How Will Judge Jackson Handle Google's Confirmed Workaround?‎

| About: FORM Holdings (FH)

Google (NASDAQ:GOOG) continues to fight back in its ongoing case against Vringo (VRNG) -- this time with big and important news. What news? A certified workaround to Vringo's patents. What was previously a rumor is now a reality based on Google's newest representations.

Some background. Google and Vringo are in the midst of several battles relating to Vringo's assertion that Google is infringing on two patents that Vringo acquired from Lycos. There are at least three ongoing battles, all at various stages. The battle at the earliest stage is the Federal Circuit appeal that will be kicking off soon. That process should take somewhere between one and two and a half years once it gets going in earnest, and is the true battleground on the merits of Vringo's case. As we have previously written, if Google posts a bond for any damages awarded by the District Court, then Google will not be required to pay any royalties (verdict award or ongoing royalties) unless and until Vringo successfully preserves its infringement and validity rulings on appeal. In Google's brief last night, they expressly reserved the right to move for such a stay of royalty payments. (See footnote 18 on page 26 of the Google's brief: "Defendants reserve the right to seek a stay of any royalty payment pending appeal.")

Another current battleground is in the United States Patent and Trademark Office. Google has initiated re-examinations on the two patents that Vringo has asserted, and has already secured a final rejection of all of the asserted claims of the '420 patent. The re-examination documents can be found here. Vringo needs to appeal that decision to the BPAI, and ultimately the Federal Circuit will have the last word. The re-examination of the '664 patent is lagging a bit, but will likely follow the same pathway as the '420 patent. At the end of the process, these patents will either be valid or not over the prior art that Google has asserted. For now, Google has secured the PTO's agreement (a position that the PTO will have to defend in front of the Federal Circuit if the BPAI certifies the Final Rejection) that the '420 patent claims should never have issued in their current form, because of the prior art that Google has now brought to the PTO's attention for the first time. (The final rejection is also an important factor in the decision whether to enhance royalties for ongoing infringement.)

Finally, the most advanced battleground is the District Court case pending before Judge Jackson in the Eastern District of Virginia. That case is in its final stage, with one more motion for the Judge to decide -- Vringo's request for an ongoing royalty. Last night, Google revealed its opposition to Vringo's motion.

Having raised a number of arguments (some unlikely to succeed) in attempt to knock down or entirely eliminate the ongoing running royalties, one headline from Google's filing last night stood out. Google represented to the Court that it has implemented a workaround to Vringo's patents. This representation should not be viewed lightly. Google's attorneys have legal and ethical obligations to tell the truth to the Court, and they submitted sworn affidavit testimony that is punishable by a felony perjury count if untrue or unfounded. (See multiple Google declarations in support of their brief) Google claimed that the workaround is one that falls outside the scope of any of Vringo's infringement arguments. So according to Google, as of May 11, 2013 -- it no longer infringes the '420 and '664 patents even under Vringo's infringement theories. So if there is any ongoing royalty, it should be limited to a royalty base covering a very limited period of time. In prior filings, Google had hinted that they were implementing a workaround. In last night's filing, they confirmed that it is already in place.

Yet, even if Google's workaround is in place, the question remains whether it is still infringing Vringo's patents. It is axiomatic that Google will not need to pay any ongoing royalties to Vringo if they are no longer infringing. Judge Jackson now has to decide what he will do with Google's new sworn representations of a workaround. (To be clear, this is a separate question from whether or not the Judge will apply an enhanced royalty rate for ongoing royalties.) As we see it, he has two choices:

1) Judge Jackson can choose to postpone determining whether Google's workaround continues to infringe Vringo's patents until after the Federal Circuit's appeal runs its course. That means, he can assign a royalty rate for ongoing damages to apply to any post-judgment infringement, but stay his determination of whether the workaround is a non-infringing alternative until after the appeal is over. From his perspective, the appeal may upset the jury's finding of infringement or validity, rendering the issue of whether the workaround is infringing moot. Further, Vringo will not be able to claim much prejudice as result of such a stay because, as we previously discussed in an earlier article, Google is entitled to stay enforcement of any past or ongoing royalties provided it posts a bond. In short, the Judge can postpone his required evaluation of Google's workaround until the "bigger" issues are decided in a year or two in the Federal Circuit appeal or...

2) Judge Jackson can open limited discovery now on the workaround, and use it to help in his determination of the appropriate ongoing royalty rate. While that will not likely require a new trial, it will involve a lengthy process that could stretch out for months while he determines whether Google's workaround is more than minimally different from Google's prior product. (As an aside, the question of whether Google's workaround is a non-infringing alternative will not be addressed by the USPTO, but only by the District Court.)

While we wait for Vringo's reply, our initial take is that Judge Jackson is likelier to choose option 1, and push off an evaluation of Google's workaround on the merits until after the Federal Circuit decides whether or not the jury verdict should stand. Such a delay would not prejudice Vringo, since they will not be getting royalty payments until then anyway. In light of this workaround, Vringo's best hope for good news is on the enhancement question before the Judge, but even they know that they are a long way from collection day.

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.

Additional disclosure: We were long Vringo, but closed our position due to risks. Some members hedged against those risks by buying put options, which were closed as well.

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