The Opinion That Brought Down Vringo

| About: FORM Holdings (FH)


On Friday, August 15th, the US Court of Appeals for the Federal Court revealed that the court found Vringo's '420 and '664 patents to be invalid.

The invalidation of the patents essentially overturned the November 2012 verdict that awarded Vringo $30.5 million in damages.

The market reacted quickly and harshly, sending shares plummeting over 70% in the course of the session, and necessitating several trading halts.

Today was a rough day, to say the least, for those who bet on Vringo, Inc. (VRNG) and its high-profile litigation against Google Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL).

To summarize the state of the case, Vringo is essentially a patent troll that won a November 2012 ruling against Google, in which Google was found to be in violation of Vringo's search filtering patents. The jury awarded Vringo $30.5 million in damages. Additionally, the judge ordered Google to pay a 6.5% royalty rate on 20.9% of Google's domestic AdWords revenues. Soon after the verdict, Google appealed to the US Court of Appeals for the Federal Circuit. Oral arguments were offered in May 2014, and the US Court of Appeals for the Federal Circuit today released its opinion - much to the dismay of Vringo shareholders.

The Opinion

In a 2-1 opinion, Vringo's '420 and '664 patents were invalidated. There was a dissenting opinion written by Judge Chen, but more on that later.

The majority opinion claimed that due to obviousness, the patents are invalid. The standard of review for obviousness can be broken down into four components:

1) "The scope and content of the prior art"

2) "The differences between the claimed invention and the prior art"

3) "The level of ordinary skill in the art"

4) "Any objective indicia of non-obviousness"

Google argued that the '420 patent fits the obviousness definition, because Vringo's patent "simply combines content-based and collaborative filtering, two information filtering methods that were well-known in the art." The majority agreed with Google's claim, asserting that "no reasonable jury could conclude otherwise."

Vringo countered this claim by pointing to the jury's finding of differences between the prior art and invention, however, the majority refuted this fact by claiming that the jury found that the '664 patent was in fact composed of independent invention that arose before or about the same time that the named inventor thought of it. According to the court, "near-simultaneous development of a claimed invention can, under certain circumstances, demonstrate obviousness." Essentially, as the majority claims, Vringo's patents are invalid because they don't cover actual invention. This is the rhetoric behind the majority's decision to reverse the District Court ruling.

As noted earlier, Judge Chen dissented from the majority opinion. Judge Chen claimed that "The patents took the query data (input for a content system) and mixed it with collaborative data (input for a profile-based system). What was claimed was the combination of elements of two evolving systems in the field of information science, not a combination of a known process and a web browser."

So, in total, what do we know regarding the validity of the patents? Well, two judges believe them to be invalid, while one believes they are valid. It should be noted that the US Patent and Trademark Office just recently reaffirmed their validity in July, yet the Court of Appeals seems to have taken matters into their own hands to contradict this validation.

Currently, Vringo only has a few options on the table. 1) The company can ask the panel to reconsider its decision. 2) It can have the case heard before all active judges. 3) It can appeal to the Supreme Court.

The Fallout

To put it bluntly, Vringo was demolished. By the end of the day, shares were down over 70% to around $0.90, and trading had been halted multiple times throughout the course of the trading session. Without the '420 and '664 patents, Vringo has very bleak prospects. The company has burned through a significant amount of cash incurred by litigation costs, and yet has little to show for it. There's still the possibility that the patents are revalidated, yet you ought not to hold your breath. Personally, I find the potential reward to be attractive at these price levels, but I have an extremely high risk tolerance. Vringo's future seems as uncertain as ever - what do you think the future holds for Vringo?

Disclosure: The author is long VRNG. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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