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Daniel B. Ravicher is a registered patent attorney who frequently trades stocks and options of public companies based on his personal opinions on legal issues that may materially affect their value. He also consults with investment banks, hedge funds, and individual investors on such issues.... More
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  • Vringo Vs. Google: Jury Verdict 51 comments
    Nov 7, 2012 12:23 PM | about stocks: VRNG, GOOG

    Last week I predicted that the I/P Engine vs. AOL et al. -- aka Vringo (VRNG) vs. Google (GOOG) -- trial would result in a jury verdict finding Vringo's patents infringed and not invalid and then award damages of $95M. Today the jury returned its verdict that the patents were infringed and not invalid and awarded approximately $31M in damages.

    Both sides have many possible appeals they can make and the judge will decide how to handle future infringement by Google, either by issuing an injunction or awarding an ongoing royalty. The jury's $31M damages calculation was based on its assessment of a 3.5% royalty rate. Obviously, this rate is not applied against Google's total revenues, and indeed that would be inappropriate.

    Thus, even if the judge awards an ongoing royalty of 3.5% against Google, and even if Google loses its appeals, and even if Google cannot develop a design around that avoids infringing Vringo's patents in the future, a rough approximation of the annual expectation to Vringo may be about the same $31M awarded by the jury today, as that was the amount they awarded for infringement since September 2011, roughly a year ago.

    Vringo can appeal the Judge's decision last week limiting their damages to only one year instead of the up to six years it was seeking.

    UPDATE Nov 7 @12:19PM: The Jury Verdict Form is now available.

    Disclosure: I am short VRNG.

    Stocks: VRNG, GOOG
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Comments (52)
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  • Sure 3.5% doesn't apply to GOOG's total rev, and that is inappropriate. However, math doesn't add up:


    say half of GOOG's rev is US-based, and VRNG is claiming 3.5% on 20% of them. that gives you 0.35%. 31M divided by 0.35% is just 8.8 Billion, and that's about 20% of GOOG's revenue for trailing 12 months. You could argue that it only applies to Q4 2011 which could make this more convincing, but that also means Q1~Q3 2012 are going into rev base for future royalty.
    6 Nov 2012, 03:25 PM Reply Like
  • can you please elaborate on your figures? i dont see where you're getting about the same amount (30mm) in future royalties. based on what revenue numbers?
    6 Nov 2012, 03:29 PM Reply Like
  • so essentially the forward-looking or running royalties rate (3.5%) will be assessed from this same Google revenue pool as was used for 2011. And that royalty rate has yet to be released from the judge. Correct?
    6 Nov 2012, 03:34 PM Reply Like
  • IMO the rev base would be: (total rev)*90%(percentage since its their core biz)*~50%(US rev)*20%(what VRNG claims)
    6 Nov 2012, 03:41 PM Reply Like
  • These are guesses. But these numbers just arent released yet? Does the judge need to explicitly value the "search-advertising revenue" from Google, then award a royalty of 3.5%? $VRNG $GOOG
    6 Nov 2012, 03:46 PM Reply Like
  • Author’s reply » The jury awarded damages for the past year of infringement. The amount of damages they are to award is a "reasonable royalty" and they determined that teh correct royalty rate would be 3.5% and the total amount would be $31M. So, doing algebra, we get a royalty base of roughly $886M.


    The equation is: ROYALTY RATE X ROYALTY BASE = DAMAGES. Thus, even if the Judge awards the same ROYALTY RATE, if it's on the same ROYALTY BASE, then the annual royalty going forward would be comparable to the same $31M they just award for Sept 2011 through November 2012. This assumes Google loses any appeal it may make of the infringement and validity decisions and also that Google does not develop a work around eliminating any need to pay Vringo any royalty whatsoever once that work around is implemented.
    6 Nov 2012, 04:01 PM Reply Like
  • Similar to what toniminbikfaya says below, is there an explicit connection between Vringo's $31,000,000 award and the 3.5% figure? I agree that that sensibly divides out to $886M; however, at this time, do we know it to be the case?
    6 Nov 2012, 05:13 PM Reply Like
  • :"Thus, even if the judge awards an ongoing royalty of 3.5% against Google, and even if Google loses its appeals, and even if Google cannot develop a design around that avoids infringing Vringo's patents in the future, a rough approximation of the annual expectation to Vringo may be about the same $31M awarded by the jury today, as that was the amount they awarded for infringement since September 2011, roughly a year ago."


