Vringo: Not Going Anywhere Fast

| About: FORM Holdings (FH)

It has almost been six months since the rendering of the jury verdict that deemed Google (GOOG), et al, was liable to I/P Engine, a subsidiary of Vringo (VRNG), for reasonable damages on the alleged '420 and '664 patents. While nothing material has really changed since then, there have been multiple Seeking Alpha articles written that display some interesting analyses, including support of Google supposedly re-inventing the search engine wheel. In addition, many people are seemingly counting down the days until the next Judge Jackson motion ruling and the never-ending hope for an all-encompassing final ruling for the share price to finally have a "parabolic gain." I have a different opinion. I, for the reasons described below, think that 1.) a Google workaround is an unfeasible bluff, and, 2.) am predicting that Vringo will not eclipse $4 per share for the rest of the year (or whatever statistically significant arbitrary number - I'm picking $4 because it is a key psychological level that hasn't been reached since late last year.)

Let me start by saying that the following analysis is based off assumptions that are absent a black swan event. One of my favorite authors, Nassim Taleb, coined this term in the book "The Black Swan," which represents an unpredictable event that deviates from the expected hypothesis, and, in 20/20 hindsight, was supposedly able to be foreseen by the general population. An example of this in a Vringo context would be Judge Jackson's laches decision. Almost no one saw it coming, and it was a significant, statistical anomaly that was a key turning point in this entire ordeal. Many people who sold before this were flaunting their investment prowess and know-how, but, in all likelihood, were just extremely lucky in their timing.

Workaround: Doesn't Add Up Technologically, Financially, Legally

I equate the workaround possibility from a technological standpoint to a metaphor of a cheeseburger. Google has generated (and will continue to exponentially generate) revenue based on selling cheeseburgers (let's call this AdWords). However, you cannot make a cheeseburger without the underlying bread and beef ('420 and '664 patents). However they try and change the process, the '420 and '664 patents will still be applicable. Read the following selected claims from the '420 and '664 patents, and this diagram provided by Vringo:

· '420, Claim 9: The system of claim 1 wherein adaptive user feedback data is applied at least to the first system to provide updating of content profile data employed therein.

· '420, Claim 17. A search engine system comprising:

A content-based filtering system for receiving informons from a network on a continuing basis and for filtering the informons for relevancy to a wire or demand query from an individual user;

a feedback system providing feedback data from other users;

a system for controlling the operation of the filtering system to filter for one of a wire response and a demand response and to return the one response to the user; and

the filtering system combining pertaining feedback data from the feedback system with content profile data in determining the relevancy of the informons for inclusion in at least a wire response to the query.

· '664, Claim 5: The search system of claim 1 wherein the filtered information is not an advertisement.

· '664, Claim 20: The search system of claim 1 wherein the content-based filter system filters the combined information relevant to both the query and the first user.

As everyone involved with this case knows, the jury found Google liable for damages based upon infringement of these two patents, specifically on the underlying issue of "Quality Score" in which, broadly, search result content is rated and is made more relevant to the party involved. Although '420 and '664 did not contain any specific code, Google still was found to have infringed. No argument there. Based on these aforementioned claims (in addition to the others), and comments from coders on various social networks, I do not think a workaround is likely from a technological standpoint, as one cannot get around the process of personalizing a search engine and ranking the results by relevancy and still not infringe.

Second, I do not think a workaround makes sense financially. Let's say Google is contemplating changing its highly successful algorithm completely in order to avoid paying $550 - $800 million in future royalties to an unnamed non-practicing entity (which, in this case, is Vringo). They would undoubtedly have to undergo a serious amount of research and development (which could be spent elsewhere [Google Drive perhaps]), in addition to a large amount of time spent in testing. The monetary cost, and opportunity cost, is substantial. They would also probably have to get shareholder approval and related compliance in order to even go through with it. And, for a company with a conglomerate total of $43,686,000,000 of advertising revenues for YE 2012 (p. 32), does it really make sense to risk changing their claim to fame in order to save a fraction of this number? Quite frankly, no. It would be the 21st century equivalent of the "New Coke" marketing disaster.

Third, I do not think a workaround makes sense legally, along the same lines of the financial aspect. If Google somehow, some way, manufactures a workaround, what happens when a company, whether it involves Microsoft, Yahoo, Vringo, etc., comes along and alleges infringement? They would just be digging their hole deeper.

