The end of the Vringo (VRNG) vs. Google (GOOG) federal district court battle may be coming to a close. U.S. Federal Judge Raymond Jackson's ruling late Friday sank a fatal blow to Google's contested revenue apportionment theories; concerning a disputed patent infringement verdict awarding Vringo 3.5% royalty payments on Google U.S. ad revenue. Google had argued the revenue base should have been 2.9% as opposed to the contested 20.9%. Judge Jackson found Google's claims unsupported by the trial evidence and ordered in Vringo's favor the higher 20.9 percentage. Investors have been patiently waiting for the court's rendering as the stock has been trading at a deep discount to the potential award. Friday's late announcement, on a holiday weekend, offered little opportunity to fully digest the consequences of this action. Few analysts follow Vringo and those that commented Friday based their reaction solely on this action, failing to disclose the larger more substantial catalysts that await this court's ruling and many others.
The Enhanced Royalty Motion
Many investors and analysts have confused the recent court order with Vringo's motion for post judgment royalties dated December 18, 2012. This "Enhanced Royalty Motion" remains pending, however in resolving the supplemental damages and interest order the court has vindicated Vringo's 20.9% revenue base argument and the initial 3.5% Jury recommendation for royalties. Clearly Judge Jackson has sided with Vringo in its interpretation of the trial documents and jury's intention. With the August 1, 2013 order fully resolved, pending auditing requests, the more important enhanced royalty motion awaits ruling. In this motion, Vringo asks the court to raise the royalty to 7% from 3.5%, based on Google's willful infringement.
"The appropriate post-judgment royalty rate should be 7% based upon changed circumstances in the post-judgment hypothetical negotiation and in light of Defendants' ongoing willful infringement. Defendants should also provide an accounting and pay those ongoing royalties quarterly."
In previous articles I have inferred the higher royalty impact could be worth more than a billion dollars over the remaining term of the patents life. This valuation continues to be withheld in the share price of Vringo, as few investors and analysts have not factored the probability of this outcome. Vringo for its part has not commented on Friday's courtroom decision, either publicly or through SEC disclosure.
Microsoft's royalty payment, ZTE, ADT
In what could be a matter of days, Microsoft (MSFT) will be required by settlement agreement to pay Vringo 5% of the 3.5% Google award. Exact amounts remain unclear but many have speculated that this one-time lump sum payment could be as much as $20 million. Microsoft has already paid Vringo $1,000,000, in addition to granting ownership of several key patents in a quiet settlement that Wall Street has yet to fully appreciate. Investors have been also watching the ZTE (OTCPK:ZTCOY) litigation with much interest. Vringo has already won patent infringement court room victories in Germany over its portfolio of wireless mobile patents obtained from Nokia (NYSE:NOK), and investors are awaiting news of a possible ZTE settlement. The ZTE action is being played out in several European courtrooms, including India and England. Vringo hopes to win legal victories over ZTE at its key European markets, and appears to be gaining traction with the latest series of wins. A global licensing deal may be in the making and Vringo expects to be handsomely rewarded. At stake are royalty payments that could amount to over a $100 million a year. Back in the U.S. federal courtroom Vringo continues to litigate new patents, with a key upcoming Markman hearing against security provider ADT (ADT). Very little has been written concerning the Vringo vs. ADT patent infringement case, but many are expecting more data as the trial begins to progress through the Federal courts.
Vringo perfect storm of victories set to change valuation in 2014
With the Google 20.9% apportionment decision in tow and the jury's 3.5% royalty decision upheld, Vringo stands an excellent probability of enhancing the foregoing royalty to 7%. Google continues to use Vringo search technology and has shown no desire to settle. It is my opinion Judge Jackson will easily find for willful infringement, and has the necessary case law and previous decisions to enhance the award to the requested 7%. Moreover, it's possible that Google's latest flagrant legal shenanigans and mockery in filings could inspire Judge Jackson to make an example of Google and go beyond the requested 7%. This is not without precedent in other patent infringement cases and Google's size, position, and dominance in the search advertising market may inspire this action. Obviously, the ramifications of this decision will push Vringo valuation far beyond expectations. Added to this are possible upcoming global settlements from ZTE, and the pending ADT Markman hearing. This has quickly become the year of catalysts for Vringo, and it's my opinion it has never been a better time to be a shareholder. As always speculative investments require due diligence and I encourage all investors to do so, before investing.
Disclosure: I am long MSFT, VRNG, NOK, . 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.