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Could The VRINGO Vs GOOGLE Verdict Have Been Stymied By A Simple Clerical Error? 29 comments
A fellow VRNG watcher by the name of MikeHD has discovered something very illogical and interesting about the recent damages calculations handed down by the Jury in the VRNG vs GOOG patent litigation case.
see mikes assessment here:
http://www.investorvillage.com/smbd.asp?mb=17604&mn=1094&pt=msg&mid=12272669
I do not agree with his conclusions that the jury used bad math or completely misunderstood the judges instructions.
here's why..
because 35% looks so similar to 3.5% many people have assumed that the jury must be applying 3.5% to the damages calculations which were supplied to them.
These numbers were already derived from 3.5% of 20% of US revenues so it makes no sense at all that they would apply 3.5% again.
(C'mon are we seriously trying to suggest that all 9 jurors didn't notice the flaw in that logic?)
most people are trying to reconcile 35% with 14 months (from initial complaint) versus 6 years in the original complaint.
at first glance 14 months does not look like 35% of 6 years..
but the percentage is not supposed to represent the chronological proportion. It is supposed to represent the revenue proportion.
as you can see from my spreadsheet which I posted before the verdict, the revenues attributed to 2012 are much higher than the revenues for 2007.
this is because revenues have been growing by between 20% and 30% year on year.
http://www3.picturepush.com/photo/a/11304676/img/11304676.jpg
according to my spreadsheet (which uses very conservative numbers) 2012 revenues represent 25% of the damages claim.
1 / 493 * 124.42 = 25.2%
now we know that there are 14 months of damages being awarded so we need to do some more math.
25.2% / 12 * 14 = 29.4%
close but still not 35%!
now keep in mind that spreadsheet is using conservative numbers...
if we use the more optimistic revenue growth of 30% year on year for Google's advertising revenues (for the period 2007-2012) then
we come up with a figure of 143.5 million claimed royalties for 2012
Revenues back to September 2011: 143.5 / 12 * 14 = 167.41
Percentage of 493 million as damages: 1 / 493 million * 167.41 = 34%
lets say that for arguments sake that the jury came up with a number close to 34% and decided to round up to 35% to make things simpler.
now that they have 35% they begin to apply it to all of the figures: (taken from mike HD)
aol $22,693,517 x 35%= $7,942,730 damage amount $7.9mil
Iac $18,917,570 x 35%= $6,621,149 damage amount $6.6mil
target $282,380 x 35%= $98833 damage amount $98833
ganet $12348 x 35%=$4321 damage amount $3432
(Edited to fix clerical error)
GOOG $451,190,903 x 35%= $157,916,816 damage amount $158 million.
this means that the total damages awarded to VRNG should be closer to $172,583,849
therefore in conclusion it is my belief that it was a simple clerical error which dropped a 0 off Google's damages number or an erroneous decimal point which was inadvertently typed into the calculator when they were applying the %35
(after all if you keep hearing 3.5% in the court for days on end it would be a pretty simple mistake to make to type in 3.5% instead of 35% when doing the sums)
i don't think the jury is heartless or stupid.. but I do think that like any other group of human beings.. its easy to miss a digit when you are looking at such big numbers.
I believe the juries calculations are SOUND in accordance with their findings have given VRNG exactly what they had asked for (excluding of course the damages barred by latches which the jury cannot change)
and further more it seems clear to me by the wording of their findings that they recommend that 3.5% be applied as a future royalty for the next 4 years.
my guess is that none of the 9 jurors is an accountant and everyone else just took them at their word literally without looking deeper into it.
kudos to mikeHD I would never have figured this out without his prior discovery.
IMO the court at next sitting will fix the clerical error putting massive upward pressure on the stock.
now that I am armed with a greater understanding of what happened I feel a lot more confident about this stock
Disclosure: I am long on VRNG, I have not been paid for this post. Please take these assumptions as my own opinion and do your own due diligence before investing in risky stocks like these.
Disclosure: I am long VRNG.
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This post has 29 comments:
Steve Kim and James A. both seemed very accepting of the damages.... precisely how they were read by the judge. This gives me concern. Most all, doubt the numbers calculations but Steve and James have not expressed concern or advised judicial remedies if such a mistake had been truely made.
and at the end of the day what those people decide has to be accepted by the parties involved (at least until an appeal can be mounted)
most people in the know aren't too concerned about the missing 140 or so million dollars because they are looking at the bigger picture... the other 500m-1100m due to come over the next 4 years.
that's not to say that VRNG wont try their hardest to get their just dues its just to say that most of the insiders have some level of deeper "perspective" on it and maybe even a sense of "don't push your luck too far"
there may not be much life left in the Lang/Lycos patents but this win is profound as it forces all of the other players to strongly reconsider the option of fighting and come to the bargaining table. (even if they are much smaller than GOOGLE and the awards are likely to me much less)
the court has to establish that the numbers are indeed incorrect before VRNG can announce that they had passed the error on to the market.
by law if a clerical error has been made then it must be addressed immediately by the court so hopefully we will get some news of the next VRNG vs GOOG court session.
"You are one of the many investors who I heard from today pertaining this confusion, and that the department is working on it and soon you will get the update"
$157,916,816 as the basis for estimating future royalties (along with compound growth of anywhere between 10% - 30% per annum)
i plan to address that in my next post.
If the royalty # is "beyond huge", why no post by you claiming victory? Or at the very least explaining why the ruling validates your call?
Once you do that, if the value is much higher than it is now, there might be a nice arbitrage. I like those sorts of plays.
I wouldn't be surprised at anything you do.
