First off, I wrote about Google (GOOG) and Vringo (VRNG) on April 1. The stock is about 100% higher although it has reached as high as 5.40 give or take in that time. Then I wrote about Vringo again on June 19. Lots of things have happened since June 19 and even more since April 1. A quick summary from April 1 to June 19.
A) Mark Cuban jumped in and bought a significant chunk of the company despite his stance on companies that depend on patent litigation.
[For more on Mark Cuban, see "5 Things I Learned from Mark Cuban"]
B) Vringo "won" the Markman hearings. I say "won" in quotes because it doesn't mean they won the case. The Markman hearings are courtroom battles where each side wants to interpret the language of the case in a way that will allow them to persuade the jury of their side. It's complicated to understand the underlying legal strategies of why a side would want a particular set of words used as opposed to another set of words used. In some cases the Defendant (Google) might want to narrow the definitions in order to prove that they did not infringe. In some cases they want to broaden the language in order to say that the patent in question (Vringo's patent) is invalid.
Suffice to say, Vringo got almost everything they asked for in the Markman hearings. You can see my earlier article for some of the breakdown.
Since June 19, many things have also happened.
1) My email box, message boards, and comments to my earlier articles, have gotten flooded with people calling me a "pump and dumper" (I still am long VRNG), or saying they were "disappointed" in me for not providing further updates, and in many other ways insulting me. Don't be an Internet troll. I know everyone who has insulted me will disappear one way or other once this trial is over. Just relax. Everything in my April 1 article still holds. In fact, the situation has clearly gotten a lot better for VRNG investors. So do your own due diligence and learn to relax a little better. I promise your investing life will be happier.
2) VRNG bought the Nokia (NOK) portfolio. I encourage you to do due diligence, as I have, on what is in this portfolio. Most of the portfolio of patents is tied to existing standards like CDMA, GSM, WCDMA, etc. That means that most of the time there will not be litigation. VRNG simply shows up at the company [e.g. Cisco (CSCO)] and says, "oh, you are building products that are tied to the CDMA standard. We have the patents on that. You owe us money." And there's simply no argument. The company has to pay. This is called low-hanging fruit. Who knows what cash this will generate but the low hanging fruit can be anywhere from $10-30mm a year in bottom line cash for VRNG. Why is this important? Because this patent portfolio JUST BY ITSELF, justifies a $5 stock price for VRNG. Do the math on it.
Why didn't NOK use these patents? Good question. In most cases, the patents directly effect the customers of NOK. Now when a customer says to NOK, "HEY! Why the hell are we now being hit up on these patents Nokia!" Nokia can say, "Don't look at us, go to Vringo." But guess what? Vringo has to give 35% of all they get off this portfolio to ... Nokia. In fact, I would argue to say that Nokia's biggest shot at surviving over the next 50 years is for Vringo to litigate the hell out of these patents.
3) NOK, part II. Did he just say "litigate"? Yes, because there's low hanging fruit (the above -mentioned $10-30 million) and then there is non-low hanging fruit that they will litigate. Do they have money to litigate? Stay tuned.
4) NOK, part III. Along with the patent portfolio, VRNG hired David Cohen. Guess who he is? He used to be Nokia's chief litigator in the United States. "Was he any good," is the next question. Yeah, he sure was. He beat Apple (AAPL), a notoriously hard company to beat in litigation over patents (see below). Telcom companies are used to paying license fees on patents related to standards. Computer companies like to fight a bit more. Apple had to pay Nokia $750 million. So I like having David Cohen on my side. He knows intimately the NOK patent portfolio. He knows how to prosecute it. He knows where the skeletons are that are infringing. He knows, he knows, he knows. I can go on. Again, the low-hanging fruit gets you to $5 by itself. Then we litigate and get higher. How much higher? I have no idea. But I own the stock and look forward to it.
5) NOK, part IV. I actually don't have a part IV. I'm just so excited about it I didn't want to end on that note. Oh wait, I do have a part IV. On the basis of this patent portfolio, VRNG had no problem raising $31 million in a heartbeat at prices higher than today's in order to buy the patent portfolio. The company then used $22mm to buy the portfolio. If you examine all the filings, it has about $12 million cash left, give or take.