    You are not speaking of what the judge might decide, or what would happen if Google were able to come up with a workaround, you are talking the numbers as they stand today and your analysis appears to be flawed. The total numbers are > 500 million, not 100 million. Do you have a follow up on this?
    8 Nov 2012, 09:01 AM Reply Like
  • How will it compute with the split between AOL, Google, Et Al? Also, I thought there was a $100K settlement w/ AOL, was this for future royalty?
    6 Nov 2012, 04:48 PM Reply Like
  • Google is only responsible for 15.8M of the 31M, so for Google alone you're actually looking at a royalty base of about 450M, not 886M. This is a tiny percentage of Google's revenue over the last year (about 1%).


    But then there's AOL, responsible for 7.9M (half of what Google has to pay), meaning the royalty base with respect to AOL is 225M. This royalty base is of course a much larger percentage of annual revenue (more than 20%).


    Google's revenue is more than 20 times that of AOL's, yet their liability for damages is only twice what AOL's liability is. It makes me wonder why the jury was so easy on Google and so hard on AOL. Were there actually facts presented that pointed to the patented technology being far more important to AOL's business model than to Google's, or did the jury get tired and start putting decimal points in the wrong place?
    6 Nov 2012, 11:51 PM Reply Like
  • eric_w you nailed it. This is a big flaw in Dan's logic.
    7 Nov 2012, 03:08 PM Reply Like
  • Hmmm....Your estimates are in stark contrast to press releases (that say they could be worth in the upwards of 125 million a year should the judge agree with the jury) on what the future royalties could mean....Who to believe???
    6 Nov 2012, 04:55 PM Reply Like
  • I think its an inaccurate statement to say that the $31M was based on the 3.5% royalty. The jury simply stated that they felt that $31M was an adequate number for past damages.
    6 Nov 2012, 04:56 PM Reply Like
  • Reconcile that one - why would they instruct the judge to use 3.5% but use a lower number for damages. That makes NO SENSE!
    6 Nov 2012, 09:30 PM Reply Like
  • What's the present value of a stock that expects to earn 30M-50M in royalties for the next 4 years? I'm thinking VRNG could head back into the 2s.
    6 Nov 2012, 07:16 PM Reply Like
  • "even if Google cannot develop a design around that avoids infringing Vringo's patents in the future"


    Did you listen to the testimony of Dr. Frieder? I believe you were there. The Dr. did say that there was no work around for AdWords. Is Google going to change their code in the middle of the game and chance that their current customers that pay for click threw's will still be happy? I Doubt it would work the same and not infringe. I would think Dr. Frieder has more knowledge of code than you and all the people on here commenting combined.
    6 Nov 2012, 07:35 PM Reply Like
  • Dan, thanks for sharing your thoughts. I didn't think your short-trade in the 3s made sense previously, but it does now in my opinion. It appears to me that the jury didn't buy Vringo's "20%".


    Are you able to explain why the GOOG portion was so low compared to AOL - this part is confusing...
    6 Nov 2012, 09:32 PM Reply Like
  • Dan, I would think as a college professor you would hold yourself to an ethical standard not to misinform for profit. You know this jury and judge intend to award far more than your article outlines, and your musings are noise. Shyster.
    6 Nov 2012, 11:03 PM Reply Like
  • How has he "misinformed" - seems pretty factual to me. If he were the scumbag you make him out to be, he would either post anonymously or lie and not say he is short. By the way, I think he described his short position as relatively inconsequential.
    6 Nov 2012, 11:26 PM Reply Like
  • I would appreciate any feedback on the following calculation. Any correction in definition or math is welcome. I pulled revenue numbers from Google. Is the 90% for AdSense correct? If so, royalty base should be 20%, correct? Finally, 3.5% is the royalty rate cited in court docs.


    GOOG Q4 2011 Worldwide Revenue = $10.58B
    U.S Revenue = 47% * 10.58B = $ 4.973B
    U.S. AdSense Revenue = 90% * 4.9726B = $ 4.475B
    Royalty Base = 20% * $4.47 = $ 8.95B


    Royalty for Q4 2011 = 3.5% * $8.95B = $31.33M


    So, doesn't this imply that damages were assessed for a single quarter instead of 4 quarters?
    6 Nov 2012, 11:29 PM Reply Like
  • Maybe 20% wasn't what was used... Maybe those who say that there is a decimal place typo for GOOG (159 instead of 15.9) are right...
    6 Nov 2012, 11:35 PM Reply Like
  • The original revenue number was improved 20% by AdSense/AdWords, so this is the amount that VRNG was basing their Royalty Base calculations on. VRNG's calculates a 3.5% royalty rate on 20% of U.S. Revenue.


