stating that there were unexpected results from their patented method and widespread failures by others to find a solution before using it.

The impact of COVID on the lawsuit and government's behavior

The speaker discusses the impact of COVID on a lawsuit and expresses disgust at the strident actions of Gary Haskin during the damages trial. The judge throws out all 74 pages of the damages ruling due to the lack of development or use of any alternative system in the 16 years following 9/11.

Settlement attempts and government's behavior

There have been attempts to settle the lawsuit, with offers ranging from $10 million to $100 million. The government countersued with a settlement offer of only $10 million, which made no sense given the previous negotiations.

Criticism of government's handling and conclusion

The speaker criticizes the government's handling of a legal case and expresses disgust at their behavior. They question why the government did not settle the case and speculate that it may be due to an unlimited budget or a desire to avoid showing a loss.

Chapters

Teagas, MIT Investment Management Company, and Marhelm Data
The Lawsuit Against the United States Government
Legal Battle and Valuation of Security Point Holdings
The Trial and Ruling in Favor of Security Point Holdings
Government Incompetence and Plaintiff's Victory
Patent Validity and Settlement Attempts
The Impact of COVID and Government's Handling of the Case
Settlement Attempts and Government's Behavior
Criticism of Government's Handling and Conclusion

Summary

Transcript

Teagas, MIT Investment Management Company, and Marhelm Data

00:01 - 06:53

Teagas offers expert interviews on public and private companies.
MIT Investment Management Company invests with emerging managers and created emergingmanagers.org for stock pickers.
Marhelm Data is an information service for investors focused on shipping and commodities.

The Lawsuit Against the United States Government

06:24 - 13:42

The lawsuit involves court documents, patent infringements, venture capital, and the TSA.
The story is based on the host's memory and may not be entirely accurate.
The host shares his personal experience as a young hedge fund manager receiving investment ideas from others.
The story revolves around an investment in Security Point Holdings or Security Point Media, which had a patent for airport security bins with advertising.

Legal Battle and Valuation of Security Point Holdings

13:13 - 19:59

A business developed a system of bins and push carts for airport security with the intention of making money through advertising.
The founder came up with the idea after September 11th.
The TSA ran into legal issues regarding intellectual property rights.
Security Point sued the TSA, leading to a legal battle that reached the DC Circuit Court of Appeals.
The initial valuation of the business was based on the bins and lawsuit, with hopes for outdoor advertising revenue.
As the lawsuit progressed, it became a significant factor in determining the investment's success.
The government made strategic blunders by fighting against Security Point's attorney's fees claim.
There is a law that allows for attorney's fees if litigation against the government takes more than 10 years or is deemed unjustified.

The Trial and Ruling in Favor of Security Point Holdings

19:33 - 26:49

The trial focused on the concept of obviousness in patent law.
The government faced a challenge because they had contracted the plaintiff's company to develop a product but then decided to steal their plans instead.
The plaintiff was able to knock out all of the government's expert witnesses before the trial, leaving them with only one expert.
The case transitioned from one attorney to another, with the new attorney seeming uninterested in settling and prioritizing his own career advancement.
The fact that the government continued to infringe on the plaintiff's patent during the litigation added significant value to the case.
Despite rejecting settlement offers, the plaintiff ultimately won the trial in 2016.
The ruling in this case was unusually long at 37 pages and ranked among the top percentile for length of decisions in the court of federal claims.

Government Incompetence and Plaintiff's Victory

26:25 - 34:10

The defendant argued that the burden of proof should be increased for the challenger because the patent had been upheld by the Patent and Trade Office.
The government failed to meet its burden of providing convincing evidence against the patent.
During the trial, the government's expert was unable to explain why they didn't recommend the solution proposed in the patent, despite their expertise in security.
The incompetence of the government's handling of the case is highlighted, with their expert giving away crucial points.
The judge strongly favors the plaintiff, stating that there were unexpected results from their patented method and widespread failures by others to find a solution before using it.
The slow pace of litigation is mentioned, with a ruling coming a year after trial and infringement occurring for over 10 years.
The lack of testimony regarding reasons to use tracing cards and objective indicators of novelty led to the conclusion that the defendant failed to prove obviousness.
Overall, it is described as a complete win for the plaintiff.

