Vringo: Don't Count Your Chickens

| About: FORM Holdings (FH)

After a brief hiatus, motion mania has started back up in the Vringo (VRNG) vs. Google (NASDAQ:GOOG), et al, case. On April 2, a bevy of motions were ruled upon by Judge Raymond Jackson of the Eastern District Court of Virginia, including: the denial of Google's FRCP 50(b) renewed JMOL's ([905], [906] [907]), in addition to denying Vringo's new trial based solely on past damages [908]. A day later, with Rule(s) 50, 52, and 59 out of the way, he set up the Response/Reply schedule for [822], concerning the royalty rate/royalty base, giving Google 15 days to Respond, then Vringo 7 days to Reply ([909]). This sets the table for Jackson to rule anytime after April 25th. I have been reading on multiple forums things along the lines of, "once Jackson rules, Vringo is going to increase by a triple digit percentage!" and "why would anyone short this stock right now?" (15.9 million shares shorted as of last recording.) I think that these people are counting their chickens before they hatch. There are a few key issues I would like to discuss.


As I noted in my last article, Google has intended to appeal the Court's ruling. On April 4th, Google filed their Notice of Appeal, which is the first step in the appeals process (here for specific 4th Circuit Rules, look at pg. 3-1). In this order, Google is going to try to make a case that the Court ruled incorrectly, by law, on these motions (including, but not limited to): the clerk's judgment on the jury verdict [801], outline of '420 and '664 patents [171], '420 claim construction [212], the Pre-trial Motions in Limine (MIL's; includes Culliss, Rose, Ortega Prior Art) [705], obviousness on '420 and '664 [799], and the aforementioned [905], [906], and [907].

At its core, Google is seemingly appealing the underlying legitimacy of the '420 and '664 patents, which would have a corresponding domino effect in that they weren't liable for any remedy whatsoever. Although it is impossible to know how Google will approach this argument (or any other) before the 4th Circuit Court, there is a very good chance that at least something will stick and send this into appeals (a District Court ruling is appealable to the USCoA by right, but it's up to Appellant to show that the District Court erred in its legal decision.) Vringo has also filed their Notice of Appeal [910], primarily dealing with the past damages decimal transposition and the Laches doctrine. Similar to Google, there is a good chance something will stick there. I am personally expecting an appeal on laches to be heard because Jackson didn't give Vringo a chance to respond, but that's just me.

Keep in mind that pursuant to [811], the judgment (past damages amount in this case) is not due until 15 days after all final outstanding motions have been decided. Although with this approximate $31 million figure certain to be appealed (probably by both sides), this could easily go into escrow. For future remedies, Google has the option to file a Motion for Stay, which would freeze the future royalties due to Vringo. Contrary to some (including me), filing for appeal does not automatically freeze this capital like it does in some other countries. I will refer to Rule 8(a)(1)(A-B) of the 4th District Rules, linked above. These highlight some potential options for Google to stay the judgment, most notably putting the due remedy into a supersedeas bond, a sort of escrow account ("Defendant's appeal bond" is the slang terminology-this is what I think will occur.) Vringo would not have access to the future royalty capital, but is fully insured (plus interest!) when the appeal is over. The average time that an appeal takes in the 4th Circuit ranges from 7 months (here) to 12.6 months (here, p. 1740; other useful data can be found on p. 1739.)

Let's do some past research on everyone's second most popular patent monetization company, VirnetX Holdings (NYSEMKT:VHC). VHC won a $200 million dollar settlement against Microsoft (NASDAQ:MSFT) on May 17, 2010. Throughout the next couple of days (do a historical quote search starting 05/17/2010), it plummeted approximately 7%, as no one seemed to care or value the settlement. VirnetX's price per share did not start to increase until the full remedy appeared in its Earnings Report on August 09, 2010. This caused the price per share to increase from around 6 to over 18 at one point in late 2010.

My point here is that Judge Jackson can rule however he wants (3.5% of the 20.9% of extra value that Lang's IP offered, correlating to approximately $550 million in future royalties) in his final judgment because the ruling is a red herring. Using VHC v. MSFT as an example (similarly to VRNG v. GOOG, VHC's case against MSFT was their first patent win), the share price will not react accordingly until capital from Google shows up on Vringo's balance sheet. This really makes sense when you consider the lack of substantial movement even with 3.5% of 20.9% (approximately $550 million in future royalties) likely, as 20.9% was the only revenue base that was presented in trial as evidence (also, during appeals, no new information can be discovered, so 20.9% still looks good as a royalty base.)

Microsoft (MSFT)

In case you forgot, Vringo sued Microsoft (Bing) based on the same underlying search technology used against Google. In late March, a court document was released from the Southern District of New York saying that Vringo and Microsoft are currently in settlement discussions. While this is great news for Vringo fans, estimates and expectations need to be kept on the ground. Remember that Google and Vringo were also in settlement discussions in the pre-trial stages with Judge Bradford Stillman (that's what sent VRNG shares to a 52 week high). Stillman was later taken off the docket due to a lack of impartiality and the case was transferred to Jackson.

According to comScore's January 2013 report, Google owns 67% of US search engine market share, compared to Microsoft's 16.5%. While I will not get into too many speculative aspects of this case (are they still going for 3.5% of 20.9%? Will they get willful infringement [constituting 3x damages]?), keep in mind that Microsoft is literally about a fourth the size of the Google litigation. I agree with John Tinker of Maxim for the large part on his $71 million dollar estimate; I am estimating anywhere from 70-90 million, +/- a settlement discount. Obviously, willful infringement is a key variable that could significantly increase this number.


I personally think the question that Vringo investors should be asking themselves is whether or not they are traders or investors. Odds are, a "+200% gain with shorts crushed" will not happen upon a final ruling by Judge Raymond Jackson. Odds are, this will get appealed and the remedy will be put into some sort of escrow account. I personally believe that Vringo, at the end of the day, will end up getting their past damages amount corrected (15.6 million v. 156 million) and get their 3.5% of 20.9% of 50% of Google's revenue going forward (3.5% of the 20.9% of Lang's added value on 50% of GOOG's revenue [US revenue]), which corresponds to $550 million.

The more significant questions that have to be asked, though: are you willing to sit on a stock for an uncertain appeals outcome? Are you willing to wait that long knowing that NPE reform (I covered the SHIELD Act in my last article) is inevitable? Are you willing to wait out this macro-bull market in Vringo while waiting for an appeal to be concluded? Are you willing to wait for months with no news from a company whose primary revenue stream at the moment comes from interactive ringtones? These are important questions that Vringo traders/investors need to be concerning themselves with.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.