Patent law is complex and ever-changing. Investors in "patent play" stocks frequently lament the twists and turns inherent in patent litigation. When the game is played at the highest levels, with skilled advocates on either side, patent cases can resemble the trench warfare of World War I. Gaining ground becomes a difficult proposition. Complicating matters further is that events on other patent litigation battlefields can reverberate on the one involving the company you have invested in.
Need an example? Look no further than the potential impact of the Court of Appeals for the Federal Circuits recent decision in Fresenius USA, Inc. v. Baxter International, Inc. (Case No. 2012-1334,-35 decided on July 2, 2013) can have on the ongoing litigation between Google (NASDAQ:GOOG) and Vringo (NASDAQ:VRNG). Contrary to prior articles that tried to argue that the re-examination of Vringo's patents would have no effect on the District Court judgment, the potential impact of USPTO actions, based on the holding in Fresenius, is huge. In short, if the USPTO ultimately cancels the claims of the asserted patents (admittedly something that could happen years from now, but likely to happen before a "final" judgment after all appeals are taken from the District Court case) then Vringo's District Court "win" could be completely wiped out. That is because an alleged infringer like Google does not need to pay damages for later-invalidated patents, even in the face of a prior infringement finding, unless an absolutely final judgment had previously been entered in the case.
According to the Federal Circuit, "final" really means final. In support, the Federal Circuit quoted the Restatement of Judgments, and cited to the Simmons Co. v. Grier Bros. Co., 258 U.S. 82 (1922) and Mendenhall v. Barber-Greene Co., 26 F.3d 1573 (1994) decisions to determine that no final judgment has been reached in the case at hand despite the District Court final judgment and the Federal Circuit's remand:
Finality will be lacking if an issue of law or fact essential to the adjudication of the claim has been reserved for future determination, or if the court has decided that the plaintiff should have relief against the defendant of the claim but the amount of the damages, or the form or scope of other relief, remains to be determined. (Opinion at 20, citing Restatement (Second) of Judgments Sec. 13(b) (1982).
So according to Fresenius, as long as there are legal issues still to be decided (such as an appeal from an USPTO reexamination finding, or ongoing proceedings in the district court or on appeal) in a case, the judgment is not "final". Based on the Fresenius decision, there has been no such final judgment in Vringo's favor, so Vringo's District Court win is at risk unless and until it successfully fights off Google's USPTO challenges to the asserted patents. The timing here is in Google's favor, since it is possible that the Federal Circuit will be considering the reexamination issues before a final judgment(assuming Vringo wins the other Federal Circuit appeal) is entered in the District Court.
Some background. Google and a Vringo subsidiary, I/P Engine, are currently in: 1) the end stages of a District Court litigation pending in the Eastern District of Virginia, 2) the early stages of a pending appeal from that District Court case to the Federal Circuit, and 3) the late stages of two pending re-examinations related to Vringo's asserted patents in the USPTO. We will address each of these in turn.
In the District Court case, Vringo secured a favorable jury verdict, finding that Google infringed and owes damages - and that the asserted patents were not invalid. The parties (and investors) are waiting for the Judge in the District Court case to issue his "running royalty" decision, or in other words, his opinion as to the amount that Google needs to pay Vringo should it continue to infringe through patent expiration. (For purposes of this article, we are keeping this simple - those interested in the ramifications of Google's declared workaround can read here) Vringo investors are hopeful that the Judge will find that Google needs to pay that royalty rate (between 3.5 and 7%) off a large royalty base (20.9% of Google AdWords revenue). Google has argued that Vringo can be made whole with a lump sum payment, and has tried to point the Judge to Vringo's recent settlement with Microsoft (NASDAQ:MSFT) (that including a 5% payment to Vringo based off any recovery from Google) in support. Again, we are trying to keep this simple - the main takeaway is that the remaining decision on the running royalty is an important one for Vringo's prospects in the near term.
In the Federal Circuit, the briefing will be starting shortly so there is not much to report there so far. In the re-examinations, we have previously reported that the '420 patent has received a final rejection from the USPTO. Vringo will conceivably be appealing that rejection to the BPAI, and the ultimate determination will eventually be made by the Federal Circuit down the line. The other asserted patent, the '664 is still being reviewed by the USPTO. Importantly, Vringo will need to "win" in the Federal Circuit to protect its jury verdict, and also win in the reexamination proceedings if it ever hopes to see money from Google - barring a settlement of course. Why is a win on both fronts so important? Because the Federal Circuit's Fresenius decision confirms that Google has "another bite at the apple" through its reexamination strategy. One that could erase its prior loss in front of the jury.
Fresenius (some more coverage of the case can be found here) presents a long and tortured litigation history of its own. Focusing on the end game in that case, the issue before the Federal Circuit was simple. The underlying District Court decision (finding that Fresenius infringed and that the patents were not invalid) had been reviewed on appeal by the Federal Circuit - who affirmed that the patents were not invalid but sent the case back down to deal with damages related issues. (As we noted above, the appeal of the Vringo jury verdict is just starting, putting this case in line with Fresenius in terms of trying to determine whether Vringo has secured a final judgment. According to Fresenius it has not. In fact, Vringo's case is not even as far along as Fresenius' was. Put another way, Fresenius faced longer odds than Google does in the Vringo case, and still prevailed.) While this was happening, the USPTO determined upon reexamination that the asserted patent (against Fresenius) was invalid, a decision that was subsequently affirmed by the Federal Circuit. So in effect there were conflicting Federal Circuit determinations on validity - one affirming the finding the District Court that the patent was not invalid, and the second affirming the USPTO that the patent was invalid. In its decision, the Federal Circuit resolved that inconsistency by giving primacy to the USPTO finding (and cancellation of the asserted claims). Fresenius' prior loss at the district court was thus wiped out. Google will surely be hoping for a similar result against Vringo - and should it be successful in the USPTO and Federal Circuit on the reexaminations, it will have a very good chance of success in light of this case. Critically, the judgment that was overturned in Fresenius was much more "final" than anything Vringo will be able to point to.
The actual decision in Fresenius rested on a number of statutory and legal grounds that will probably be of interest only to patent lawyers. It is worth noting that there was a strong dissent written by one of the judges on the panel. Dissents have no legal effect, but can be useful in marshaling support for a rehearing or en banc review by the entire Federal Circuit, or else be used as support for a petition for Supreme Court review. Vringo investors should keep an eye on the yet-to-unfold events in Fresenius, because of the importance of this decision to Vringo's prospects. The best result for Vringo at this stage may be to try and secure a settlement from Google, as those monies would normally not need to be repaid even if the patents are later cancelled. Of course, why would Google settle at this stage, with momentum at its back?
Because of the complexity of these kinds of cases, and ever-changing legal landscape, investing in "patent play" stocks without guidance from experienced patent litigators is a risky proposition. It will be interesting to see how Google tries to use this Fresenius decision as leverage, perhaps to argue for a stay at the District Court or even Federal Circuit level until the re-examination process has concluded in the USPTO with respect to the asserted patents. That would be an aggressive approach, but consistent with Google's position in this case -- to fight this to the very end, across whatever fronts it can. If Vringo wants to see any money from Google (barring settlement) it needs to reverse the tide in the USPTO, while defending its District Court win in the Federal Circuit. It is not an impossible task for Vringo, but Google's legal team will surely be the ones emboldened today because of the Fresenius decision.
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.