If you have been following the Vringo (VRNG) vs. Google (GOOG) face-off, you know the case is in its final stages. The jury has returned a verdict finding infringement by Google, and now legal motions are being filed by both the plaintiff and the defendant to influence Judge Jackson's final ruling. By now, I believe both longs and shorts can agree a mistake was made by the jury in respect to calculating past damages. The issue at hand is whether this mistake will be resolved by Judge Jackson in a positive or negative way for Vringo. Longs argue the mistake is an obvious calculation error, and shorts argue the verdict purposely ratcheted down Vringo's payout.
This article recaps the jury's mistake, explains the post-verdict motions filed by both the plaintiff and the defendants, and speculates on how Judge Jackson may rule going forward. I feel this monumental patent infringement verdict is an event which has been severely undervalued thus creating value in Vringo shares.
Recap of Verdict
Below are two snippets from the jury verdict form. The first shows the degree to which the jury believed Google infringed. The jury wrote "yes" (for infringement) next to every single claim for both the 420 and 664 patents. If you are new to the case, these are the Lang patents which describe methods for ranking ads as they relate to keyword searches. During the trial, Vringo presented evidence that Google began infringing on these patents in 2004, but Judge Jackson ruled, using the doctrine of laches, that damages could only be assessed from the date Vringo filed the complaint (Sept. 15, 2011). Also, note that the jury wrote "yes" next to every single infringement claim for each co-defendant in the case including: AOL, IAC, Gannett, and Target.
Below, you can see the jury also recommended a running royalty rate of 3.5%. The pivotal question for the remainder of this Vringo/Google story is, "3.5% of what?"
During the trial, Vringo lawyers and star witness Dr. Stephen Becker presented evidence that technology behind the Lang patents was very effective for Google. In fact, the plaintiff presented the following two slides clearly showing Google's revenue increased 20% starting in July 2004. The second slide illustrates Vringo's ask for infringing on this technology which Lang had already created and patented... 3.5% of the 20% revenue increase. Keep in mind, Google did not ever present a counter-method for computing royalties. This was the only method the jury saw and knew.
In light of this evidence, why and how would the jury come up with the numbers (below) for past infringement damages? They simply do not make sense and are the crux of the debate between shorts and longs. The interpretation of these numbers will determine how Judge Jackson will rule on the running royalty award going forward.
In post verdict motions, filed by both Vringo and Google, the calculations are referred to it as a mistake. I'll point out the specific motions later. Suffice it to say, the jury left Judge Jackson to deal with a glaring inconsistency - in the final verdict they charged the co-defendants 35% but Google 3.5%.
The jury returned the following awards for past infringement:
Google: $451,190,903 x 3.5% = $15,791,681.61 -- $15,800,000
AOL: $22,693,517 x 35% = $7,942,730.95 -- $7,943,000
IAC: $18,917,570 x 35% = $6,621,149.50 -- $6,650,000
Gannet: $12348 x 35% = $4,321.80 -- $4,322
Target: $282,380 x 35% = $99,833.00 -- $99,833
Total Sum -- $30,497,155
Longs believe Judge Jackson was expecting the following number for Google's past damages calculation:
Google: $451,190,903 x 35% = $157,916,816.05 -- $158,000,000
After the verdict was read, there were reports by multiple in-courtroom sources which described confusion in the courtroom. In fact, Judge Jackson asked to read the verdict and then asked the court clerk to review it. He then, abruptly adjourned court for the day.
Now keep in mind that Judge Jackson after reading the verdict page by page very carefully asked for it back after it was read aloud by the court clerk to double check something that he obviously didn't see the first time.
Let's now take a look at how Google and Vringo are positioning respective motions and counter-motions to address this obvious mistake.
Three days after the verdict was read, Vringo filed motion #792 which is entitled: "MOTION FOR AN AWARD OF PREJUDGMENT INTEREST, POST-JUDGMENT INTEREST, AND SUPPLEMENTAL DAMAGES FOR DEFENDANTS POST-DISCOVERY/PRE-VERDICT INFRINGEMENT." Instead of directly calling out the jury's mistake, this motion asks Judge Jackson to award supplemental damages for the time period of October 1st 2012 through the judgment (since Vringo's original calculation of damages went though September 2012 only). From what I have read, this is a common motion usually awarded after a jury finds infringement. It is a method lawyers use to not leave money on the table. The kicker is in the following excerpt:
Vringo's lawyers cleverly included the original "3.5% of 20.9%" calculation for Judge Jackson to compute supplemental damages. The reasoning here is, if Judge Jackson uses this calculation for supplemental damages, then for the sake of consistency he will use it for computing the running royalties. So, getting Judge Jackson to order motion #792 has now become the main battleground for the remainder of this case.
On 11/29 Google filed motion #805, a rebuttal to motion #792 entitled: "DEFENDANTS' OPPOSITION TO PLAINTIFF'S MOTION FOR AN AWARD OF PREJUDGMENT INTEREST, POST-JUDGMENT INTEREST, AND SUPPLEMENTAL DAMAGES." I believe the content of this motion is a pretty desperate attempt at preventing #792 from being ordered. Google attempts to construct a multi-walled line of defense basically arguing in this manner:
Argument #1: Plaintiff's motion is premature
If this argument does not work, then...
Argument #2: Plaintiff is not entitled to prejudgement interest for two reasons: a) There was an undue delay in bringing the lawsuit to court b) The plaintiff overstated the prejudgement interest calculation because Plaintiff used the wrong interest calculation.
and if this argument does not work, then try this....
