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Litigation is expensive. Office supplies, stenographers, secretaries, legal assistants, and attorneys all are costly. However, there are often trade-offs when implementing cost-cutting efforts, and foresight is necessary to predict and weigh them. Vringo (NASDAQ:VRNG) is a new Non-Practicing Entity ("NPE") that seeks profitability through asserting and licensing patents that other businesses utilize. While its methods for selecting counsel are not completely opaque, it appears that the company's Head of Litigation, Licensing, and Intellectual Property, David Cohen has critical input. As it may be years before an appreciable percentage of prospective licensees are willing to settle without litigating, the quality of hired legal help should be focal.

However, Vringo's Executive Vice President, Cliff Weinstein has previously stated: "We structure our agreements with our service providers with a blend of caps and contingencies and keep the interests aligned." Chief Operating Officer Alexander Berger adds, "If we are not really interested in lawyer financing, we are able to get it cheaper elsewhere." On page 5 of Vringo's most recent conference call, for its Third Quarter of 2012, an analyst asks a question regarding Powell Gilbert LLP, the firm selected for its newest patent assertion against ZTE Corporation (OTCPK:ZTCOF), in England. Chief Executive Officer Andrew Perlman provides additional insight into its selection processes with his reply:

Powell Gilbert is a specialty IP regulation firm. Most importantly they are after the long relationship there with David Cohen and...are a trusted partner of his and...were very, very key to the win that Nokia had against Apple, which was one of the things as I mentioned earlier David managed...

Many NPE followers quickly point to the costs of asserting patents. A most glaring expense is typically attorneys' fees. If evaluators, and management, can take at least one full step back they should quickly realize that excellence also needs emphasis. An exceptionally high skill level is required for litigation, which typically involves matters of elevated importance.

Unfortunately for VRNG, an incipient product of a merger that has yet to demonstrate profitability, it has recently lost hundreds of millions of dollars in claimed damages when its counsel failed to offer rebuttal evidence showing that the defendants concealed their infringement during several years preceding trial. Its biggest opponent for the case, Google, has an established tactic of not settling patent claims, and has declared its belief in ultimate triumph against VRNG. Mainstream press coverage of the verdict would have amounted to settlement leverage; however, the damage figures that could have reasonably been placed in headlines have fallen from over $1 billion to $600 million.

Similar issues continuously occur. Acacia Research Corporation (NASDAQ:ACTG), a bigger and more established NPE, has recently had an entire claim dismissed because its subsidiary failed to show unified ownership of a patent used as a basis for a suit. Information about their representation is available here.

No one at VRNG is vocal about Nokia's $2.3 billion settlement agreement with Qualcomm (NASDAQ:QCOM), in October, 2008, that resulted from three years of litigation and was executed under Cohen's leadership. The lawyer who has filed the complaint against ZTE is Ari Laakkonen, and a biographical snippet shows his role as in house counsel for Nokia from 2003 and through 2007. This seems to put any onus for blame more squarely on Laakkonen's shoulders than Cohen's, because the Vringo executive's history as senior litigation counsel at Nokia only begins a year and a half before settlement (April 2007), and does not overlap the infringement and litigation that led up to it. In fact, there actually are some positives attributed to the settlement for Nokia. An objective and reputable resource that describes Mr. Laakkonen as a highly capable attorney would be helpful, but is unavailable. Powell Gilbert LLP as a firm however lists multiple awards on its web site.

The ZTE action also involves a lawsuit in Mannheim, Germany. Generally speaking, a settlement agreement affords all sides in a dispute advantages if it can be reached. While Vringo's favored strategies are privileged information, it makes sense that court cases held in multiple nations increase its overall ability to induce settling. Notably, Mannheim is listed as the best place in the world to sue for patent infringement. If acceptable terms are reached, claims needing defense in different jurisdictions would be a thing of the past for ZTE.

Yet, an even better scenario for Vringo is no litigation. As Acacia CEO Paul Ryan has said, licensing without litigation "Creates great margins and it's great [for the] bottom line." For reference, ACTG defines average margin as "Gross license fees less investor royalties and contingent legal fees for the portfolios generating revenues."

If Vringo cannot reach a settlement, it has little choice but to go to trial in Germany, where its in-house personnel evinces no competencies with the language, laws, or nuances of patent assertion. This situation would be increasingly probable if Acacia's past experience is predictive. During its Q4 2011 Conference Call, ACTG CFO Clayton Haynes shares that in 2009 "We virtually had zero settlements that were without litigation and we saw about 20% of the revenues in 2010 and about approximately 25% of the revenues in 2011." Litigation reduces margins by about 20%.

Questionable abilities have already cost Vringo a large portion of revenue; and arguably, other significant settlement leverage. Still, there has been lacking indication that management emphasizes high standards when selecting legal counsel. The fact that the smallish company is now taking on the added jeopardy to complain in foreign lands increases urgency. Vringo would better demonstrate its fiduciary relationship to shareholders by hiring litigators who are consistently and objectively recognized by peers as meriting favorable superlatives in their field, rather than saving Euros in other arrangements.

Trying to license ZTE in Europe elevates risk for Vringo investors. Having yet to show a profit, stakes are especially high for the NPE. If a fledgling corporation wants to be the best at asserting patents, it should not cut corners in choosing its highly skilled, expert help. Anything else is a reason to sell the stock.

Source: Vringo: Where Are The Top-Notch Litigators?