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Vringo (NASDAQ:VRNG) is a litigation company, most notably suing Google (NASDAQ:GOOG) for a set of patents in search engine filtering. VRNG is a small-cap trading with high sensitivity to this case.

Google has introduced into evidence prior art patents which existed before Vringo's patent. This means that the actual IP held by Vringo is not represented by its patents alone.

Vringo's IP is represented by its patents, minus the prior art.

This point is underscored by the USPTO, which has granted Google's request that it reexamine some claims in Vringo's "420 Patent". Reminding us of what can happen with prior art is recent news from another company suing Google internationally:

(click to enlarge)

Vringo Bulls Are Ignoring Prior Art

Ed Liston's article is an example of a majority of Vringo articles. Liston summarizes the patents held by Vringo and compares the IP to Google's business practices. This skips the step of subtracting prior art.

The "420" and "664" Patents

Both patents are directed to (that is lawyer lingo for "related to") the so-called Lang/Kosak Relevance Filtering Technology which produces more relevant search results for user queries. This technology aims to

  • filter items for content relevancy to a search query, so if you search for "Vietnam travel" it does not produce pages about "local dentist."
  • provide feedback information from prior users, and in filtering the items. So it tells you if the algorithm was not working for some query.
  • combine the provided feedback information with the content relevancy to determine whether (or where) an item should be "ranked" in a search results resp, summarizes the patents held by Vringo and compares the IP to Goonse to the query.

[...]

As we can see, what Google calls Quality Score appears to be what Lang and Kosak called relevance in their patents.

There are two prior art patents known as Culliss and Bowman which each contained the ideas represented by the three bullet points above. This is a fact. You can read the full proof here starting on page 20 in Google's Motion for Summary Judgement (which was not granted, more on that later).

I encourage you to read the full text of the MSJ. To illustrate my point in this article, I will restate the Bowman facts as relating to the 3 ideas claimed by Vringo. I am excerpting from the MSJ.

Here is proof that Bowman's patent included "content relevancy".

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 included "filtering information" and "combined scores":

Although [Vringo's witness] 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".

There you have it: all three points Vringo is suing for are in the prior art.

Regarding the denied MSJ: Summary Judgment is usually not granted in patent cases; this does not mean that Google's prior art case is not strong. MSJ being denied says very little about the prior art.

Even if Google's prior art case was weak, it would certainly be worth mentioning. But it hasn't been mentioned consistently in the Vringo investment narrative, nor analyzed publicly by any objective expert.

This much is clear: Vringo's IP is something one might describe as a "remix" of patented ideas. Most Vringo articles ignore this, and assert that Vringo's song was an original.

Overvaluation of Shares

With so many articles presenting the prior-art-free case to VRNG investors, one can reasonably assume that the small-cap is pricing this in. The Vringo you are buying is suing Google for a remix, but you are paying for a Vringo that can sue for the original.

This raises the question: what is the remix worth? Only Vringo's side of the story has been heard: Google has refused to comment to investors on Vringo's claims. Google has restricted much of its court filings (such as proprietary software code) from public scrutiny. But Google has pointed out that Vringo paid less than eight figures to acquire the patents not long before filing the lawsuit a year ago.

Is Vringo talented enough to flip the patents' market value into high-nine figures within a few years? Far more likely, in my opinion, is the ability of bulls in the small-cap market to sell a remix for the price of a song.

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.

Source: Vringo: Remix For The Price Of A Song