Argument #3: Plaintiff is not entitled to supplemental damages for the following reasons: a) The verdict already covered the pre-verdict period b) The plaintiff's demand for pre-judgment damages is inconsistent the jury's verdict.
The last point in argument #3 is most important. Google actually calls out the jury's mistake writing:
No reasonable jury would award an amount of damages on a proportion far greater than what I/P Engine's own expert testified about at trial.
The document also states:
The jury awarded total damages from Google of $15,800,000. (D.N. 789, 11.) Using the information from the slide that Plaintiff represented covered the allowable damages period, and accounting for the 3.5% royalty rate, the apparent effective apportionment of the revenue base for Google is approximately 2.8%...
The jury's award of $15,800,000 (Ugone)... appears to amount to an approximate 2.8% apportionment, not the 20.9% apportionment that Plaintiff claims.
Here we see Google attempting to take advantage of the jury's mistake to actually back in to a new calculation of which there was no testimony during the entire trial. Remember, Google never offered a counter-methodology for computing damages. Google is saying, based on what the jury charged Google, the calculation for damages and future royalties should be 3.5% of 2.8% of Google's revenue. What about the other co-defendants who were charged 3.5% of 20.9%? Why were they charged more than the company that actually created the infringing technology?
Most recently, on 12/7, Vringo fired back a reply to Google's Motion #805 entitled: "REPLY IN SUPPORT OF PLAINTIFF I/P ENGINE, INC.'S MOTION FOR AN AWARD OF PREJUDGMENT INTEREST, POST-JUDGMENT
INTEREST, AND SUPPLEMENTAL DAMAGES FOR DEFENDANTS' POSTDISCOVERY/PRE-VERDICT INFRINGEMENT." In this document, Vringo counters with these arguments:
By using only the $15.8 million awarded against Google and ignoring the $14,696,155 awarded against the other Defendants, Defendants are suggesting a meaningless and unreliable apportionment percentage. This can be demonstrated by applying the 2.8% apportionment factor to the period covered by the actual award. Total accused revenues (including the Google codefendants) for the period from September 15, 2011 through September 30, 2012, based on accounting documents produced by Google, were $16.18 billion. (Becker). Defendants' 2.8% apportionment factor, if applied to these undisputed amounts of revenue yield total royalties, for all defendants, of $15,858,033, not the total jury award of $30,496,155 (Becker). To accept Defendants' argument, one must ignore all evidence presented at trial, back into an implied speculative apportionment factor, and ignore the jury award.
The only relevant apportionment percentage proffered at trial, and the only apportionment percentage ever suggested to the jury, was 20.9%. (Becker). Neither PDX-441 nor any other exhibit or demonstrative introduced at trial supports a 2.8% apportionment factor. (Becker). In contrast, there was no evidence at all of a 2.8% factor and, in particular, no evidence upon which one could conclude that the intended royalty rate to be applied to Google was an order of magnitude lower than the other defendants. To arrive at Defendants' conclusion, one must jump through multiple hoops-none of which were ever proffered at trial. (Becker). To accept this calculation and never-proffered apportionment rate would be clear error.
In essence, Vringo is asking how Google can come up with a 2.8% number based on what the jury charged Google, but ignore how the jury charged the other co-defendants. Vringo is also highlighting the fact that no other counter-methodology for computing damages was offered.
Judge Jackson to the Rescue
Luckily we have the veteran Judge Raymond A. Jackson of the Eastern Virginia District Court presiding over these matters and I have no doubt that he will straighten things out. Let's speculate over how Judge Jackson may deliver his final ruling in the coming days. Obviously Judge Jackson can rule in many different ways, but here are the most obvious:
1. Utilize Rule 60(B) "Relief From a Judgment or Order" - which states a party may be relieved in the event of a mistake. Note that there is precedent for the utilization of this rule; one instance is here. But according to Steve Kim, it is rare. Steve Kim believes judges have a habit of giving deference to verdicts and rarely disturbing them.
2. Keep the verdict and the past damages number intact, but award the 3.5% running royalty on a royalty base of 20.9% of revenue. If this happens, I still stand by my computation of future royalties here. Vringo stands to gain approximately $575 million in royalties IF Google's revenue stay flat. If Google's revenue trajectory stays on its current path, this royalty windfall begins to approach $800 million.
3. Keep the verdict and past damages number intact, and award a 3.5% running royalty on a royalty base of 2.8% of Google's revenue. I believe this outcome is highly unlikely due to the degree to which the jury found infringement on every single claim for all defendants. If this is how Judge Jackson rules, this would deal a serious blow to Vringo's stock as this is the worst case scenario.
4. Keep the verdict intact, but award a slightly higher running royalty to "atone" for the jury's mistake. In other words, instead of disturbing the verdict, Judge Jackson could apply a 3.75% running royalty rate to a royalty base of 20.9% of revenue. To me, this makes the most sense. The verdict is left untouched, but Vringo is compensated. Google is not likely to appeal because it won a few skirmishes with laches and a reduced past damage payout.
There has been much debate in this case with experts in law taking opposite sides and longs and shorts flaming each other. For a moment, let's remove all the emotions of greed and fear. If one takes a step back and looks at the following:
- The Jury's sentiment behind the verdict which found infringement
- Judge Jackson's reaction to the verdict when read
- The logic supporting the arguments in Vringo's post-verdict motions
- The logic supporting the arguments in Google's post-verdict motions
I firmly believe the odds favor a positive outcome for Vringo shares and shareholders.
Disclosure: I am long VRNG.