Google Vs. Vringo: Why I Think A Settlement Is In The Cards

| About: FORM Holdings (FH)

In this article, I would like to first provide a brief overview of my previous predictions for Vringo (VRNG), and then address what I think is about to happen this week. It's important to address the past at this juncture because a minority of folks on the twittersphere have deemed it necessary to take some of my off-the-cuff comments that were clearly "wishful thinking," or an outright joke to spread the idea that I have been "shockingly incorrect" on the Vringo case. So let's look at the tape, and see if I've really been off base.

The Past

On August 21st, 2012, I predicted that VRNG could easily rise to $5 or above in the late September-early October timeframe based on settlement speculation alone. What actually happened? The stock rose to $5.25 on October 4th based on settlement speculation alone. Seems like I was shockingly correct on that one, no?

On August 24th, 2012, I predicted that Google et al. would submit a Motion for Summary Judgment based upon the Prior Art references of Cullis, Bowman, and Ryan. What actually happened? Google et al. filed a Motion for Summary Judgment on September 12th, 2012 relying heavily upon the Bowman and Cullis references. Seems like I got this one correct weeks ahead of the actual event as well.

On August 30th, 2012, I published our damage estimates in this case, and outlined how they were calculated. Our estimates were for a Final Judgment, which included the Pre-Judgment interest but not future royalties. The very next day Maxim Group published their damage estimates, which did not include Pre-Judgment interest but did include royalties. If you include the missing information for our estimates and Maxim's for comparison purposes both estimates fall around 1.5B all-in-all (base award, pre-judgment interest, and future royalties). I fully admit that my calculation differs by 200M higher, but not bad considering I lack the resources of the Maxim Group.

So what happened? That still remains to be seen because the final numbers are still in flux. However, we do know that Dr. Stephen L. Becker suggested a $696M base award plus pre-judgment interest and future royalties. And we know that he used the same approach (Entire Market Value and Reasonable Royalty Rate) used in Maxim Group and my calculations. To check our estimates, I plugged and chugged Dr. Becker's base award in with the missing values. His numbers would extrapolate to around 1.1-1.3B. So overall, I was close to the so-called experts, but considerably higher than the numbers being considered inside the courtroom. But I was definitely not "shockingly" incorrect. With that said, the damage estimates do appear to be going down considerably due to the use of only U.S. revenues, not worldwide.

On September 18th, 2012, I predicted the following in my previous Seeking Alpha article:

1. Google would submit a Motion for Summary Judgment.

2. The motion would attack the term "collaborative feedback data" using prior art and their trade secrets.

3. The Motion for Summary Judgment was DOA.

4. Call options were an excellent way to profit from this case.

What happened? Google submitted a Motion for Summary Judgment, used prior art and their trade secrets to attack the term collaborative feedback data, the motion was denied, and calls have skyrocketed to over 100% in many instances. Seems like these predictions were dead on as well.

Overall, the only issue that I have been incorrect on is my call on the court allowing untimely prior art, and Vringo is doing its best to get that decision reversed. Yet, according to some bashers, I have no idea what I'm talking about. If you are of the same mind as them, please ignore the next forward looking part of this article. You will only find it to be more useless supposition and speculation.

Predictions for this week

The recent motion activity has been quite interesting from both an intellectual and an investor perspective. My reading of the tea leaves is thus: The Judges are forcing this to a settlement and it's Vringo, not Google that's dragging its feet. If you have been carefully reading and researching this case, you should have come to the conclusion that Google is NOT preparing for a trial. Google, from the onset, has been sailing the ship to avoid a massive settlement (> 1 billion). Why do I say this? As a legal research assistant for nearly 3 years, I had the opportunity to watch dozens of cases (criminal and civil) move through motion hearings and into trial. The one clear takeaway from this experience was that when a trial was imminent, both sides would attempt to hire as many experts and the best experts their respective budgets allowed.

It's been said about this case elsewhere that the trial will ultimately come down to how the Jury feels about critical experts. And yes, I mean feels, not believes. This case is way too complex for a Jury to understand fully, and they are going to rely heavily on expert testimony. Thus far, Vringo has gone out and gotten the absolute best experts in the information technology field. Google, by contrast, went out and hired someone with a highly suspect background in regards to expert testimony and whose formal training lies in chemical engineering. Moreover, Google's legal team spoon fed him his lengthy expert report, which is shady to say the least. Overall, this is not how a major law firm preps for trial, but rather how they avoid trial. If Vringo's legal team can impeach the credibility of Dr. Ungar in front of the jury, and that seems simple enough to do, the jury will tune out everything else their side has to say. Any decent attorney knows that, and this is why I can't personally believe Google seriously wants a trial. Lastly, Google's instructions to the jury are extremely insightful in understanding their thought process. After a litany of straw men arguments about non-infringement, invalidity, obviousness, and laches, Google basically admits to infringing towards the end of the instructions. But here is the catch: They only admit to using the patents since November 2010, not the first quarter of 2004 per Vringo's claim (again, a way to limit damages, not win at trial).

My best guess is that Google is ready to settle for a lump sum around 300-500M, and is using the threat of an appeal as leverage to push the number down as much as they can. Vringo may have gotten greedy during the settlement conference, and this is why the Judge made it clear treble damages are off the table. While it wasn't in the original complaint, Vringo did address willful infringement in its instructions to the Jury, arguing in favor of treble damages. Given that the court quickly addressed this issue thereafter, I find that a big hint that this was a sticking point for a settlement. Why settle for 500M when you can get 1.5B after all?

My final prediction on this case and the one I'm most hopeful about is this: Google and Vringo will hammer out a settlement sometime between Monday and Wednesday of this week. Because Vringo won the future royalty issue, it's hard to say how much the settlement will be all-in-all. My gut feeling is the $500-$600M neighborhood. I'm only basing this on what I think Google has offered in regards to a lump sum payment, plus what Vringo might be arguing for in terms of future royalties. In this way, Google gets a discount for settling now versus later, and Vringo won't have to face an unpredictable appeals process. Win-win for everyone in my humble opinion.

Right or wrong, this week is shaping up to be drama filled for Vringo longs and shorts alike.

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.