Vringo's (VRNG) IP-Engine patents in reexamination had an update Friday, September 20, 2013, that investors should understand. Reexaminations have been a tool defendants have been using to try to invalidate patent claims, which could mitigate royalties and damages owed. Reexaminations are also a negotiating tactic by defendants to gain leverage in any negotiations or mediation parties are conducting. So far, Vringo management and experts have done an excellent job defending their patents in reexamination as the '420 patent was confirmed by the US Patent office on July 24, 2013. Following the confirmation Google (NASDAQ:GOOG) filed a second reexamination on the '420 patent on August 12, 2013, citing only Bowman as a reference.
On September 20th, the US Patent office determined that the '420 patent should be reexamined and a substantial question of patentability exists in regards to claims 10,14,15,27, and 28. These claims were asserted at trial, which Vringo won last November. I want to clarify the fact that there was only a determination to undertake the reexamination and the patent claims were not canceled in a non-final action. A non-final action either re-confirming or canceling the patent claims should follow within the next three months. An additional comment and response period that follows. The typical ex parte reexamination process typically takes 26 months to complete.
Also on September 20th, a small update materialized on the '664 reexamination in the image file on the 90/012,791 & 90/012,722 dockets. Vringo and USPTO examiners discussed Rose and Bowman in relation to the '664 patent. Vringo argued that Rose processes information relevant to a user, not to a query. Vringo also argued that Bowman lacks collaborative based filtering and that Bowman teaches away from the '664 patent. As indicated on page 5 of the filing, an agreement was not reached. Vringo received a non-final action on the '664 patent on June 25, 2013, rejecting claims examined 1,5,6,21,22,26,28, and 38. Vringo responded to the non-final action on August 26, 2013. Vringo has one month from the interview date to provide a statement of the substance of the interview.
I believe the reexaminations are an attempt by Google to exhaust all possibilities in regards to not paying a running royalty to Vringo. Vringo investors are at minimum expecting a 3.5% royalty rate, which would yield roughly $125M per year through 2016. Vringo's current valuation of $254M is mostly tied to this royalty rate. Reexaminations are a cheap method to gain negotiating leverage, which typically cost around $20,000-$45,000. At this stage of the patent life cycle and court process, I believe it is highly likely that any conclusion to the reexaminations will be favorable to Vringo or an unfavorable result will conclude after the patents expire. I feel it is very unlikely for a Baxter situation to arise with the Vringo IP/Engine patents. The threat to Vringo's royalty will mainly come from Google's attempted workaround, with expert reports to be submitted by September 25th, 2013 and will play out further through the end of 2013 and possibly in the first half of 2014.
Investors also need to realize that the reexaminations have nothing to do with any possible workaround/design-around that Google is going to argue or implement. The workaround will proceed through District court and likely through Federal court. The reexaminations will proceed at the US Patent Office. Just because Google has filed another reexamination on the '420 patent does not mean they do not have a workaround for AdWords or AdSense.
I also disagree with Fusion Research's conclusion that a favorable outcome on the '664 reexamination will lead to a higher ongoing royalty rate. I believe that validity is a non-issue at this stage of the litigation cycle and has little impact on any negotiations that might possibly be ongoing. Vringo and Google were ordered to mediate for the ongoing royalty for the period of October 2012-May 2013, by December 1st, 2013. A base revenue has already been decided by Honorable Judge Jackson at 20.9%, which is a major victory for Vringo. I expect the mediation to fail as all prior mediations have failed in the past. I further expect a timeline to be set for Judge Jackson to decide on the applicable royalty extending into 2014. I believe any royalty percentage that Vringo receives will be decided by a Judge, not in negotiations.
It is important for Vringo investors to understand the reexamination processes and implications as they proceed in relation to their investment. It is very often that reexaminations can be scary for patent owners as it is a highly complicated process. In Vringo's case, I believe the reexaminations do not pose a long term threat and investors should ignore any "noise" that might be generated.
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.