6) Cost to litigate. One astute IM-er badgered me with: GOOG will stretch this out and VRNG won't be able to afford it. I have a couple of answers to this:
a) Don Stout. He's a big shareholder. As I mentioned in the April 1 article, he won over $600 million from Research In Motion (RIMM) when he OWNED NTP. He wasn't just the lawyer for NTP. He owned it. I like him on my side. I don't know what this has to do with the cost of litigation but it helps me not to worry.
b) the above mentioned David Cohen. He's on payroll. He's not a lawfirm charging by the hour.
c) Well, let's look at the math. It's in the filings. VRNG has paid $4 million so far in litigation costs in TOTAL against Google. They've been suing for over a year. The trial is in just a month. Appeals don't cost much. They have $12 million in cash left. Just do the math.
7) Apple - Samsung (GM:SSNLF). What does this have to do with the Google - Vringo case. Only EVERYTHING. Guess who Samsung's lawyer was that lost in a jury trial case? Quinn-Emannuel. Now, this doesn't mean they will lose in this case. But do you really think they want to lose two in a row big patent cases to a jury. They will be like the Arthur Anderson of patent law firms. That said, I can't help but play over and over again on YouTube (owned by my third favorite company, Google) the song "The Mighty Quinn." Because Quinn-Emmanuel is mighty. They have almost a spotless track record. They do that by settling cases and not ruining the track record. Apple-Samsung was a big hit against them.
8) The new garbage. Everyone is panicking about all the new stuff Google is doing to pull an upset in this case. Let's review what it takes to win a patent trial if you are the big GIANT fighting the small inventor (Ken Lang).
i) Stall and Delay - this battle is over. The trial is set for October 16. This is a "rocket docket" which means trials happen quickly. There is a downside to being a rocket-docket also, which I will get to in a moment.
ii) Try and outspend. This is not happening. There will be, at most, one appeal. And the trial is in a month. And look for my other reasons above.
iii) Argue that they don't infringe. Since Vringo won most of the outcome of the Markman hearings, I don't think Google can argue this so they are currently trying a different tactic. They tried several times to narrow the language used and it didn't work out. See my June 19 article.
iv) Call Vringo a "troll." This is not a legal thing but a psychological thing that can effect a jury, for instance. But in this case, the inventor of the patent is an individual suing Google while he's building a company that has revenues. A troll applies to the case where you buy a patent portfolio (for instance, Google buying Motorola's portfolio) even though you are not the inventor and then using those patents to sue people. In this particular case, Ken Lang is the inventor of the patent that Google is infringing.
v) Try to invalidate the patent. This is what Google is trying to do. They are basically saying there is "prior art": the Culliss patent, that they are using and that Ken Lang's patent should never have been valid in the first place. This is a common trick. If Google's lawyers didn't do this I would be surprised. Other articles mentioned that Google tried to do this in the Oracle (ORCL) patent case but the judge threw it out. I have a couple of comments on this.
- Lang's patent specifically mentions the Culliss patent four times on the front page of the patent he submitted to the U.S. Patent Office. This gave the U.S. Patent Office plenty of opportunity to notice the differences between his patent and Culliss. The outcome: they granted Lang the patent. Here: I used a search engine called Google to find the Lang patent. You can see how he refers to Culliss specifically. He clearly was not trying to hide the fact that he uses Culliss. He is proud of it.
- I've taken a closer look at the Culliss patent and the Lang patent. Again, I knew the technology on these things from the beginning, having sat right next to Lang in grad school. Culliss says that a user clicks on a link, and then the link's "rank" gets altered accordingly. Then a second user comes along and the rank gets altered again. And so on. Lang does this also. Lang also takes not only the clickthru data but COMBINES it with the CREDIBILITY of the user and the content. This is different. Google could say (and I expect them to say) that "CREDIBILITY" is an obvious addition so no patent was needed. But I ask this: define "Credibility" of a user. It's not so easy. Now program your definition up. Even harder. I bet my definition of credibility is different from yours. Is it someone who uses the search engine a lot? Is it someone who tends to click on things that other people tend to click on? I don't know. And then combining this with clickthru data is also interesting. How do you combine? This doesn't seem obvious to me. But hey, perhaps this is why I was thrown out of graduate school and Ken Lang went on to get his PhD (err ... I think. Ken?)
- My final comment on point "v" is how this is interpreted by the market. First off, check out this docket filing.
