I've written previously about the Vringo (VRNG) v Google (NASDAQ:GOOG) patent infringement case, where the jury awarded Vringo's I/P Engine affiliate a mere $31M, which was a small fraction of the $493M it asked the jury to award. The litigation appears highly material to Vringo's valuation, currently around $250M, as some suggest it could provide future royalties for Vringo from Google of hundreds of millions of dollars. I have opined against this expectation because I believe Vringo's future royalty expectation is on par with the jury award, which was similarly hoped by Vringo to be in the hundreds of millions but resulted in only tens of millions.
While the Court awaits the parties' post-trial motions, which Google has already suggested will include a motion to decrease the verdict even further, not much coverage has been given to a separate front Google has successfully opened against Vringo's patents at the U.S. Patent and Trademark Office. Even if the court awards Vringo an ongoing future royalty against Google, something it has not yet done, and something Google has indicated it will vigorously oppose, there are several ways Google can reduce or eliminate altogether paying any such future royalties to Vringo. I've previously mentioned appealing the jury's verdicts of infringement and validity and designing around the patents, but Google's attack on I/P Engine's patents at the PTO could also terminate any Vringo entitlement to future royalties. I discuss that risk to Vringo's future expectations here.
EX PARTE REEXAMINATION
Through a process known as "ex parte reexamination," any member of the public may ask the PTO to reconsider the validity of a patent the PTO previously issued. To do so, the requester must provide the PTO evidence that raises a "substantial new question" (SNQ) regarding the validity of the patent. One can't simply raise the same issue that was already addressed by the PTO either during the initial examination of the patent or any other reexamination that may have already occurred. It must be a new issue and it must be substantial.
Upon finding that a request raises at least one SNQ for at least one of the claims of the patent, the PTO will grant the request to reexamine the patent. As a result of reexamination, the PTO may ultimately cancel the entire patent, affirm the entire patent, or accept changes proposed by the patent holder to some or all of the patent's claims. In its June 2012 report on ex parte reexamination, the PTO's statistics show that when third parties like Google request reexamination of a patent, 12% of the time the entire patent is canceled and 23% of the time the entire patent is confirmed, but 65% of the time the claims are changed. Thus, the most likely outcome from a reexamination is that the patent gets changed in some way that the PTO believes makes it valid.
Note, however, that the law prevents patents from being broadened through reexamination. Claims can only be changed in a way that makes them narrower, which makes them more easy to avoid infringing. So, even if a patent survives reexamination, if it did so because it was narrowed, then it's possible that a party found to be infringing the original broader claims is no longer infringing the new narrower claims. The narrowing of the claims also makes it easier for the infringer to develop a design around that no longer falls within the scope of the narrowed claims even if that design around would have fallen within the scope of the original claims.
GOOGLE'S REEXAMINATION REQUESTS
In its litigation against Google, Vringo asserted two patents, U.S. Patents Nos. 6,314,420 and 6,775,664 (the '420 and '664 patents, respectively). To be uber technical, I/P Engine asserted only a handful of the claims within each of the two patents, specifically claims 10, 14, 15, 25, 27 and 28 from the '420 patent and claims 1, 5, 6, 21, 22, 26, 28 and 38 from the '664 patent. The jury found in its verdict that each of the 6 claims of the '420 patent and the 8 claims of the '664 patent were infringed by Google and its co-defendants (customers who use Google's systems). The jury also found each of these claims were not invalid for anticipation. The judge will decide whether the claims are invalid for obviousness, although the jury did find several preliminary factual questions for the judge to consider on that issue in Vringo's favor.
In the meantime, Google has asked the PTO to reexamine each of the asserted claims in the two patents. First, back in March, Google filed a request for reexamination of the 6 claims of the '420 patent. In its request, Google set forth 11 different reasons why the various claims were invalid. In July the PTO granted Google's request, noting that all of the prior art submitted by Google was new to the PTO (i.e. had not been considered during initial examination of the '420 patent) and that there did not appear to be a specific reason given by the original examiner for allowance of the six claims. This was quite an admission by the PTO, to say that the Examiner who issued these claims did so without a specific reason. I guess it was close enough for government work.
In September the PTO issued an Office Action rejecting all 6 of the claims under review and adopting each of the 11 different arguments Google made as to why the claims are invalid. The Office Action is called "Non-Final" by law, as patentees like I/P Engine must be given an opportunity to respond to any rejections made by the PTO before the PTO can make those rejections "Final." However, that does not mean the rejections are not serious. The PTO could have decided in its Office Action to uphold some or all of the claims and/or it could have only adopted some of the arguments Google made. It did not do so. It rejected every claim and adopted every Google argument.
