I am a former patent litigator who trades stocks in which patent litigation has a meaningful impact on valuation, and I have been following the Vringo (NASDAQ:VRNG) vs. Google (NASDAQ:GOOG) (a.k.a. I/P Engine v. AOL et al.) case for some time. There is so much misinformation and conjecture being posted about this case that I have decided to add what clarity I can to parts of the discussion. I intend to write a series of articles, each addressing a specific issue that I believe affects the value of VRNG. This article is on the supposed "flip-flop" by Google on the issue of Vringo's entitlement to ongoing royalties, and the timing of Vringo's ongoing royalty motion.
In a recent SA article regarding the Vringo v. Google litigation, Daniel Ravicher concludes that Google "flip-flopped" on the issue of ongoing royalties, an issue that is worth several hundred million dollars, and that Google now concedes Vringo is entitled to ongoing royalties. Obviously this is an important issue to Vringo's valuation, and it appears that a lot of traders relied on Mr. Ravicher's article; VRNG rose more than 20% after Mr. Ravicher's article was published with no other news, and even further the next day, before Mr. Ravicher released another article disclosing that he had changed his position from a long to a short.
Contrary to Mr. Ravicher's articles, there has absolutely not been a "flip-flop" by Google or by the other Defendants (the motion at issue was filed by Defendants, but I will focus on Google). Google has not conceded the issue of ongoing royalties in any way. I base that and other conclusions in this article on the briefs filed in the Vringo case, and on a decade of experience in a top patent litigation practice where I represented companies like Intel (NASDAQ:INTC), Motorola, Samsung, Yahoo! (NASDAQ:YHOO), Boeing (NYSE:BA) and Honeywell (NYSE:HON) in patent litigation, including multiple cases against (and with, as joint defendants) Google's counsel, Quinn Emanuel.
Although many commenters have taken serious issue with Mr. Ravicher's quick switch and the timing of his articles, in this article I set aside these issues, and evaluate the merits of Mr. Ravicher's assertions 1) that Google has "conced[ed] Vringo [is] entitled to ongoing royalties," and 2) that Judge Jackson will deny Google's request to postpone briefing on Vringo's post-trial motion for ongoing royalties. As discussed below, Mr. Ravicher is clearly wrong on the first point, and I disagree with him on the second point as well.
As mentioned above, the ongoing royalty issue is huge for Vringo. The value of the outcome on this issue alone could be greater than Vringo's current market capitalization. The success of Google's request to postpone Vringo's ongoing royalties motions is also significant for traders, as it affects the timing of the resolution of this important issue.
There Is No Flip-Flop on Ongoing Royalties
Mr. Ravicher's view on Google's supposed "flip-flop" comes from a statement by Defendants in their December 21 Brief in Support of Defendants' Motion to Postpone Briefing and Ruling on Plaintiff's Motion for Post-Judgment Royalties (Dkt. 848). In that motion, as the title suggests, the Defendants, Google included, seek to delay the briefing and ruling on Vringo's Motion for Post-Judgment Royalties until after the Court rules on the other pending post-trial motions. In it, the Defendants make three arguments, only the last of which is that it "would give the parties an opportunity to negotiate post-judgment royalties themselves."
This statement is unremarkable. It is not an admission of any kind to tell a judge that postponing a motion will allow the parties to work out a compromise. Rather, this is a standard statement that parties routinely make when seeking delays. The U.S. court system is overburdened, and courts always encourage parties to work out their issues on their own if possible. Therefore, parties seeking a delay routinely tell courts that the requested delay will provide an opportunity for the parties to resolve the underlying issue. The Vringo defendants did only that, and did not concede to the issue of ongoing royalties.
There is no ambiguity here. You will NOT see Google concede this issue in its court filings from now on. I expect that Vringo will also not argue that this statement by the Defendants is any kind of admission. Arguments that cherry-pick language to suggest that a party is taking a position that it clearly has not - i.e., that Google has conceded a royalty - have virtually no chance of success. Google's other motions to undermine the verdict on issues of liability and damages - which remain pending - clearly show Google's intent to fight Vringo's claim for a running royalty tooth and nail. The sophisticated lawyers on both sides know that Judge Jackson is not going to be swayed by such a disingenuous position. This supposed "concession" is such a non-issue that I would be surprised if Vringo even tries to use it in the way that Mr. Ravicher suggests.