Patent Validity and Settlement Attempts

33:40 - 40:40

The patent in question is simple and uses common implements.
Courts must be cautious of hindsight bias when evaluating the validity of patents.
The defendant failed to provide testimony explaining why tracing cards were used in the patented matter, which, combined with other indicators of novelty, led to the conclusion that the patent was not obvious at its priority date.
There have been attempts to settle the lawsuit, with offers ranging from $10 million to $100 million.
Efforts were made to settle during different presidential administrations, including hoping that blaming Obama would lead to a settlement under Trump's administration.
Gary, a key figure in this case, was confident about winning but put his bosses in a difficult position due to potential leaks and negative publicity.
The inventor of the patented technology is sympathetic as his business was allegedly stolen by the US government and he had to seek outside funding for legal battles.
A damages trial is upcoming, requiring additional fundraising efforts through preferred or view for capital type raises.
Shepherd Mullen law firm has done an impressive job representing one side of this case while Gary has been deemed incompetent by some.

The Impact of COVID and Government's Handling of the Case

40:19 - 48:07

The speaker discusses the impact of COVID on a lawsuit and their surprise at the strident actions of Gary Haskin during the damages trial.
A 77-page document from October 22nd, 2021 highlights various aspects of the patent damages trial, including the discussion of a non-patentable alternative and its inadequacies.
The judge throws out all 74 pages of the damages ruling due to the lack of development or use of any alternative system in the 16 years following 9/11.
There was a small procedural ruling in 2018 or 2019 where the judge seemed to question his understanding of the case and faced pressure from colleagues.
The damages trial escalates from an initial settlement offer of $30 million to a $900 million mark, with delay damages totaling around $200 million.
The speaker mentions that there is no incentive for the government to file cost-effectively due to their unlimited budget but expects some level of competence.
The patent's coverage includes security zones using plastic materials, while arguments arise over technicalities like pivot steps and extrapolation of study results across all years of the patent.
The judge simplifies evaluation by considering patent use based on the number of passengers going through security (unit economics).
Despite efforts by TSA to design around the plaintiff's method, it has been widely adopted across the country, while spotty use and late developments characterize alternatives.

Settlement Attempts and Government's Behavior

47:41 - 55:25

The alternative to the current pattern was not attractive enough to dissuade the TSA negotiators from considering paying for it.
A reasonable royalty rate of two cents per passenger was determined, which would amount to approximately $100 million.
There was a chance to settle the case for $200 million before the damages trial, but it was declined in anticipation of more findings of fact during the trial.
The government countersued with a settlement offer of only $10 million, which made no sense given the previous negotiations.
The main lawsuit focused on tier category one airports, while smaller airports had about $20 million in dispute.
The government requested a four-year discovery process that would cost them $15 million due to ongoing infringement and delayed damages.
The judge expressed frustration with the government's actions and called them ridiculous and stupid.
Insurance companies and hedge funds got involved to ensure and lend money against the verdict, resulting in a significant amount of money at risk.
Despite having insurance coverage, the government questioned its validity and seemed unwilling to accept responsibility or settle quickly at a lower price.
The inventor has been greatly affected by this lengthy legal process, while lawyers and financiers have profited.

Criticism of Government's Handling and Conclusion

55:01 - 1:01:48

The speaker criticizes the government's handling of a legal case and expresses disgust at their behavior.
They question why the government did not settle the case and speculate that it may be due to an unlimited budget or a desire to avoid showing a loss.
The speaker suggests that those in positions of power within the government may not be the most competent individuals, as many talented people have left for private practice.
They anticipate that once the case is over, they will reach out to someone named Gary with their achievements and possessions as a way of highlighting how poorly he handled the situation.
The speaker finds the story interesting because it combines legal litigation with an inventor who created something unique but was initially dismissed by others.
They mention reading a 37-page document that confirmed the invention's non-obviousness and felt confident about winning the case.
The speaker compares Gary's attitude to that of George from Seinfeld, emphasizing his determination to win on appeal despite evidence against him.
They discuss various off-market deals and opportunities available to people, including creating insurance products and finding ways to cash out during legal processes.
The speaker reflects on their own excitement about selling and acknowledges that investing in ETFs would have been more profitable than pursuing this particular story.
They express gratitude towards Judd for participating in this podcast episode, which is expected to contribute significantly to reaching one million total downloads.
There is mention of someone named Maya being present, who is younger and may no longer be able to attend Harvard due to the lawsuit's duration.
The speaker wishes everyone happy holidays and hopes for a successful year ahead.