Vringo responded to the PTO's Office Action in late November, and now the matter is back before the PTO to decide whether to maintain some or all of its rejections. I find it very unlikely that the PTO will do a 100% about face and abandon all of the 11 rejections it made of the '420 patent's claims. Instead, I expect the PTO to stand by at least some of its rejections and issue a Final Office Action in the near future indicating that it intends to cancel all of the 6 challenged claims.
In addition to the reexamination of the '620 patent that is completely going in Google's favor, Google just a few weeks ago filed a request for reexamination of the 8 claims of the '664 patent. In that request, Google made 8 separate arguments why the claims were invalid. The PTO is now considering whether to grant Google's reexamination request, which usually takes them about two months to do. I fully expect the PTO will grant Google's request to reexamine all 8 asserted claims of the '664 patent and then subsequently issue an Office Action rejecting those claims for at least some, if not all, of the reasons given by Google in its request.
PTO CAN CANCEL PATENTS EVEN IF JURY/JUDGE FIND PATENTS VALID
Although I predicted the jury would find the Vringo patents valid, I believe the PTO will likely cancel (i.e. invalidate) all of I/P Engine's asserted patent claims from both patents now under review, or at least require they be changed to a narrower form before confirming them. This may seem as though I've changed my opinion on the issue of whether the patents are valid or not, but I haven't. The apparent difference in my opinion results from two important differences between reexaminations at the PTO and validity challenges in court.
First, patent claims under review at the PTO are given their broadest reasonable construction, whereas in Court patent claims are given the construction that the Judge thinks is most correct, whether that be broad or narrow. In fact, District Courts in some circumstances are supposed to interpret patents narrowly so as to preserve their validity. A broader patent claim is more easily invalidated, as it is more likely to encroach upon the prior art, that would thus invalidate it. So, the fact that patents under reexamination are interpreted broadly means they're more likely to be found invalid. The Court's claim construction in the Vringo v Google case did not adopt the broadest reasonable interpretation of the claims, and therefore it was narrower than how those same claims will now be reviewed by the PTO. This means it is more likely the PTO will find those claims invalid.
The second hugely important difference between reexamination of patents at the PTO and validity challenges in court is that the burden of proof to show invalidity is much lower at the PTO, where only a preponderance of the evidence has to show that the patent claim is invalid, whereas in court the evidence must be clear and convincing that the claims are invalid. This difference in burden of proof has already caused situations where the exact same patent was upheld in court but later found invalid through reexamination at the PTO. This result may seem strange, but it is completely in accordance with the law. Just this October, the Court of Appeals for the Federal Circuit, which is the exclusive Court of Appeals for all patent cases, said in the case of In re Baxter International:
The majority here concludes-rightly in my view-that a prior court decision in which a party has failed to prove a patent invalid does not bar the Patent and Trademark Office from subsequently reexamining that same patent. And, it concludes that, despite a final court judgment reaching a contrary conclusion as between the patent holder and one alleged infringer, the PTO is free to conclude that the patent is, indeed, invalid. That proposition is an unremarkable one.
So, just because the jury upheld the I/P Engine patents as valid under anticipation, and even assuming the judge does not reverse that decision or find the patents invalid under obviousness, that does not mean the PTO will necessarily do the same. The PTO can -- and I expect will -- find I/P Engine's asserted patent claims invalid and thus either cancel them or require I/P engine to change them. If and when the PTO cancels the claims, they can no longer be infringed and Google would therefore not be required to pay any more royalties from that point forward. However, to avoid any confusion, a canceling or changing of the patents by the PTO would not require a refund of any monies paid by Google to Vringo prior to that time.
In conclusion, for Vringo to actually collect any future royalties from Google, there are many things that must happen. Vringo must have the judge rule the patents are not obvious. Vringo must have the judge award it future royalties. Vringo must defend the jury's verdict of infringement on appeal. Vringo must defend the jury's verdict of validity affirmed on appeal. Vringo must defend the judge's decision that the patents are not obvious on appeal. Google must not be able to design around the patents. And, now, add to that list, Vringo must keep the PTO from canceling the asserted patent claims and/or requiring Vringo change them in a way that either no long covers Google's systems or makes them easier for Google to design around.
And even if Vringo is able to run the gamut and survive all these issues, there is still the issue I discussed before of how much future royalty will be awarded by the Judge. Ultimately, the risk that the patents will be canceled or changed by the PTO through Google's reexaminations of them is more reason why I believe the expectation of others that Vringo will receive hundreds of millions of dollars in future royalties from Google for these two patents is extremely unlikely.
Disclosure: I am short VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This content was originally issued as a Ravicher Report on December 12, 2012. It is now being made available for free to the public for the first time here.