The history of how invalidity was disclosed is laid out there. Google had essentially promised to be done with new invalidity disclosures. Does it matter that they broke their promise?
In my opinion, not really. This is a standard tactic and this is the negative of being in a rocket-docket court as opposed to a slower court. In a slower court, there are very specific deadlines for when Google could've brought up these items. In a rocket-docket you have to give (I imagine) some leeway. Things are moving very fast and you have to allow for some last-minute disclosures. Was it unfair? Maybe, but who cares. The Lang patent is not invalid anyway.
Will the judge allow these new requests to enter the case? VRNG has motioned for "No" but my guess is the judge will allow it. It doesn't really effect the case at all and it's perfectly fair for Google to have last-minute disclosures in a fast case like this, despite their promise to not have additional disclosures. That's the downside (for VRNG) of being in a rocket-docket.
So here is the order of events I think will happen:
a) The judge allows this invalidity content into the case. The stock will be volatile but ultimately this does not effect the case at all no matter what is said on message boards.
b) Google will make a motion for summary judgment to throw the case out. Of course they will do this. That's what lawyers do. The judge will say "no." There's no factual reason why this isn't a case that can go to trial. And let's not forget: the U.S. Patent Office has already said Lang's patent is valid, and he specifically point out Culliss. So there is no way, without enormous evidence, that this patent will be declared invalid. I'm not a patent lawyer but above I give my layman's view of the two different patents and you can decide if you agree with me or not. The U.S. Patent Office agrees with me.
c) The case will not make it to trial. The case will be just like the Yahoo (YHOO)/Overture patent case. This is the case where the Lang patents were specifically scratched out and where Google was certainly aware of them (See my original article. See definition of "willful infringement" and how a judge can then aware triple damages).
If the case does not make it trial what could happen. There's a lot of speculation. Maxim just said Google could buy Vringo. I don't think that will happen.
(And note: I love Google. I think they will do the right thing. See, "10 Things You Didn't Know About Google")
We already have a playbook for what will happen. Yahoo. My back of the envelope math (I don't work very hard and I have a lot of envelopes lying around) shows that the stock Google gave Yahoo would be worth $1.8 billion now. So that's the playbook. I think Google should give Vringo $1.8 billion in stock combined with a guarantee from Vringo that they can't sue any more of Google's customers. I would be terrified of someone suing all of my customers. It seems like that's a great way to lose a lot of customers.
So, let's build the case for the stock now:
A) the low hanging fruit on the NOK portfolio (and managed now by David Cohen, the ex chief litigator for NOK) is enough to justify a $5 stock price on VRNG. I'm not going to do all the math here.
B) there's the high-hanging fruit on the NOK portfolio that will get eventually litigated and will result in more settlements for VRNG, resulting in a higher than $5 stock price.
C) There's potential for a multi-billion settlement with GOOG. If they simply go with the playbook from the very similar case and settlement with Yahoo it would justify a $15 stock price for VRNG, without any multiple at all. [And note that Virtnex (VHC), when they beat Microsoft (MSFT) in a case, got a 10x multiple on the settlement price, although I can't even imagine VRNG getting a 10x multiple. I might have a stroke or something].
D)There's potential for other settlements with both Google customers and with other search engines (BING! BING!). I assume Microsoft is in Vringo's sights although they have never mentioned that so we can't count on it. But MSFT must be following this case closely.
Note: Another important thing that happened is that AOL (AOL) settled although I haven't gone over all the numbers on that one. It is significant that a former GOOG employee (the AOL CEO) thought it wise to settle but, again, I haven't fully analyzed it. It does make sense, though, that Google customers will not want to fight this.
In final conclusion: I think there will be a lot of volatility in the stock between now and mid-October for the reasons I discuss above. I think I will buy on any dips. I personally think Google will settle although I have no idea and anything can happen. They can take this all the way through jury. They can appeal. Who knows? But why risk getting all of your customers sued when you're known to have settled similar cases before and Quinn-Emmanuel probably doesn't want to risk another Samsung. This is just my opinion. I'm going to play it like I'm saying here. I've also bought stock. And finally, the NOK portfolio alone justifies a higher stock price. Which is why this stock is now so appealing to me. Please don't call me a "troll," "pump-and-dumper," "idiot" or whatever although I suppose you can if your psychology demands it of you.
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.