What a difference a day makes in the zany world of Vringo (NASDAQ:VRNG) vs. Google (NASDAQ:GOOG). Only yesterday, most commentators agreed that Google's MSJ had little or no chance of success. Today, the case's most important commentator, Judge Raymond Jackson, agreed, issuing a terse order that "summary judgment is inappropriate at this time as there are genuine issues of material fact in dispute."
Yesterday, before the MSJ was denied, I bared all by saying that I expect this case to settle before verdict. Not a very bold prediction, considering that we all know 95% of civil cases settle before trial. Still, nobody wants to be part of the 5%.
I think it is ripe to discuss the dynamics of settling lawsuits, and in particular, this one. If this case is destined to be part of the 95%, what are the factors that will help us get there? Here's what I think is important in the settlement landscape, what settlement options are out there, and what I would most like to see as a Vringo bettor.
Let me reiterate that lawyers are, first and foremost, risk managers. Lawyers are not hired to take cases to trial, but to position their clients for a favorable settlement. Lawyers who wind up in trial are lawyers who have failed in their primary task of evaluating and settling their clients' case. They have exposed their client to the risk of trial, instead of managing that risk and getting the case settled favorably. I think there is very little likelihood that the lawyers in this case will fail to get this case settled.
If everybody and their sister knew Google's MSJ was destined for the round file, why did Google's lawyers bother to file it? Aren't they smart enough to know what we know? Of course they are. They filed it to get settlement leverage.
All the motions that are now pending before the Court are designed not only to affect the outcome of trial, but to increase the parties' settlement leverage.
Believe it or not, all the involved parties in this case have known for a long time that this case would eventually come to a point of settlement. Therefore, all the motions that have been filed have one eye on trial outcome, and one eye on creating an advantage in settlement negotiations.
When Google filed its MSJ, my guess is that they were hoping that the motion would be "hanging over Vringo's head" during the settlement negotiations, thus driving the settlement price down. The same with all the other motions. The problem with the MSJ is that the Court ruled on it, thereby shifting the settlement leverage associated with that motion from Google to Vringo. The denial of the MSJ means that a jury trial just became an unavoidable reality for Google.
The settlement landscape has changed, and the dance is about to get serious.
I have been very clear in my belief that settlement conversations have been ongoing in the background, between the attorneys. This is normal, and expected. I think those conversations stopped today. Not for any bad reason, mind you, but for a good reason. The settlement conversations have been moved from the back burner to the front burner, and I believe settlement momentum will now begin in earnest. The parties now have a Court date for a judicial settlement conference.
Leverage is extremely important in settlement negotiations. As I said, the pretrial motions provide leverage. At 9:30 a.m. next Tuesday (October 9), two important pretrial motions will be argued before Magistrate Judge Lawrence Leonard. Judge Leonard will be deciding whether to strike some of Google's trial evidence on Vringo's 2nd and 3rd Motions for Discovery Sanctions.
If the October 9 date sounds familiar to you, move to the head of the class. At 10:30 a.m. that morning, immediately after hearing Vringo's motions for sanctions, Judge Leonard will hold a mandatory judicial settlement conference that Vringo and Google are ordered to attend. Do you think it's a coincidence that Judge Jackson set the settlement conference on October 9 before Judge Leonard, immediately after Judge Leonard hears the motions for sanctions? No, because Judge Jackson also knows about settlement leverage. That's what this is about.
Imagine that during the 9:30 motions next Tuesday, Judge Leonard tells the parties, "your arguments are very interesting, and I will think about my decision. Now let's talk about settling this case." He then invites Google into his chambers, and explains to them very honestly that the motions look bad for them, and there is a good chance he will grant Vringo's request for sanctions against them, so they really need to think about increasing their settlement offer by a substantial sum. Google grimaces, but agrees. After all, the Judge has a lot of leverage while he is considering whether to grant Vringo's motions for sanctions.
Next, Judge Leonard excuses Google from the room, and invites Vringo into his chambers. He frowns, and explains to Vringo very honestly that the motions look bad for them, and there is a good chance he will deny Vringo's request for sanctions, and admit the evidence that Vringo is seeking to exclude, so they really need to think about decreasing their settlement demand by a substantial sum. Vringo grimaces, but agrees. After all, the Judge has a lot of leverage while he is considering whether to deny its motions for sanctions.