    Did the jury use these numbers (3.5% on 20% of U.S. Revenue)?


    What about the $14.1B consolidated revenue in Q3 2012?


    Should $14.1B be used for the calculation or should I use the revenue number mentioned for international: $11.53B?


    U.S. REVENUE Q4 2011 : $10.58B * 44% = $4.655B
    U.S. REVENUE Q1 2012 : $10.65B * 44% = $4.686B
    U.S. REVENUE Q2 2012 : $10.96B * 44% = $4.822B
    U.S. REVENUE Q3 2012 : $11.53B * 43% = $5.4B
    Total U.S. REVENUE : $19.53B


    Adwords / AdSense 96% * 19.53B = $18.75B
    Royalty Base 20% * 18.75B = $ 3.75B
    Royalty 3.5% = $131M


    Obviously, this isn't close to $15.8M and $158M doesn't seem right unless we use consolidated revenue. Thoughts?
    7 Nov 2012, 01:43 AM Reply Like
  • One quick question Dan. Goog pays $16 million, and AOL pays $7.9 million... what is the ratio? Goog revenue is roughly more than 20 times (10 times if taken US revs) of AOL, and also AOL revenue is not all coming from adwords like Goog whose 96% comes from adwords.
    7 Nov 2012, 12:42 AM Reply Like
  • The math was calculated incorrectly


    Look at the following calculations.


    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


    GOOG $451,190,903 x 3.5%= $15,791,681 damage amount $15.8 million.


    All the awards were calculated at 35% except GOOG which was calculated at 3.5%. If the jury's intentions were for 35% of damages, the GOOG award would be $158M not $15.8. The judge will be made aware of this and will have to take action.
    7 Nov 2012, 12:46 AM Reply Like
  • The math is incorrect:


    Look at the following calculations.


    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


    GOOG $451,190,903 x 3.5%= $15,791,681 damage amount $15.8 million.


    All the awards were calculated at 35% but GOOG was calculated at 3.5%. The math is wrong and judge will need to address this.
    If 35% is the number the jury chose for past damages, the GOOG payout should be $158M not $15.8M
    7 Nov 2012, 12:47 AM Reply Like
  • The basic error surrounds a simple decimal points mistake from applying 3.5% running rate to table of damages that had already been set at 3.5%, hence reducing Google’s share of damages by 3.5% x 3.5%! Please see flythink222’s logic:


    “I'll explain jury error very simply


    The error comes from the very strange coincidence that the last 13.5 months of revenues
    (Sept 15 2011- Nov 06 2012) are exactly 35.0% (10 times the famous 3.5% royalty) of the total of the 6 years


    They had a table of damages which was ALREADY SET at 3.5% for all the 6 years


    google-$451.1M 35% = 158M (jury error 15.8)
    aol-$22.7M 35% = 7.9M correct
    IAC-$18.9M 35% = 6.6M correct
    target-$282k 35% = 98K correct
    Gannet-$12k 35% = 4K correct


    So the only thing they had to do was to calculate 35% for each defendants (a 5 minute job),
    and that's what they did for all defendants BUT Google.


    For Google they used 3.5% not 35%....
    that's the error...


    ZERO doubts it will be fixed”


    The most lucent question to ask here is why would Google pay $15.8 million in damages on $451million when AOL is being asked to pay $7.9 million based on $22.7million? VRNG shareholders will now anxiously await Judge Jackson’s return. As the worm turns….
    7 Nov 2012, 08:12 AM Reply Like
  • Dan you are utterly clueless. Should be 35% of 2011 = $158MM from GOOG, revised up from jury miscalculation, then $500MM for four years using 3.5% running royalties. Cover your short.
    7 Nov 2012, 12:28 PM Reply Like
  • Dan, would you agree that people saying the jury did the math wrong is like people saying Romney won and we need a recount?
    7 Nov 2012, 12:55 PM Reply Like
  • i wouldn't agree with that. Not many people are calling for a recount due to the margin of victory; however, there appears to be a very real case for this being an error.
    7 Nov 2012, 12:58 PM Reply Like
  • Jury's often get the math wrong and the judge will often take their "recommendation" and amend it. It happens all the time - right Dan? These are regular people, not accountants.
    7 Nov 2012, 03:11 PM Reply Like
  • Are you just stirring the pot, or are you serious? Are you just having some fun at our expense?