Also, keep in mind that Vringo has made in-the-air statements similar to Google's. Per [813], bottom of p. 7: "Second, even if I/P Engine was a non-practicing entity (which it is not), it is entitled to prejudgment interest like any other patentee awarded damages." By my judgment, I/P Engine isn't garnering revenue from a search engine. So, Google's statement of a workaround could very well be similar legal fluff.

Now for my predictions about how VRNG share price will not eclipse 4/share, based on order of trial defendants (Google, ZTE, Microsoft [MSFT]):

GOOGLE: The long-awaited Jackson Ruling and Appeal

As of this writing, there is an outstanding motion (930) to delay the motion process even further to give Google time to compel a deposition of Dr. Becker and give Google even more time, who is Vringo's damages expert (reminder--keep in mind folks, that the royalty base is just as, if not more, important than the royalty rate; 3.5% of 20.9% is better than 7% of 2.8%). This motion has postponed the briefing schedule of (822), the royalty base and royalty rate motion, yet again. Anyway, as I wrote in my last article, I do not think the share price will react based on Judge Jackson finally ruling (regardless of the actual underlying ruling) due to an immediate appeal (both parties have taken the first step and filed their respective Notice of Appeals). In addition to VirnetX (VHC), I have found other stocks that have not substantially moved following a positive outcome in a patent infringement case:

1. Mylan Inc. (MYL) settled a patent infringement suit with Shionogi Inc. and Andrx on March 13, 2013. The share price did not react accordingly, as it ended the day even. The settlement has not been shown on financial statements yet.

2. Covidien (COV) won a patent infringement suit against a subsidiary of Johnson & Johnson (JNJ) on March 29, 2013. Although the damages amount was $176.5 million, the share price decreased the next trading day (market was closed on Good Friday).

3. Document Security Systems (DSS) settled a suit through its merger subsidiary against an unknown third party in an ongoing social networking civil suit. The share price has traded flatly since the announced settlement.

4. Medtronic (MDT) won a $101.2 million dollar judgment against NuVasive in late 2011. Once again, the share price dipped the week it was announced.

5. (Just to recap) VHC won a $200 million settlement against Microsoft (MSFT) on May 17, 2010. It plummeted nearly 7% after the settlement was announced, and rocketed once the remedy appeared in the financial statements.

6. (A different type of example) Marvell Technologies (MRVL) lost a highly publicized patent infringement case against Carnegie Mellon University in December. The share price decreased approximately 10% after the billion-dollar plus verdict, but has substantially increased back to higher levels after saying they were going to vigorously appeal..

Although these companies all vary in size, there is one underlying theme here: the share price doesn't correspond with a win (settlement or positive judgment) until that judgment is free of appeal and, in small-cap non-practicing entities at least, appears in financial statements. In Vringo's case, Google is 99.9% going to appeal. From a Google statement after trial, "we remain confident that the patents here invalid, what we did not infringe them, and that we will ultimately win this case (here)). The appeal will go through the USCoA for the Federal Circuit (I incorrectly said it would go through the 4th Circuit Court in my last article). Nonetheless, the future royalty judgment due to Vringo (whatever the number) will be unattainable pending the conclusion of the appeal. The Federal Circuit is a highly busy place when it comes to patent appeals from the US District Courts, with the highest amount ever, 471, filed in 2012 (here). The median time from docketing-disposition is 11.3 months, but, with a cross-appeal (an appeal from both parties; this has been initiated), it might get a little longer. Let's call it, conservatively, 12 months. This means that before Vringo has the chance to get its "short-slamming multi-hundred million dollar reward," it can be estimated that a year will go past, without much news coming out at from the Fed. Circ. at all.

ZTE: UK, France, and Germany

Vringo currently has four outstanding lawsuits against three subsidiaries of Chinese superpower ZTE regarding telecom infrastructure, with two in the UK, one in Germany, and a newly announced one in France. Not much is known about both the France and UK trials at this point. More information will be available about the UK trial(s) on or before the pre-trial case conference in June. Keep in mind that if Vringo gets more than $22 million (purchase price of patent family from Nokia [NOK]), then Vringo must pay a 35% royalty on the excess delta.

