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Vringo (NASDAQ:VRNG) is suing Google (NASDAQ:GOOG) for patent infringement, with potential damages in the high hundreds of millions to low billions (documents suggest $700MM but this assumes no penalty for willful infringement, which could triple damages).

Although Vringo has other assets, this lawsuit is central to its current valuation. VRNG could double or halve based on this lawsuit.

Google recently asked for Summary Judgment. Unfortunately Google's reasoning in this request has been glazed over in published articles, including this article which covered Vringo's response to the MSJ. I am writing to remedy this.

Below is a summary of what Google wrote. Language has been reduced as much as possible to promote clarity. Google's case is strong and doesn't need to misrepresent itself through fancy legalese.

"Summary Judgment Is Appropriate On Several Grounds"

There are three reasons offered (by Google) for granting Summary Judgment. The Judge will grant Summary Judgment if any of the three reasons are good.

(Reason #1 was mostly redacted. Let's assume it is not good.) Reason #2 is prior art patents by Bowman and Culliss. Reason #3 is presumption of laches. (I will summarize Reason #2 and Reason #3.)

Prior Art Patents by Bowman and Culliss

Bowman and Culliss may have discovered the same idea (created the same invention) as Vringo's idea. Vringo's idea was discovered by Lang. Bowman and Culliss found their ideas before Lang.

The ideas are for search engines. In a search engine, users make queries looking for results. Search engines make money by giving users the results they are looking for. So, search engines have to decide which results are the best.

Bowman's idea is for how to give search results scores against each other. The results with the highest scores can go on top. That way users get the best results for what they are seeking. Results get points for different things:

  • looking a lot like the query
  • having been clicked on often by other users
  • having been clicked on more often by users similar to the current user (similarities like age, income, or behaviors)

Culliss's idea is like Bowman's, but Culliss does something extra. He uses key words to score similar results. Results get key-word scores for each word on their page depending on how many times a word appears on the page. When a user makes a query and clicks on a result page, key-word scores of the result page will update: words that were in the query will get more points.

Vringo paid an expert witness, Carbonell, to tell the judge how Lang's idea was different. Remember, if Lang's idea is the same as Bowman and Culliss Prior Art, the judge will not give Vringo any money.

Carbonell said there were three components (mini-ideas, an idea within an idea) that make Lang's idea different.

  • Lang's idea employs content analysis
  • Lang's idea filters information
  • Lang's idea searches for information

Carbonell said Bowman and Culliss did not have these three mini-ideas. But, both Bowman and Culliss did have these three mini-ideas. What Carbonell said is not true.

Here is proof that Bowman had the mini-idea for "content analysis" (all quotes from the Google document linked above):

For example, if the search results are books, Bowman states that a list of books will be "matching the terms of the query" if their "titles contain some or all of the query terms." In that same paragraph, Bowman states that the list of books "may be ordered based on the extent to which each identified item matches the terms of the query."

Here is proof that Bowman had the mini-idea of "filtering information":

Although Dr. Carbonell admits that Bowman presents the user with search results that score above a numerical threshold and excludes the rest, he argues that this is somehow not "filtering" because it is "relative and carried out with reference to the entire ranked list of search results" rather than being an "item-by-item process." This argument makes no sense. By setting an absolute numerical threshold and presenting a user with the search results that score above this threshold, Bowman determines, on a non-relative and item-by-item basis, whether each search result has scored highly enough to be presented to the user.

Furthermore, Bowman also teaches "select[ing] for prominent display items having top 3 combined scores".

Here is proof that Bowman had the mini-idea of "searching for information":

Claim 1[a] recites "a scanning system for searching for information relevant to a query associated with a first user in a plurality of users." The Court construed "a scanning system" as "a system used to search for information." Thus construed, Bowman meets this limitation because it searches for information relevant to a query associated with a first user. [...]

Because Bowman generates a query result and explicitly calls this query result a "search result," Bowman necessarily teaches that it has searched for these results.

Similarly Culliss's idea contained all three mini-ideas and Carbonell was making non sequiturs when he said otherwise.

Because Dr. Carbonell's interpretation of Bowman's "matching" technique ignores the plain text of Bowman, Plaintiff cannot rely on Dr. Carbonell's implausible interpretation to alter what Bowman discloses and defeat summary judgment. See Iovate Health Sci., Inc. v. Bio-Eng. Supp. and Nutrition, Inc., 586 F.3d 1376, 1381 (Fed. Cir. 2009) (upholding summary judgment of anticipation despite patentee's submission of an expert declaration, where the Court found that the expert took implausible positions that were inconsistent with the patent specification).

So, Carbonell and Vringo were just playing with the words to make the ideas look different, when really the ideas are the same. Lang also had another mini-idea involving a "wire", which the Patent and Trademark Office found was original, but

None of [Vringo's] asserted claims recite the "wire" that the PTO recited as the alleged point of novelty.

so who cares about the wire?

laches

Laches is a legal doctrine. It can be used by a defendant to ask for the dismissal of a lawsuit. Laches becomes relevant when a delay exists between an act and the resulting litigation.

Typically the burden of proof is on the defendant to show that the delay was unreasonable, inexcusable, and to the prejudice or injury of the defendent. However, the burden of proof is reversed by default when there has been a substantial delay.

Because Vringo is suing for something that happened six years ago, Vringo had the burden of proof in showing one of the following:

  • the delay was not "unreasonable and inexcusable"
  • the delay was not "to the prejudice or injury of the defendant"

To date, however, Plaintiff has come forward with no evidence to rebut the presumption. Accordingly, the presumption must stand.

So the judge should grant Summary Judgment based on laches, if not Prior Art.

----------End of Google summary------------

Conclusion

Google has a very tangible argument behind its MSJ. Vringo stock has failed to price in the extent of this risk and is therefore overvalued. We could be looking at a black swan, or at least a very dark grey one. The information is known, but it is functionally unknown, because the vast majority of media coverage has come from conflicted Vringo bulls.

What if?

If the judge rejects Google's MSJ, this would create an ideal long entry point for VRNG traders. It is unlikely that shares would immediately move up to an extent reflecting the opportunity; the stock would be undervalued. After surviving Summary Judgment, Vringo would have a much higher likelihood of receiving a settlement offer. In this scenario, I would consider any price below $5 a no-brainer bargain.

I think a settlement is the only way Vringo can win. I do not think this case would survive in appeals. For this reason, I would not be comfortable holding the shares for very long. I would look to get in after the Summary Judgment rejection, and out after a 35% appreciation.

In other words, Summary Judgment is an underappreciated risk; its removal is also likely to be underappreciated, assuming the MSJ is not granted.

Source: Tangible Possibility Of A Black-Swan Judgment Against Vringo