Let's cut through all of the noise and get to the question that has flooded the investment world: In their decision for Vringo (VRNG) vs. Google (GOOG), did the jury miscalculate the royalty rate for last year's damages in regard to Google?
My understanding of this increasingly murky math is as follows: The rate of 35% was assigned to profits for AOL, IAC, Gannet, and Target. Since AOL's ad-related profits were $22 million, Vringo will receive approximately $8 million based on a 35% royalty rate. This rate was used for the other defendants as well, except for Google.
In regard to Google, a 3.5% rate was used. Since Google's ad-related profits were about $450 million, a 3.5% rate brought Vringo approximately $15.8 million. Add that to the $8 million from AOL, $6.6 million from IAC, a whopping $4.3k from Gannet, and $100k from Target, Vringo is scheduled to receive an immediate payment of $30.5 million.
The question is why did the jury scale down to 3.5% for Google but used 35% for the remaining defendants. The obvious and logical answer is that the jury simply made an error. In retrospect, it is no surprise that the foreman came out twice to ask the judge about damages calculations.
If that were true, it would seem probable that the judge will come out and rectify this egregious error. But more importantly, the stock price should have reflected the awareness of this error. That the stock went down today says one of three things:
1) Investors are not aware of the error. I find this hard to believe, though, considering that the purported jury error is all everyone is talking about now.
2) The switch from 3.5% to 35% may have been deliberate. The jury has the right to choose the penalty. They already rejected the Google expert witness who said that no royalty should be paid. The jury was simply exercising their judgement.
3) Investors are wary of a Google appeal. Google could attempt to drag this out, and after the underwhelming damages, they might feel a bit more confident going forward.
While a frustrated Vringo investor might accuse MM's of holding down VRNG, there are many legitimate questions and risks that need to be played out. In addition to a possible Google appeal, there is the clarification that Judge Jackson will provide tomorrow. While I felt that he was more pro Vringo for most of the trial, save for Latche, he could just as easily hold up the 3.5% calculation, or even change the future royalty rate of 3.5% on the next 4 years to a lower number. Unlikely, but again, impossible to predict.
On the plus side for Vringo investors, it should be noted that Vringo is indeed aware of the possible miscalculation and is making sure that the Judge looks into it. "The company has received numerous inquiries about the jury's calculation of past damages. Vringo's legal team is reviewing the verdict and plans to address all post-trial matters with the Court."
In all fairness, the Pacer filed today by Vringo was not related to the possible jury miscalculation. It is in regard to pre-judgement interest, and would come out to roughly $600k.
Another positive is the recent reiteration by Maxim Group's John Tinker of Vringo's $10 a share target price.
And let's not forget what investors came for. A victory. Jeffery Sherwood, the stalwart lawyer who put on a tremendous performance these past two weeks, had this to say:
"We are very pleased with the jury's conclusions with respect to validity and infringement. It is a very significant win."
Notice how he focuses on infringement, and no mention of damages. This means that the victory was the most crucial hurdle until now. With that solidified, damages are the next item for Vringo lawyers to set their teeth into. Google's lawyers did not impress in the courtroom, and I have no reason to believe that they will prevail in regard to damages.
And last but not least, Vringo has another card that it will certainly play: The Latche appeal. The Latche ruling initially denied Vringo's right to collect damages from the past 10 years, and rather only from when they filed the lawsuit-- slightly over a year ago. A successful appeal to Latche would re-open these past 10 years in damages. I'm with Tinker.
Disclosure: I am long VRNG.