Sensing weakness, the Judge gives both sides some time to think about it, and he schedules another mandatory settlement conference the next day. This continues until an agreed settlement figure is reached. It doesn't have to happen in a day. Multiple settlement conferences are common.
Welcome to the world of high-stakes judicial settlement conferences. Courts know how to create and use leverage. Judicial settlement conferences are extremely effective tools for settling cases, because they get the attorneys out of the way, and allow the Court to threaten, cajole, and mediate between the parties in order to find and exploit settlement cracks.
Settlement Options: Buyout or Cash Settlement?
By use of leverage, litigation positions are softened, and settlement positions are exposed. There are two prevailing views on how a settlement would be likely to be structured. Google can either pay money to Vringo to settle the case, or alternatively, it can make a buyout offer to Vringo that is sufficiently rich that Vringo has little choice but to accept it.
Google's best case analysis is to buy Vringo. This is good for Google, because for its money, it doesn't merely get released from the lawsuit, it gets to own all of Vringo's patent portfolio, which by all accounts has a lot of value. Then Google gets to sue everybody to enforce those patents, not Vringo. And the money from the future patent enforcement goes to Google, not Vringo.
This is not the best outcome for Vringo's shareholders, but it may be unavoidable. The reason I believe this is simple. I have become a believer in Vringo's new core business of monetizing their patents, and their ability to carry it out. There is nobody on Vringo's hit list of companies to sue who will be bigger and badder than Google. If Vringo can force Google into a settlement, then the only question Vringo is going to hear in the next suit is going to be "how much do we have to pay, and how long can we have to pay it?"
Note that my use of hyperbole is, in fact, hyperbole.
If there is a buyout, Vringo's shareholders get paid once. If there is a cash settlement instead, then Vringo shareholders own a gift that just keeps on giving, since its patent portfolio is like a fertile field that will produce bumper crops year after year.
The risk here (and this idea is not original, but was pointed out to me) is that Vringo may not be able to avoid a buyout. If Google makes a buyout offer at say, $12 per share, Vringo may have to accept it. Remember, Vringo has a board of directors, and the board has a duty to act in its shareholders' best interest. In other words, they have a duty to protect you and me. Accepting a $12 per share offer is a safe move, and it is one they may have to make, because if they reject such an offer, and the shares later fall back to $3 (or worse), they will be looking at shareholder suits for not having accepted the buyout. See what I mean? If a large buyout is offered, Vringo may have to accept it. Not that I will complain about having my $3 bet quadrupled, but it means that my $3 can never turn into $25.
The most commonly touted alternative to a buyout is for Google simply to pay a sum of money to Vringo for past and future royalties for infringement. Once a sum is agreed, the lawsuit and the USPTO reexamination get dismissed, Vringo gets a fat check, and Google gets a license to continue use of the Lang patents. Everybody goes home happy. With the Google case done, the Vringo execs each buy personal jets and fly to China, where they use Google Translate to tell ZTE how many zeroes to put on their settlement check. And so on down the line.
Unlike a buyout, a cash settlement is Vringo's best case scenario, because the team they have assembled puts them in a pretty intimidating position to monetize their patent portfolio. I'm guessing that as we speak, Microsoft (NASDAQ:MSFT) is trying to figure out how much of a settlement reserve to put aside to hand to Vringo when they come knocking. And they will come knocking.
On The Other Hand, Everything Could Still Fall Apart
Everything I have mentioned about settlement leverage and positioning means that this case should settle, whether by buyout or cash settlement. Perhaps I have discussed the matter too casually, thereby doing you a disservice of feeling too comfortable. Bear in mind, however, that everything could still fall apart. There is always a chance that the case will not settle. Maybe Google insists on buying the Lang patents, and Vringo insists on merely licensing them. Maybe Vringo insists on $1 billion in cash plus future royalties, and Google feels that future royalties should be built into the settlement amount. Cooler heads may not prevail, if things become position oriented. The settlement judge is there to make sure people don't get entrenched in positions, but it happens. I am optimistic that this case will settle. Just don't go spending any of your Vringo money until it's settled funds in your brokerage account.
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.