Well, yesterday was interesting. Judge Jackson rocked the Vringo universe yesterday with a stunning ruling in the Vringo (NASDAQ:VRNG) vs. Google (NASDAQ:GOOG) case that limits Vringo's potential damages to those incurred since the date of filing of the Google lawsuit. In so doing, Judge Jackson threw cold water on a promising day for Vringo investors, whose stock rose to an intraday high of $4.47 before plummeting to $1.75 on the news.
After intermittent trading halts, the stock settled -- or, more accurately, was frozen -- in the mid-$2s by the end of the trading day. News of a T1 trading halt going into yesterday's close gave rise to speculation regarding a significant news announcement, but no additional significant news has eventuated.
This morning, Judge Jackson initially indicated he would only apply the laches argument to Google, and not to the remaining defendants. But in the end he wound up sticking with his decision, so there is no change in the laches impact announced yesterday. In other words, the start date for Vringo's damages can be no earlier than Sept. 15, 2011, the date it filed the lawsuit.
Closing arguments are completed and by the time you read this, the jury will have been instructed and will begin its deliberations. There is a very good chance the verdict will be announced tomorrow (Friday) during the trading day. In fairness, I hope it is announced after trading is closed or that trading is halted before the news breaks so that everybody will have the same opportunity to make considered, as opposed to impulsive, trading decisions. The confusion and panic we saw yesterday simply wasn't fair to the retail investor.
When the verdict is announced, here are the most important issues we will want to listen for and the considerations associated with them:
1. Did Vringo Prove Infringement?
The import of this question is obvious. If there is no infringement, then we have all treated ourselves to a costly education on betting on lawsuits. If Vringo cannot prove infringement its stock will plummet, and, fairly or not, its credibility on its patent enforcement business model will take a huge hit. In reality, the outcome of the case should not have a huge effect on the stock price, since at its current levels below $3.00 there are many reasons to consider that the company is fairly valued in relation to its patent portfolio and future enforcement prospects. Nevertheless, I doubt there will be many retail investors who will be interested in staying on for the ride if Vringo loses outright.
2. Did Google Prove Invalidity?
Again, this is a win/lose question. If the jury finds the patents are valid, that is obviously good news since I don't think the jury even gets to that question unless it has already found infringement. If the jury completes the verdict form in a way that leads to a conclusion of invalidity, then see question No. 1 for the anticipated impact on Vringo's share price. If the patents are invalid, Vringo loses -- the same as if there is no infringement.
3. Does Vringo Get a Running Royalty or a Lump Sum Royalty?
This now looms as perhaps the biggest damages issue in the case. If it finds infringement, the jury will be called on to decide whether Vringo should be awarded a running royalty or a lump sum royalty. If Vringo obtains a running royalty, they will have to decide the percentage of the royalty. This would keep the door wide open for an award of future royalties. If the jury awards a lump sum royalty, then from anything I can determine at this point, the door to future royalties would be only cracked, if not slammed and deadbolted. The jury will provide a specific answer on the verdict form as to whether the royalty is running or lump sum. This is a really crucial issue to watch for.
4. What Amount of Damages (if any) Is Awarded?
If the jury awards a lump sum royalty, then there is a very good chance that the damage award is about "as good as it is going to get" for Vringo.
On the other hand, if the jury awards, for example, $100 million in past damages based on a running royalty, then I think we can begin to extrapolate the actual value of the award as the running royalty rate will likely be a significant determinant in Judge Jackson's later decision on future royalties. In other words, a $100 million verdict based on a running royalty would likely confirm Vringo as having an upside of approximately $600 million including future royalties, as has been discussed. Please note that the amount of future royalties is also unpredictable. My use of a $500 million future royalty number is based on Google's own opening statement, which quantified the future royalty claim as being approximately $500 million.
I hope the above information is helpful. The ride has been exciting to say the least, especially the loop-the-loop we were treated to yesterday. Some coins certainly fell out of all our pockets on that one. For what it is worth, I believe that at the current level Vringo is fairly valued regardless of the outcome of the eventual verdict. Despite this, we have already seen how wildly volatile this stock is and how it reacts to polar extremes on any significant news.
I have tried to give you a guide to what I think the important considerations will be once the verdict is announced, but no matter what I think there will be a wide swing in pricing once the verdict is announced. Depending on your outlook, I think the verdict presents a short-term trading opportunity using near-dated puts or calls, with the understanding that the outcome is very likely to cause a big mood swing in one direction or the other, which may be susceptible to leveraging by use of options trading.