Google Has a Reasonable Chance To Delay the Briefing and Ruling on Vringo's Ongoing Royalties Motion
Before I discuss why I believe Google is likely to prevail in its request to postpone briefing regarding ongoing royalties, I think it's important to clarify what's at stake here. The papers that have been filed in the last two weeks relate primarily to scheduling, not to the issues themselves. If the Court does not grant Google's motion - i.e., if briefing is not postponed - the parties will brief royalties on the same schedule as the other post-trial motions, which is set for completion on February 15 (Dkt. 850). If the Court grants Google's motion - i.e., briefing for running royalties is postponed - the parties will still argue it, just at a later date to be determined. A Google win on its scheduling motion will delay resolution of this critical issue for an unknown amount of time, which will affect many traders' strategies. With that clarification, I would like to explain why Google has the better side of the scheduling argument.
After discussing the non-existent flip-flop, Mr. Ravicher points to Vringo's response, which takes Google to task for making no effort regarding settlement since the jury verdict. Vringo informs the Court that "Defendants have not contacted I/P Engine at all since the jury's verdict to convene any such negotiations" (Dkt. 852). I want to focus on the significance of this statement: VRNG traders do not count on a Google settlement anytime soon because the parties are not even discussing settlement, much less trying to accomplish it. In any event, Mr. Ravicher states that because he thinks Vringo has the better argument here, he believes the Judge will deny Google's request to delay Vringo's ongoing royalty motion.
Even if Vringo has the better argument on the issue of delay in order to give the parties time to work out the issue, this argument is neither Google's only argument nor its primary one. Google's main arguments are that: 1) both sides have made post-trial motions to set aside parts or all of the jury verdict, so briefing and determining an ongoing royalties motion, which is likely to be affected by one of the other pending motions, is inefficient for the parties and the Court, and 2) Vringo's motion raises a new damage theory and expert opinions which Google is entitled to rebut.
Google's first argument is correct and I believe should prevail. The judge, however, has near-complete discretion to set the timing as he sees fit. Both Google's and Vringo's positions on the ongoing royalty issue rely heavily on the jury verdict, and both Google and Vringo have challenged that verdict. Google is challenging nearly every aspect of it - infringement (Dkt. 831), validity (Dkt. 820), and damages (Dkt. 833) - and Vringo has asked for a new trial on past damages (Dkt. 825 & 835). The Court could render Vringo's motion for a running royalty (and any briefing) moot if it grants these motions, so it would make sense to decide them first.
As I have explained, these disputes confirm that Google has not conceded royalties. Regardless of timing, the Court will likely not decide the ongoing royalties issue before it decides the parties' challenges to the jury verdict, on which the ongoing royalty arguments depend. Therefore, if Google does not win a delay of the ongoing royalties issue, because briefing on the other motions will not conclude until February 15 (Dkt. 850), the earliest that we could expect a decision on Vringo's ongoing royalties is at the same time as the other post-trial motions - which may not be until sometime in March. However, the Court may not make its decision until significantly later. I may write more on motions and scheduling issues in an upcoming article.
What does this all mean for trading and valuation of VRNG? First, there is no flip-flop. Any bump in VRNG's price that was based on the supposed flip-flop in Mr. Ravicher's article is unwarranted. Second, the briefing and ruling on Vringo's motion for ongoing royalties will likely be delayed as requested by Google. If timing is an important part of your trading strategy, you need to account for this. Also, as noted above, the parties are not discussing settlement, so do not count on one in your trading. Both parties right now appear fully committed to a fight, which will take some time. Investors, buckle in. It will be a bumpy ride and it may take a while (although there's always the hope of an out-of-the-blue Nokia patent settlement) to know if your risk will be rewarded. Traders, expect volatility and the profile of a heavily speculated stock, which can be great for trading if understood and managed properly.
Lastly, do your own work. Don't blindly trust someone who posts on an internet bulletin board, including me, even if they claim to be or look like an expert. This is a high-risk stock, and I hope that people are trading/investing wisely (i.e., limited portions of their portfolio that they can afford to have at risk).
Good luck to all.