On Tuesday, the Court of Appeals for the Federal Circuit heard oral argument in an appeal of the patent infringement case I/P Engine vs. AOL, better known as Vringo (VRNG) vs. Google (NASDAQ:GOOG). Here I provide a brief overview of the case, give my thoughts on Tuesday's oral argument, and project what I expect the Court of Appeals will decide in the appeal.
Overview of Case
In November 2012, a jury in Virginia found that Google infringed Vringo's 6,314,420 and 6,775,664 patents, and awarded it $31 million in damages. The judge overseeing the case refused to overturn the jury's verdict, and ordered Google to pay an additional $17 million for interest and damages accruing since the verdict. The district court judge has also since ordered Google to pay an ongoing royalty for continued infringement of Vringo's patents of 6.5% of a 20.9% royalty base on U.S. AdWords revenues (i.e. 1.36% of Google's AdWords revenues).
Google has appealed several issues to the Court of Appeals for the Federal Circuit in DC, which is the exclusive Court of Appeals for patent cases. The first appeal filed by Google raises the issues decided by the jury and not overturned by the district court judge. A second, more recent, appeal filed by Google raises the issues of additional damages and ongoing royalty.
In the first appeal, Google raised three main issues. First, Google appealed the finding of infringement, arguing that its accused systems do not perform all of the required steps of the asserted patents. Second, Google appealed the finding that the patents are valid, in particular arguing that the patents are invalid for being obvious in light of the prior art. Lastly, Google appealed the award of $30M in damages to Vringo, arguing that the evidence did not support such an amount. Vringo cross-appealed the issue of laches, which the district court judge held limited the amount of damages Vringo was entitled to receive from Google.
Briefing in the first appeal was submitted late last year, and oral argument took place on Tuesday before Circuit Judges Wallach, Mayer, and Chen. An mp3 of the oral argument is available from the Federal Circuit's website. I did not attend the oral argument in person, but I reviewed the submitted briefs and listened to the mp3 recording.
As the appellant, Google went first. Google began by discussing its non-infringement argument based on the requirement that the patents "combine" collaborative feedback with content filtering. The Court of Appeals pointed out, however, that Google had not appealed the district court's construction of the word "combine", and thus, Google must show there was no substantial evidence in the record on which the jury could have ruled in Vringo's favor on the issue. Google resorted to rearguing the evidence, which is not sufficient to carry its burden. It must instead show that no reasonably jury could have ruled for Vringo on the issue. Vringo's attorney pointed out how expert testimony supported the jury's verdict. I do not think Google has overcome its very high hurdle for reversal on this issue. Thus, I expect the Court of Appeals will affirm the finding of infringement.
The Court of Appeals seemed much more interested in the second issue Google appealed, validity, and specifically the issue of obviousness. Indeed, one of the Court of Appeals judges actually interrupted Google's attorney while he was discussing infringement and asked him to move on to discuss obviousness. The Court of Appeals was confused by the jury's specific finding that there had been both copying of the patented invention and independent invention of the accused systems by Google. Vringo's attorney conceded this inconsistency, but argued it was insufficient to reverse the finding that the patents were valid, because the jury found that the prior art did not teach all of the elements of the patented inventions, and those two issues (copying and independent invention) are merely "secondary considerations" that can help tilt an obviousness finding if, and only if, all of the elements in a patented invention are found in the prior art, leaving one to ask whether it would have been obvious to combine the prior art's teachings to achieve the patented invention.
Indeed, if one looks at the jury verdict form specifically, the jury did not make inconsistent findings on these two questions for the '420 patent. They only did it for the '664 patent. There's also no dispute on other secondary considerations, such as commercial success, long-felt need, and unexpected results, all of which the jury found supported a conclusion that the patents were not obvious. In my opinion, even if the Court of Appeals were to assume there was no copying and there was independent invention, the other secondary considerations weigh in favor of nonobviousness, and there is still no evidence to fill the gap between the prior art's combined teachings and the patents in the first place. Thus, I do not believe the Court of Appeals will find that Google has proven with clear and convincing evidence (the standard it must satisfy) that Vringo's patents are obvious. Indeed, towards the end of the oral argument, one of the Court of Appeals judges pointed out how the U.S. Patent & Trademark Office, in evaluating reexaminations of Vringo's patents, had itself found them not to be obvious in light of similar prior art.
One of the Court of Appeals judges raised the issue of 101, which deals with patent-eligible subject matter. Indeed, the Supreme Court is currently considering a case on the issue of whether business methods can be patented (much like the Bilski case from a couple years ago). Thus, the question may have been that particular judge's way of asking Google to explain whether it thought Vringo's patents violated 101. Another Court of Appeals judge pointed out with his questioning how the only patents found invalid under 101 by the Court of Appeals were on business processes like hedging risk, and regardless, Google had not raised the issue below or noted it as an issue on appeal (something Google said was a calculated litigation decision). Thus, I do not expect the Court of Appeals will even address the 101 issue, since Google did not raise it itself, and even if the Court of Appeals does raise the issue on its own, I doubt they will find Vringo's patents invalid under it.
Damages / Laches
There was no discussion of the damages issue appealed by Google, and very little mention of the laches issue appealed by Vringo during the oral argument. I took this to mean those issues were of no interest to the judges, and thus, are likely to be affirmed, because it is very rare that the Court of Appeals will reverse a lower court decision on an issue without asking at least some questions about it during oral argument.
As I say above, I expect the Court of Appeals will affirm the district court decision in all respects. Thus, I expect Google will lose all of the issues it has appealed in this first appeal and Vringo will lose on the issue that it has appealed. As for timing, the Court of Appeals could issue a Rule 36 Judgment, which is a simple one-page 100% affirmance, within days (usually 3-4 court days from oral argument). If, instead, the Court of Appeals decides to write a full written opinion, that takes on average 2-4 months, although it could take longer, depending upon schedules of the judges. Once this appeal is decided, the Court of Appeals will consider Google's more recent appeal of the additional damages and ongoing royalty decision by the district court judge. I plan to follow that appeal as well, as it progresses.
Disclosure: I am long VRNG. 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: I may change my positions at any time for any reason, or no reason at all.