    The jury used the $493 damages estimate, and decided on 35% to approximate the laches period.


    I would genuinely like to know whether you think the jury intentionally used 3.5% for GOOG damages, but 35% for all other defendants.


    Why would they use a 10x smaller number to calculate damages for Google?
    7 Nov 2012, 03:29 PM Reply Like
  • Modernist, why are you so antagonistic? Especially when you are wrong? The verdict as it stands allows for royalties of better than 500 million..what is your answer to that?
    8 Nov 2012, 08:56 AM Reply Like
  • You are Short and I am Long..Lets go drinking till one is proven wrong!
    7 Nov 2012, 01:11 PM Reply Like
  • Reporters, and pundits on tv, have said that Mitt Romney has a "Likeability problem." My own opinion has been that Governor Romney has a likeability flaw.


    In fact, around 1994 he was running for US Senate and accepting volunteer staffers. Romney's charisma was questionable then, because the campaign personnel repeatedly said 'If there is something you do not like about him...'


    Not to fault Romney, he had an opportunity for me--even if that particular campaign was not a winning one. Despite lots of room for improvement being available to the Obama administration--due to an inability to work with the House, a signature law that the majority of states opposed right up to the Supreme Court; and the resignations of Christina Romer, Lawrence Summers and others--we got another four years for the president. And sensibly, there was no indication of a coattail effect.
    7 Nov 2012, 01:26 PM Reply Like
  • Mr. Collins, you're lucent questions points to the gravamen.
    7 Nov 2012, 02:41 PM Reply Like
  • Bottom Line: Dan has FAILED to explain WHY Google, with larger revenue, would pay a much smaller percentage of damages. Dan - this is the FATAL flaw in your logic and despite your pushing your argument in various forums, I have yet to see an explanation.
    7 Nov 2012, 04:26 PM Reply Like
  • Does jurors allow to speak out on how the damages were calculated?
    7 Nov 2012, 07:08 PM Reply Like
  • Mark, have you ever served on a jury? They hand in the verdict.
    7 Nov 2012, 07:17 PM Reply Like
  • he's asking, can they be interviewed
    7 Nov 2012, 09:53 PM Reply Like
  • I have no doubt that the Michael Collins math above is correct:
    google-$451.1M 35% = 158M (jury error 15.8)
    aol-$22.7M 35% = 7.9M correct
    IAC-$18.9M 35% = 6.6M correct
    target-$282k 35% = 98K correct
    Gannet-$12k 35% = 4K correct


    I also have no doubt the jury form just shows a dollar amount of $15.8M, with no underlying math to be corrected.


    Being at election time I am reminded of Bush v. Gore and having Supreme Court rule that 'divining the intent of the voters' was not possible so recount ended.


    Hypothetically if jury had awarded $173M instead what would impact on stock price be? Alternatively what would $17M award do to stock price?


    7 Nov 2012, 11:14 PM Reply Like
  • Your analysis is totally wrong..the total payments, if received, would be over 500 million, not 100 million as you state..Modernist has been using your analysis to tell everyone else they are wrong, but you are wrong. How about a retraction? And this has nothing to do with the stock price, it is the amount of the award, that you have totally erred on.
    8 Nov 2012, 07:48 AM Reply Like
  • ml1234, you could be right and I would think probably are correct, but it's premature to say that he erred. The judge hasn't made a ruling regarding running royalties yet. At face value, if one believes that the award is reflective of the damages, then the author's conclusion is correct. I tend to think that the jury made a computational error, but that's not a fact, at least yet.
    8 Nov 2012, 08:13 AM Reply Like
  • Dan, please spend some time with this, as we need your opinion on matters moving forward. The only people that do not know it is a math error, are people who have not spent enough time getting their arms around it, or people who just can't figure it out. You are obviously in the former group, so please spend a moment looking at the fact that 15.8 was supposed to be 158..The jury took the damages numbers for the original damages amounts that Vringo presented for 5 years, which was already set at 3.5% x 20.9% of revenues by Vringo, and multiplied them by 35% to "pro rate" the total damages owed because the Laches ruling told them to only award damages on the last 13.5 months..Instead of just using 22.5% (13.5/60), they used 35%, because the judge told them to "use their best judgement" to account for the fact that the last 13.5 months would be incremental over the first months of the full damages period...Please, I mean this, spend some time with this. You will come to no other conclusion, because none other is plausible. Look at the numbers Vringo presented, x 35% for all of them to "pro rate" for latches, and you get the exact numbers the jury awarded..except for Google, which was 15.8 instead of 158.
    10 Nov 2012, 09:36 AM Reply Like
  • Please just get past the "I told you so".. A math error is what kept your prediction on target. Not, a likely math error, or maybe a math error. A 100%, no doubt about it at all, math error. The comma was placed one spot over from what the jury thought they were doing, which was handing Vringo a complete victory. So, please, spend some time with the numbers, and then when the light goes on, use your expert status to tell us if the judge can do anything about it, or if Google just escaped disaster after getting their backside handed to it. Thank you in advance.
    10 Nov 2012, 09:42 AM Reply Like
  • >>>Google just escaped disaster<<<


