What Is Behind Vringo's Lawsuit Against ZTE?

| About: FORM Holdings (FH)

Vringo (VRNG) announced yesterday that it has filed a lawsuit in the British Patents Court against ZTE's (OTCPK:ZTCOF) U.K. unit for allegedly infringing on 3 patents whose rights are held by Vringo. The patents in question are related to mobile phones and infrastructure gear. These are among the 500 patents Vringo recently acquired from Nokia (NYSE:NOK), as detailed in this SEC 8-K filing from September 8.

Vringo has undertaken to fight a slew of lawsuits against various giant technology (and other) companies on patent infringement questions. Many of these are patents it has acquired from other companies. For example, some search advertising related patents that it alleges Google (NASDAQ:GOOG) and AOL (NYSE:AOL) infringe on are from the now-obsolete Lycos, a search engine company from the 1990s. In all, it has waged wars against IAC (IACI), Target (NYSE:TGT), Gannett (NYSE:GCI), AOL, and Google. As I write this, one such lawsuit against Google is about to be decided in American courts. In light of this background, the ZTE case is important not just for itself, but also as to how the results might be used against other mobile hardware companies. Since many of these patents are standards-essential patents that need a FRAND license, Vringo can easily find other mobile hardware manufacturers to sue.

The Patents In Question:

ZTE has allegedly infringed upon these 3 European Patents, Nos. EP1212919, EP1166589 and EP1808029. I looked through the Espacenet database to locate the actual patents. Here's a brief summary of what they entail.

Patent No EP1212919

This patent was granted to Ahmavaara Kalle of Nokia Corp. with effect from 08.09.2010 and titled "Relocation in a Communication System." The status of the patent is "in force."

The field of the invention relates to relocation in a communication system, and in particular, but not exclusively, to relocation of a protocol termination point. The invention can apply, among other things, to gateway GPRS supporting node (GGSN) and gateway mobile switching center (GSMC), which are essential to developing mobile communication hardware.

Patent No EP1166589

Inventor here was Benoist Sebire of Nokia, and the patent titled "Rotating Synchronization Channel (SCH) Transmission" was granted on 18.06.2008 and is still in force.

The field of the invention relates to radio telelphones and mobile stations capable of operating with digital downlink (forward) transmission from a plurality of base stations. It presents a method of transmitting information to a mobile station irrespective of traffic slots assigned to it.

Patent No EP1808029

This one was granted on 17.06.2009 to Antti Pitkamaki of Nokia, titled "Inter-system hand-over of a Mobile terminal Operable with a First and a Second Radio Access Network."

Here, the field of invention relates to mobile originating service-based inter-system (in particular, terminal-oriented) handover having improved characteristics from previous models.

All three patents form part of the backbone of Nokia's mobile hardware technology, and are considered essential technology for most of today's mobile hardware. Although Vringo has acquired them from Nokia in September this year, the relevant patent documents at the PTO are yet to be updated with assignee information.

Patent Acquisition Details:

On 9th August, Vringo announced that it will buy over 500 patents from Nokia for a price of $22 million. It also said that it will raise $31.2 million for the purchase by selling 9.6 million shares of its common stock. Besides the cash payment, compensation included certain ongoing rights in revenues generated from the patent portfolio. According to the relevant press release, "Thirty one of the 124 patent families acquired have been declared essential by Nokia to wireless communications standards. Standards represented in the portfolio are commonly known as 2G, 2.5G, 3G and 4G and related technologies and include GSM, WCDMA, T63, T64, DECT, IETF, LTE, SAE, and OMA."

The 3 disputed patents form part of this group.

Background to the Lawsuit:

It may look interesting that Vringo - described as a patent troll and an intellectual property firm, not a technology company - filed the lawsuit against ZTE the same day the latter was described in the House Intelligence Committee as an espionage threat to the US. This was also the day when Cisco Systems (NASDAQ:CSCO) dropped ZTE for allegedly illegally selling products to Iran. However, this is a coincidence; Vringo had begun a war against ZTE right after it acquired the relevant patent rights from Nokia. Given that David L. Cohen, Vringo's chief IP strategist, is ex-Nokia, the war seems pre-planned from much earlier.

On September 25, Vringo sent a letter to ZTE informing them that Vringo has acquired rights to 31 families of standards essential patents, some of which are related to UMTS and/or GSM/GPRS, and which ZTE has allegedly infringed upon since 2002. Vringo offered FRAND license for all essential patents that ZTE considers necessary to license, barring which it threatened legal action.

In a published news release, Vringo said:

"The filing of this action in the United Kingdom is an initial step in Vringo's global licensing and enforcement program in the telecommunications sector. ZTE has elected not to take a license to patents in Vringo's portfolio relevant to certain international standards, despite manufacturing and selling devices and equipment for a number of years that are said by ZTE to be compliant with those standards," said David L. Cohen, Head of Licensing, Litigation, and Intellectual Property at Vringo. "We believe that ZTE is aware that it requires licenses to all patents that are essential to relevant standards. Further, we believe that ZTE is familiar with systems for declaring patents to standards-setting organizations and the relevant intellectual property rights policies for those organizations, having itself declared hundreds of patents to international standards."