However, there is a good bit of information known about the German trial (once again, not damages, as it is a delicate topic). Germany has a dual judicial system, where District Courts determine infringement and the separate Federal Patent Court determines nullity (validity) of patents. This makes both trials independent of one another; a defendant is not able to say a patent is not valid in an infringement case (different from the US). Both of these trials will not be determined by a jury (so no chance of a juror decimal transposition error). Instead, three District Court judges will determine infringement, and five judges with a combined combination of technical and legal background will adjudicate on nullity. Germany is unique in that it has a combination of 108 technically and legally qualified judges, the most among surveyed countries (2009). This is one of the key factors that make Germany the most respected judicial system for patent-related litigation within the EU (same link above). The average timeline for an infringement trial is 8-13 months, while nullity separately lasts 18-22 months, with nullity appeals (50% of cases [using most available data I could find, 2003] lasting 24-36 months (p.6). This makes the total time (appeals added) a multi-year process. A joint infringement trial for both the '119 and '919 EU patents is to be held on October 15th, different from the September 24th date first reported, which makes sense given that the initial suit was filed mid-November 2012 (elapsed 11 months).

If Vringo does come out on top in the infringement case, then an injunction is usually ordered in the meantime while the underlying nullity of the alleged intellectual property is decided. This is done to make sure that there is not a case of infringement on an invalid patent. Nullity could be proven through a.) lack of patentability, b.) lack of enabling disclosure, c.) unlawful deprivation, d.) inadmissible amendment of the claims, or e.) inadmissible broadening of the scope of the patent (p.10, table 2.5). I could write a whole article making a case on a.) whether or not the '119 and '919 patents are being infringed upon and/or b.) they are valid. I will let the reader determine that (and perhaps provide some relevant analysis in the Comments section). But, in conclusion, Vringo will have to wait until the nullity suit before the German Federal Patent Court is concluded (probably Q2-Q3 2014), and pray for no appeal, before any remedy can be received (provided they win both the infringement and nullity suits).

Microsoft: Settlement?

As many of you know, Vringo and Microsoft are currently in voluntary settlement discussions. Much has been made about the potential damages analysis (we don't know dollar amounts yet), but I personally agree with John Tinker of Maxim about the Microsoft settlement value of approximately $71 million, or 73c per share.

But let's take a step back. This suit was filed in the Southern District of New York, and based on average time-to-trial, is 2.65 years, one of the longer waits out of the District Courts surveyed (chart 7d.). This means that VRNG v MSFT will most likely not go to court until approximately 3Q2015.

Now, consider all the bedlam going on in the VRNG v GOOG case (royalty rate issue, royalty base issue, laches issue, jury decimal transposition error issue, etc.). Vringo and Microsoft have until June 4, 2013, (pre-trial conference) to discuss a settlement before Vringo formally gives its complaint to Microsoft (they could settle at anytime, though.) What is the rush? If I was Microsoft, I would wait until Google and Vringo is completed (my estimates are sometime in early 2014) until handing over any type of settlement, especially considering that the same underlying IP in the Google case is directly applicable to Bing. It just doesn't make sense to rush into a settlement when there are years before this case goes to trial and the opportunity to see how the cookie crumbles with Google and Vringo. Needless to say, I am not expecting a settlement.


Like I listed before, nothing has materially changed for approximately six months, except investors' frustration over Vringo. Recently, the relatively high Vringo executive compensation structure has been scrutinized following the hiring of new CFO Anastasia Nyrkovskaya, carrying a $300K salary with a $25K signing bonus with 300K in stock options. This is unusually high for a small company, especially for a company with no revenue streams at the moment sans interactive ringtones. Not the most complicated financial statements ever. When investing in Vringo, you are largely investing in Vringo's employee human capital, since most of their revenue is attempted to be ascertained through intangibles (legal expertise, negotiating ability, innovation, etc.). Hopefully, this investment pays off over time as Vringo continues its win streak. But, just as legal matters take time to develop, Vringo's stock price will take time to develop. By my analysis, barring a settlement and/or black swan event, the earliest that VRNG can have any type of remedy in its usable possession is late 1Q2014. But, on the good side, a Google workaround that would terminate any potential future royalties is, in my opinion, not happening. I will continue to follow these possibilities with keen interest over the next couple of months.

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.

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