Archive for July 21st, 2008

Law.com has an interesting article today by Zusha Elinson of California legal journal The Recorder entitled “Patents: The New Class Action Frontier?”  The article discusses a recent settlement in a securities fraud case against Magma Design Automation.  The fraud case arose out of a declaration signed by its chief scientist in connection with an earlier patent dispute that he had developed the patents while still employed by a competitor, Synopsis, Inc.  The plaintiffs in the securities fraud case alleged that the company concealed the facts regarding the orgins of the patents, causing them injury when the stock price dropped.  According to the article, the dip in stock price did not occur Magma’s settlement of the patent case, but rather in response to an earlier, highly publicized analyst’s report of the inculpatory declaration.

Although the title of the Law.com article suggests a possible trend in securities fraud cases flowing from patent disputes, the securities fraud case brought against Magma was in large part a result of its unusual facts.  As the article notes, that the fact that patents are secured by public filings makes it very difficult in most cases for shareholders to argue that facts relating to the validity of patents were concealed.  On the other hand, the Magma case involved the alleged concealment of disputed facts that would not be reflected in the public patent filings.  So, a trend in class actions based on alleged failures to disclose “risks” relating to the validity of a companies patents is not out of the question simply because patents involve public records.  For a company facing litigation over the validity of a patent, the possibility of a securities fraud class action relating to the alleged facts underlying the patent dispute will at least have to be considered as a possibility.

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