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[Warning label - I am not a lawyer and have no specific information about this case. In fact I'm really not qualified to write about it. But that seems to stop nobody these days. I also don't have any positions in any of the stocks mentioned here.]

The awaited results of the Vringo "Markman" hearing rippled through the market in the last day or so as Vringo stock (NASDAQ:VRNG) started to rise again. Since this is such a high stakes soap opera I decided to take a little time to go through the court's "Memorandum Opinion and Order" which was filed with the SEC by the company. It's already said that the result was a win for Vringo with a score of 4-2 but I wanted to know more.

First of all some bad news for followers of this saga - the 23 page document is concerned with the meanings of terms and the construction of claims. That means that it's a long and nuanced discussion of what specific terms like "a scanning system" actually mean down to minutia - is scanning through information or merely scanning across a network. My summary and analysis follows but if you really want to get the full effect you should read the full document.

So what's with deal with "terms?" As you'll see in the analysis the legal definition of what terms mean can play a pivotal role in determining whether or not there is actually infringement. For example let's say I patented step-by-step instructions with a specific order to whiten teeth. If someone used these instructions but in a different order I would have a hard time asserting infringement since my patent covers a specific order. It's not black and white but you get the idea.

The Arguments

There were four undisputed terms included "informon" (a unit of information), "user" (thank goodness!), "relevance to the query" (how well the information satisfies) and "query" (request for search results.)

There were six disputed terms:

"Collaborative feedback data" - The sticking point on this one is that defendants wanted this term to apply to the data about what information was most relevant rather than the information itself. The court however focused on the notion of whether or not the users are required to have "similar interests or needs." The ruling was that the term pertains simply to users and they are there is no requirement for "similar interests or needs."

"Feedback system for receiving information found to be relevant to the query by other users" - Similar to the above the defendants argued for the notion of users with "similar interests or need" and again the judge ruled that there was no language in the claim to support this meaning.

"Scanning a network" - The point here has to do with whether scanning is the same as "spidering" or "crawling" the network. Although we can appreciate some confusion over the notion of scanning and spidering it's not clear how the outcome of this ruling would impact the case. The judge went for the simplest ruling which is that this term can have multiple meanings that include spidering but that their definition of the term should remain "looking for or examining items in a network."

"A scanning system" - The dispute here centers on whether the scanning goes on over a network to retrieve the information or goes on though the information to determine relevance. This was also an attempt by the defendants to roll back some of the improved language in the newer patent claim. It failed however and the judge went with the definition of a scanning system as "a system used to search for information."

"Demand search" - Here the defendants argued for the meeting to be more specific as "a search engine query." There is also a disputed notion around whether a demand search can be persistent and continue to occur for a long time or whether it is a kind of "one shot deal." The court ruled that this term is more of the one shot variety with the definition "a single search engine query performed upon a user request."

"Order of Steps" - As hinted at above a specific order requirement might make infringement harder to prove. In this case the court broke things down by patent (the '420 and the '664) and particular steps. In the case of the four steps in the '420 patent the court ruled that "scanning" had to come before "receiving" information. For the '664 patent the decision was that "searching for" and "receiving information" must precede "combining." The specific steps are outlined in the document but that's the gist of it.

So what does that all mean?

Qualitatively the set of rulings were more favorable to Vringo and less so to the defendants. That doesn't mean that it's conclusive. But it does help. As can be seen in the ruling the defense strategy is typically to create increased specificity around terms and thus terms to either defend against any infringement at all or reduce potential damages.

Although there isn't much room for the defendants there might still be a little. I'd say it would have to hinge on going after the timing and the mechanism of steps that Google uses versus what is in the patents, specifically the notions of "demand search" and "Order of Steps."

But this case involves multiple defendants (AOL (NYSE:AOL), Google (NASDAQ:GOOG), IAC (NASDAQ:IACI), Gannett (NYSE:GCI) and Target (NYSE:TGT)) who all may have greater or lesser arguments for their approaches being different relative to their mechanisms of action. So even if Google might have a decent defense it doesn't follow that it would apply to the others.

And the stock?

Well the traders are already pushing it higher (again). However the company has a complex (204 page!) document outlining the proposed merger terms with Innovate/Protect. They have a shareholder meeting scheduled for July 12th to approve the merger and additional business.

The merger includes a share exchange whereby the owners of Innovate/Protect will own just over 56% of the outstanding common stock of the combined company. One concern that has been voiced in the market is the dilution in the stock following the merger and the uncertainty around just how many future shares will be outstanding.

This isn't a time to roll out the spreadsheet just yet. That's because if the lawsuit is successful the amounts at stake will be large even compared to a much expanded VRNG company value. For example some very simple back-of-the envelope math using the recent purchase by Mark Cuban and a quick review of the merger terms suggests an effective capitalization figure of something like $200M (versus the quoted $56M cap.) That is a big step up but one that remains small in relation to the stakes.

There is also a legitimate carrier-focused business model inside the company that we continue to believe can be a source of value but it's lost in the weeds here.

Probably the biggest caution we have is the out-of-left-field ruling we saw recently in the Apple (NASDAQ:AAPL)-Samsung case where the judge essentially ruled against the growing absurdity of the patent system. Although profound it's not a defense that can be planned or counted on so it may not impact potential settlements.

Further Reading

If you haven't seen it, the original match to the flame came on March 31st with this post by James Altucher on TechCrunch: Why Google Might Be Going to $0.

There are more links to this so please share in comments if you have them and they will be added.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: A Closer Look At The Vringo Patent Ruling