    This is chump-change to GOOG, whether they pay 15.8mm or 158mm. The running royalties are likely $700-800mm in total, and even that is chump change.


    I find it ironic that people want Dan's input after all the crap he was dealt by VRNG longs. Not sure if you were one dishing it out.


    I agree with you that the jury almost certainly screwed up. It would be nice if the judge can "fix" it, but the more important issue is the running royalties.


    VRNG has now been screwed twice - laches (I agreed with this one), apparent damages award error. Better hope that there isn't a third time...
    10 Nov 2012, 10:10 AM Reply Like
  • Well, the royalty problem could become that according to the damage amount the jury put on the verdict form, and assuming they did agree that 3.5% was the reasonable amount to pay Vringo for the past infringement, as they indicated, then Google will argue that the jury was telling the judge to use a far smaller number as the "base" revenue to multiply by 3.5%...Again, assuming Dan does now indeed see where the jury wrote a number that was 10% of what they intended, I would hope he will let us know some of the possible outcomes. I realize he owes us nothing, but it's crazy that I am reading through federal decisions and case law because I just can't find anybody who is credible, as Dan certainly is, to give a forecast. So again, I beg, please Dan chime in here..Is Vringo just stuck with the mistake? Can the judge still now use 20.9% of US sales as the base to apply the 3.5% royalty, or will he use 3.5% 0f 20.9% for the other defendants, and a far smaller base % for Google? That seems crazy, but maybe his hands are tied? Does Vringo need to go through a new "partial trial" for damages, if the judge agrees that it was a mistake, or can he just "fix it"? Thanks in advance.
    10 Nov 2012, 02:28 PM Reply Like
  • Alan,


    From what I have been told, most likely the jury award will not be fixed. I guess GOOG will appeal and spend the time trying to come up with a work around to avoid the royalties. Do you know if they met in court on friday? I've never seen a situation where it is so hard to get info.




    11 Nov 2012, 07:53 AM Reply Like
  • ml1234, I don't know if they met on Friday.


    As far as what GOOG will do, who knows. Did you mean, though, that VRNG will appeal? They are the ones who are more likely to appeal, especially if the jury award stands. While I liked that the judge limited the damages period, it would seem very likely that VRNG will challenge that ruling.
    11 Nov 2012, 08:03 AM Reply Like
  • Alan,
    I guess VRNG will appeal the damages, I don't know. I meant GOOG will appeal the jury ruling, I believe I read that their lawyers said so. Of course I can't find anything that says they will appeal, but an appeal makes sense. Seems that a fair amount of these patent rulings get overturned later.


    11 Nov 2012, 09:21 AM Reply Like
  • I don't think GOOG has ever said anything about this. I scanned their SEC filings for "Vringo" and "I/P" and there is no mention. The judgment was so immaterial that it didn't even merit an 8-K filing. While it would seem rational to just pay, I am not so sure that they won't be irrational and appeal even with little chance of overturning it. I have thought too that there might be a workaround, but I am not so sure that it is possible.
    11 Nov 2012, 10:00 AM Reply Like
  • Patent infringement law & possible workarounds for a search engine? Good grief. Could I be in any more over my head?
    11 Nov 2012, 10:46 PM Reply Like
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