Seeking Alpha
Special situations, deep value, growth, momentum
Profile| Send Message| ()  

Following up on an article written earlier this year, it was reported on Nov. 6, 2012, that the "420" and "664" patents owned by Vringo (VRNG) were finally "validated" in a Federal court. The defendants put up a good fight all the way, but did not prove to the jury with clear and convincing evidence that the asserted claims of the patents in question were, in fact, invalid.

From a Virginia courtroom, the jury unanimously returned a verdict award for Vringo amounting to $32 million with respect to "past damages" involving the following defendants: Google (GOOG), AOL (AOL), Target (TGT), Gannett (GCI), and IAC/InterActive (IACI). The jury granted what is known in the legal arena as "reasonable royalty rates" in addition to the approximate $32 million in damages. So, plaintiff Vringo will also be awarded an additional 3.5% in running royalties on its patents until they are due to expire in 2016.

Reports are now suggesting that the deal could equate to much more than "past damages" of $32 million -- an additional $125 million to $150 million per year in royalties for five years. Of course, this depends on the growth in revenues of the defendants, but sales of Internet giant Google's revenues have been trending higher through the years.

As reported by Vringo late yesterday in its official press release:

The asserted claims of the patents were both valid and infringed by the defendants. The jury, not the judge, found that the following sums of money, if paid now in cash, would reasonably compensate Vringo's I/P Engine for the defendant's past infringement as follows:

-- Google: $15,800,000

-- AOL: $7,943,000

-- IAC: $6,650,000

-- Gannett: $4,322

-- Target: $98,833

The judge and counsel will surely be crunching the numbers to see if the calculations regarding the 20% of revenue numbers for each of the defendants are correct. I suspect that these numbers are a bit light. Quite possibly, the Google calculations are just the jury's interpretation of damages, short of what Judge Jackson might render a final award. We will have to see what the judge has determined after some fact-checking the real figures based on revenues that were reported inside the courtroom.

Vringo supposedly got what it was asking for except for the damage award, which was surprisingly way off. It is quite possible that the jurors calculated the damage award based on real revenues incorrectly. Some clarification may need to be made from the judge. I have already seen a lot of misinformation stating that Vringo only won $30 million in this lawsuit, and that's just not the case here.

Let me be perfectly clear that Vringo's courtroom victory may be worth over $500 million-$600 million in overall royalties, and it may be the impetus to opening the floodgates that could garner other similar patent search lawsuits in the coming weeks. Longs in this stock will want to book gains as the stock climbs higher.

Let's review: After an intense past two weeks of trial and jury deliberations, along with extreme wild swings in the stock from week to week, the jury in Virginia confirmed what many already suspected -- the validity of Vringo's patents. Rightfully so, the plaintiff was awarded judgments against some pretty powerful tech giants that included Google, AOL, Target, IAC/Interactive, and Gannett in this widely publicized lawsuit. Those of us who did our due diligence felt strongly that Vringo had substantial and sufficient evidence to prove (as it did) that the accused defendants infringed on Ken Lang's "420" and "664" patents.

Furthermore, it makes sense that we should all expect many more details to follow. One might even speculate that additional lawsuits encompassing these collective search patents could essentially open the floodgates (as alluded to earlier) to other leading search engines, such as Yahoo (YHOO) and Microsoft (MSFT).

Also, I think that the Vringo case is far from being over. Judge Jackson still needs to affirm the jury's damages and royalty rate given in court. Knowing full well that he ruled on the "laches" on behalf of Google last week, I would not be surprised to find out that he may have done this to keep Google from appealing the "final" awards, which are pending. You should know that it will be up to his discretion to keep or adjust the final damages and royalty rates given by the jury. If he wants to, he could very well increase the royalty rates to lean more in favor of Vringo. We shall soon see.

Clearly, this would be the most opportune time for Google to start making some concessions, vs. waiting for the judge's final word, getting together with the plaintiff to develop an amicable final settlement plan. What if Vringo files a laches appeal, or even worse a cease and desist on the patents? It might make sense now for Judge Jackson to raise the royalty rate to offset the laches decision. This makes perfect sense to keep Google from filing its appeal. No one wants to drag out a patent abuse case for years, so a settlement is still feasible.

Lastly, I'm sure that the company has been under some sort of gag order not to discuss details of the trial to the media regarding any court developments or other significant news that may be worthy of telling investors over the past few weeks. So, we will have to see what else it can shed some light on following Judge Jackson's final ruling this week. The ZTE (OTCPK:ZTCOF) patent infringement lawsuit is pending as well -- it was announced last month. So be on the lookout for more details to follow here as well.

Source: Vringo's Court Win Suggests Running Royalties May Yield $500-$600 Million