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As we previously reported here, Vringo (VRNG) and Google (GOOG) have been briefing the issue of ongoing royalties before Judge Jackson. On May 20, Vringo filed its reply brief, which ends the briefing. The issue is now teed-up for Judge Jackson's decision.

Vringo has pushed hard for enhanced royalties -- 7% of a 20.9% base. (At trial, the jury determined a running royalty of 3.5% and a base of 20.9%) Vringo has argued that as an accused infringer, post-verdict, Google's continued infringement is unequivocally willful and its bargaining position substantially weakened. Given this, Vringo contends that doubling the 3.5% running royalty to 7% is warranted. Vringo arrives at this number by first bumping the jury's verdict of 3.5% to a post-judgment rate of 5% due to the parties' changed circumstances (e.g., verdict in Vringo's favor) and then enhancing that rate to 7% because of Google's continued willful infringement. By contrast, Google is trying to escape paying any royalty, and has lobbied instead for a lump sum of 3.5 million dollars. To do so, Google has attempted to raise several doubts about what Google would have paid during a hypothetical negotiation. But at heart, Google's argument is that, since May 11, 2013, it has implemented a non-infringing alternative to its enormously successful AdWords system. This work-around, Google contends, means it is necessarily off-the-hook from paying any ongoing royalties.

There has been much debate about whether Google's alleged work-around can upset its obligations to pay Vringo ongoing royalties. After all, Google lost at trial. Vringo's patents were found infringed. And Google's last-ditch effort to scrap the jury's determination based on half-baked allegations of a work-around seems disingenuous. Surely, many have argued, Judge Jackson will be able to see through Google's smoke and mirrors. Indeed, he may find Google's antics disrespectful of the court's time and just slam Google with heavy damages without having to even address the work-around.

In its latest brief, Vringo calls Google's work-around a red herring and simply an attempt "to hijack I/P Engine's ongoing royalty motion." (See page 17 of Vringo's Reply). Vringo points out that Google had ample time to previously raise the possibility of a work-around at trial. And Vringo rightfully points out that nothing submitted by Google to date proves, conclusively, that Google's alleged work-around does not, in fact, infringe the Vringo's patents.

However, it is important to point out what Vringo does not argue. It does not question the veracity of Google's allegation that it has, in fact, implemented a work-around. And Vringo acknowledges that the workaround discussed in Google's latest filing was not discussed at trial -- so it represents a new attempt by Google to avoid infringement. (Vringo Reply at 12). Further, Vringo does not contend that the work-around can just be ignored. Indeed, Vringo admits the whether or not Google's alleged work-around is indeed infringing is an issue that Judge Jackson must eventually address-albeit at a later time. Vringo states:

The Court should not decide the issue of whether Google's alleged redesign is non-infringing in the context of this motion. Instead, the Court should decide this issue along a separate track, ordering a period for fact and potentially expert discovery of the redesign and a briefing schedule, and then conducting a hearing to determine whether Google's redesign is more than colorably different from the adjudicated infringing AdWords system. The outcome of that hearing will determine whether Google's redesigned system is subject to this Court's ongoing royalty Order or must be adjudicated in a separate proceeding. See Soverain Software v. Newegg, 836 F. Supp. 2d at 484.

See Footnote 12 on page 18 of Vringo's Reply

Vringo goes a step further. It out-right acknowledges that if Google's work-around is, in fact, not infringing, then Google can escape paying any more royalties. Vringo states, "If Google's allegedly modified system is later determined to be colorably different, the ongoing royalty rate would not apply to the revenues derived from that system." (Vringo Reply at 19, citing Soverain Software v. Newegg, 836 F.Supp.2d at 484).

The sum of Vringo's argument is that Google's allegation that it has implemented a work-around cannot affect the determination of the amount of the ongoing royalty. That is true. Yet, as we previously reported here, the work-around itself, and whether or not it infringes Vringo's patents, must be addressed at some point by Judge Jackson. Vringo does not deny that. Vringo only contends that issue is not yet ripe, but for later determination.

Judge Jackson has discretion to put off the determination of whether or not the work-around infringes Vringo's patents until after Google's appeal. The question can be stayed for that time because, as we previously reported here, Google can stay any payments of past damages or ongoing royalties pending the outcome of its appeal before the Federal Circuit, simply by posting a bond.

The bottom line is that one way or another, Google's work-around (and the appeal) must be addressed by the court before Google parts with any money (absent settlement of course).

In the meantime, investors will be waiting for Judge Jackson to decide this motion. While he can take as long as he feels like to do so, he did decide a similar motion in an earlier case after one week from when the motion was fully submitted. (Despite investor impatience, that kind of speed is not the norm in patent cases, where even simple motions can take months for other courts to decide.) In that case, he actually enhanced the royalty post-verdict as well.

And just as investors will be watching Judge Jackson, they should also be watching events in three other forums:

1) The USPTO - for any further developments on the re-examination of the '664 patent;

2) The Federal Circuit - for filing of opening briefs or a request for an extension (very common practice) to do so; and

3) The Southern District of New York - where Vringo has until May 31 to serve Microsoft (MSFT) with its Complaint, and the parties are scheduled to appear before the Court on June 4th. Last time that date was pushed by a letter two weeks before the conference. Vringo's service of the Complaint may indicate that settlement discussions have broken down for now. On the flip side, another request for an adjournment of the initial conference will undoubtedly stoke settlement hopes.

Either way, Vringo's story will be an ongoing one, and catalysts remain to send Vringo's shares upward or downward due to the risks mentioned above.

Source: Can Judge Jackson Still Ignore Google's Work-Around?