Claims in the Lawsuit:

Vringo claims that ZTE's cellular network elements fall within the scope of all three patents, and ZTE's GSM/UMTS multi-mode wireless handsets also fall within the scope of the '029 patent mentioned above.

I read a copy of the lawsuit. Among other claims, Vringo wants the following from ZTE:

(4) An order for delivery up or, at the Claimant's option, destruction upon oath of all products, articles and other materials in the possession, power, custody or control of the Defendant the keeping of which would infringe the Patents or any of them;

(5) An inquiry as to damages in respect of the Defendant's acts of infringement of each of the Patents or, at the Claimant's option, an account of profits derived by the Defendant;

(6) An order that the Defendant pay to the Claimant all sums found due upon making of such inquiry and/or taking of account together with interest thereon pursuant to s. 35A of the Senior Courts Act 1981 and/or the inherent jurisdiction of the Court at such rate as the Court thinks fit.

The lawsuit presents a very detailed study of how and where ZTE allegedly infringes on these 3 patents, so I am not going into that. However, I think Vringo would rather settle this and other similar cases, rather than fight them out through trial. Vringo is not a small tech company trying to protect its useful assets, it is an intellectual property management firm whose business is IP litigation and making money through settlements and licensing where possible.

Broader Implications of the Lawsuit: Analysis

Vringo has had a strange transformation since its founding in 2006. It changed focus from being a moderately interesting technology company offering video ringtones and other products to becoming a major IP litigation firm. I locate the origination of this transformation since early this year, when on March 4, 2012, Vringo entered into an agreement to merge with Innovate/Protect Inc. This is a company whose sole occupation seems to be to acquire and litigate over intellectual property. A few years ago, Vringo (or rather, Innovate/Protect) acquired key patent rights from Lycos, a highly innovative tech company of the early 1990s that has fizzled out under pressure from Google and others. Many of these patent rights relating to online advertising technology are arguably infringed by the likes of Google and AOL; easy targets for the firm as is being showed today.

Consider the Lycos patent portfolio and associated lawsuits as the phase I for Vringo. It has had huge success in this phase, winning lawsuits or settlements against AOL and about to win one against Google.

The mobile technology patent portfolio that it acquired from Nokia is its second phase in "maximizing the economic benefits of intellectual property assets." This phase has been started off aggressively with a pursuit of ZTE. However, this is only the beginning. As Vringo's head of licensing, litigation, and intellectual property David Cohen said, the court action against ZTE is just "an initial step in Vringo's global licensing and enforcement program in the telecommunications sector."

Vringo has huge strength in its IP litigation department. See the graph below from its website

(Click to enlarge)

As you can see, David Cohen and Donald Stout have immense experience in IP litigation, and Dickstein Shapiro is one of the most well-known IP litigation law firms around. Here's a more detailed list of key members from J. P. Moreno's analysis of Vringo:

  • Andrew K. Lang - Former CTO of Lycos and key inventor of the acquired Lycos patents, CEO and CTO of I/P before the merger. Current CTO, President and Director of Vringo.
  • Donald M. Kosak - Technical consultant and patent co-inventor.
  • Donald E. Stout - Co-founder of NTP, Inc. - which reached a $612.5 million settlement in 2006 with Research in Motion (RIMM), former U.S. Patent examiner. Current Director and Chairman of Vringo's Intellectual Property Committee.
  • David L. Cohen - Former Senior Litigation Counsel at Nokia, Special Counsel of I/P before the merger. Current Head of Litigation & Licensing for Vringo.
  • Dickstein Shapiro LLP - Nationally ranked intellectual property litigation law firm representing I/P in current legal dispute.

So, to answer my original question, Vringo's underlying agenda is pursuing other mobile technology companies in order to make money through settlements and subsequent licensing. As the analysis by Moreno says, the IP portfolio Vringo inherited is alone worth over $172 million over the next 4 years.

Vringo as an Investment:

VRNG shares have jumped almost 500% YTD. In the last 7 days alone, the stock has climbed almost 90%. It is still bordering the small-cap range at around $5.43. There is considerable upside potential to this stock. The territory is uncharted; as news about its latest litigation conquests develops, the stock is going to get to higher and higher levels. However, long time investors who thought they had invested in a tech company should be aware of the latest developments in the company's focus. While its tech products like Facetone are very important assets, the company seems to have begun to focus more on what I just discussed here. That is all very positive for the company; however, investors should be aware of where to look for information about the company - legal databases and not technology websites.

There are many, many other issues that I have not been able to cover in this brief article - insider trades, legal beef with Google, Innovate/Protect and what it was all about, Vringo's social mobile products - and I hope to do that in a future article(s).

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

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