In a previous article, I wrote that the verdict in Vringo (VRNG) vs. Google (GOOG) represented a very significant and one-sided victory for Vringo, on every single issue put to the jury, and with respect to the jury's decision that Vringo is entitled to an award of a 3.5% running royalty. Yesterday, fellow Seeking Alpha Contributor Dan Ravicher published an interesting read opining that not only the jury verdict, but also the issue of future royalties, are "on shaky ground." I would like to respond.
1. Vringo Prevailed On The Running Royalty Issue.
As has been pointed out on multiple occasions by multiple writers, Vringo won a very significant victory when it prevailed on the running royalty issue. Before the verdict was announced, I wrote here that the issue of obtaining a running royalty was probably the biggest damages issue in the case. And while Dan Ravicher grudgingly concedes that "Google does realize that it's possible that the Judge will award an ongoing royalty," I believe this hugely understates the reality.
Suggesting that it's merely "possible" that a running royalty will be awarded is disingenuous. The jury found that Vringo is entitled to a running royalty, and the Court entered judgment specifically incorporating that determination. The train has left the station on that issue.
2. Vringo Will Likely Prevail On The Royalty Base.
Dan Ravicher's central thesis is that the royalty base will be small because he believes the foward royalties must be proportionate to the jury's past damages award. While this argument has some surficial attraction, it is unsound.
This is because little of significance can be gleaned from the past damages award. Viewing the damages awards to the various defendants, one could conclude that the jury used a very low royalty base, a very low multiplier, or a very generous royalty base with an extremely small multiplier, and so on in countless combinations and iterations. Or one could conclude that the jury was simply confused. The point is, while they reached a verdict, no reliable conclusions concerning royalty base can be made from the jury award, and it is speculative to try to do so. We just don't know what they did, or how they reached the numbers they reached.
Fortunately, Judge Jackson is not tasked with reverse engineering the jury verdict to try to extrapolate the royalty base they used, and then replicating it. Judge Jackson's task is to determine a fair and appropriate royalty base that is supported by the evidence. I presume that Judge Jackson will do what judges do, which is examine the evidence in the record to determine the appropriate royalty base. And here is where the rubber meets the road. The only significant evidence in the record on the issue of royalty base came from Dr. Becker, who opined that Google's revenues increased by 20% after the infringing SmartAds system was launched.
Google's damages expert did not offer any competing opinion as to royalty base, presumably because Google elected to put all its eggs in the lump sum royalty basket, and therefore declined to address the issue directly.
Unlike the jury, Judge Jackson's findings concerning the royalty base must have specific support in the record. And the only evidence in the record is Dr. Becker's testimony regarding the royalty base. Because of Google's strategic trial decision not to offer a competing number, I believe that the most likely outcome on the royalty base issue is that the running royalty will be based upon 20% of Google's U.S. ad revenues. It would be virtually impossible for Google to successfully challenge such a finding on appeal, and in fact, that is the only royalty base figure that is absolutely supported by the trial record.
3. The Verdict Is, Unfortunately, Awfully Safe.
Dan Ravicher argues that the verdict will be revised downward, and that Google's motion for a downward revision will be "granted, at least in part, if not in full." One small detail worth noting here is that Google has not yet filed such a motion, so none of us, including Dan Ravicher, has yet had an opportunity to read it (ahem).
While we are on the subject though, Dan Ravicher isn't the only one out there who is eagerly anticipating that the verdict will be revised. There are plenty of longs out there who believe that the jury made a calculation mistake, which is sure to be revised upward. I have argued that the most likely outcome is that the jury verdict will be left undisturbed, with nary an upward or downward revision.
The reason for this is because it is exceptionally hard to set aside a jury verdict, period. By far, the most fruitful grounds for attacking a jury verdict on appeal lie in collaterally attacking the appropriateness of the court's jury instructions, or the court's evidentiary rulings. A trial court might overturn the verdict if it concludes that no reasonable jury could have reached the verdict based on the evidence at trial. That is highly unlikely here. In short, direct attacks on jury verdicts are very difficult, because courts give great deference to jury verdicts. This is designed into the system through the standard of review, which demands that a verdict be upheld if there is substantial evidence in the record to support it. Accordingly, I believe the verdict is quite safe, and that the Court would be highly unlikely to disturb it, whether downward, or upward.
4. Catalysts for Stock Movement.
Dan Ravicher sees "nothing but negative catalysts possible for Vringo from this case over the next year." I am not sure that this is true, but I am sure that he is answering the wrong question. The market is not interested in what catalysts Vringo has remaining "from this case," but rather, what catalysts Vringo has from any and all sources. Vringo is currently pursuing two ZTE lawsuits in the U.K. and one in Germany, for which they are seeking not only damages, but also injunctive relief. A good result from these cases, measured in money, would certainly be a significant catalyst for Vringo. Is it really relevant whether the catalyst comes from the Google case or from the ZTE case or some other case? Not really.
But speaking of the Google case, I do see some near term catalysts. First, I believe that Vringo will file a motion to correct the verdict upward, and that such motion would provide a renewed, albeit, temporary, catalyst for the stock. Second, I believe that Judge Jackson's decision on the royalty base will also be a significant directional catalyst for the stock. For the reasons stated, I am optimistic that the announced royalty base will be grounded (as it should) in the evidence adduced at trial, which strongly favors Vringo over Google. The laches issue could also be a significant catalyst for Vringo, although I certainly agree that Vringo will not see any relief on that issue for at least the better part of next year.
From where I sit, Dan Ravicher's reports of the verdict's demise are greatly exaggerated. Oh, and by the way, Vringo didn't depend on luck to beat Google on every single issue put to the jury. They won by working hard, being right, and proving it.
Disclosure: I am long VRNG.