As for your challenge and thoughts regarding quantifying risk here, I don't think I've asked you to quantify risk. I've only asked why you are remaining so silent.
The fact is, your pieces, where you speculated on risk and valuation, were written when far less information than exists now. So your quaint little "You can list..." is really just a snotty reply to a legitimate question.
But like I said at the beginning, I wouldn't be surprised by anything you do.
/r
that would be like 3 people rob a bank and the guy that held the gun to the cashiers head gets 1 year in jail while the guys providing lookout and driving the getaway car get 10 years each.
sure that's a pretty extreme example and this is not a criminal case but even so the defendants damages should be relative to their actions.
i doubt it would ever get as far as an appeal by VRNG but i'm sure that the VRNG lawyers and Judge Jackson would be using the threat of appeal as leverage to get something a little fairer out of Google.
go and read the actual verdict sheet and you will see that it is not possible for the 30 million dollar number to be used as the basis for future royalties. It clearly states in the verdict that the intention of the jury is that royalties be calculated at a rate of 3.5%.By law Judge Jackson is only allowed to modestly modify that percentage.
The only risk is that Google will appeal the case.. which, if you take a look at the verdict sheet is not true risk because the verdict was overwhelmingly in favor of VRNG. in order for Google to overturn the verdict they need to show that the verdict was fundamentally flawed in some way (either by facts or the jury being compromised)
the worst that could happen is that Google delays making payments to VRNG for 10-14 months which, if the appeal fails, Google will have to pay + interest. so this "risk" actually has more upside than downside IMO.
no doubt any appeals process will put downward pressure on the VRNG stock but I don't believe it will have any positive effect on the outcome for GOOG. Considering how badly the trial went for GOOG they can consider themselves to have gotten off very lightly indeed.
on the upside any appeal by VRNG to have the latches decision overturned OR to have their damages re-examined has some potential for success.
so to sum it all up.. whats the real risk? that some more disillusioned investors might cut their losses and leave this stock before the GOOGLE vs VRINGO case reaches its final conclusion. Theres no doubt in my mind that this stock can and will dip bellow $3 if this issue drags on.. but theres also no doubt in my mind that the stock will rebound sharply once some form of certainty is established even if that means no amendments to the verdict.
I have to be honest, I find your math and your rational a bit tortured. By that I mean like trying to put on a shoe of wrong size.
Regarding your math.
E.g. your "if we use the more optimistic revenue growth of 30% year on year for Google's advertising revenues (for the period 2007-2012) then we come up with a figure of 143.5 million claimed royalties for 2012"
Not by my math.
If 2011 = 103.68 (from your spreadsheet) and the YOY growth is 30%, then for 2012 the equation would look like this:
(103.68 * .30) + 103.68 and equal 134.78
Not your 143.5
So your calculation to extrapolate the 12 months of 2012 out to14 ("Revenues back to September 2011: 143.5 / 12 * 14 = 167.41" ) would not yield 167.41 but rather would look like this:
134.78/12 * 14 = 157.24
So following the rest of your process your "Percentage of 493 million as damages: 1 / 493 million * 167.41 = 34%" should have been
157.25/493 = 31.9%
Still close, but…. arguably likely to be rounded down to 30% as up to 35%.
Regarding your rational which brought you to this math.
The whole exercise was directed to trying to determine how the jury came up with a fair percentage. The exercise was undertaken because no one knows for sure the numbers the jurors used.
Consider this explanation.
Look at slide 12, numbered PDX 43, in "Defendant's Notice of Lodging of Demonstratives", provided by VRNG to the court:
http://bit.ly/TxlVrm
The slide comes from a Google marketing product of how its "SmartASS" upgrade, i.e. VRNG's patented idea, impacted their "revenue and clicks".
Notice in the slide the "an immediate 20% gain" and the "Now difference is probably >40%" in the slide.
Remember, this is a Google marketing piece to entice customers to use their product.
So… I think it's more likely the jurors said this:
"Google said there was an immediate 20% gain, and now it's probably over 40%. So let's use 20% and 50% and split the difference…
That kind of "common sense" is the way people and jury's think when they face the responsibility of justice. They seek common sense. They don't try to figure out how to re-do the math of Wall Street thrown at them by lawyers. They look for what makes common sense justice their conscience and fellow man would consider just.
They saw a simple Google marketing product and said "Fine, if Google says it improved their SmartASS 20 to over 40% we'll take them at their word. So we'll go with 20% and 50% since 50 is > 40.
…(20+50) / 2 = 35%
Here's a link to my Instablog piece on how I think 35% came about. It has a bit more detail on the 3.5% vs 35% question.
http://bit.ly/S6W1ey
do you still feel that I am a tortured soul or will you now concede that I was right on the money re my conclusion...
http://bit.ly/QO9r3f
"It is apparent that the jury made a simple decimal point transposition error in arriving at its damages amounts. This confusion was caused by the Court’s limitation of the damages period to September 15, 2011 (“the laches damages period”). The Court announced this ruling after all damages evidence had been submitted, and further altered its ruling in the middle of closing arguments. The jury awarded 35% of the damages I/P Engine sought for AOL, IAC, Gannett,and Target. (Becker Dec., ¶ 12). However, for Google, the jury awarded 3.5% of the damages I/P Engine sought for the original damages period—one tenth the amount awarded for the other defendants. The evidence of the underlying revenues for each of these defendants was the same.Thus, the portion of the amount I/P Engine sought for the original damages period should have been the same for each of the defendants. The most plausible explanation is a simple decimal point transposition with respect to Google’s damages."
you may not agree with the way I round my numbers but will you also disagree with the VRNG legal team?
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