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## Vringo, Google And Where 35% Came From 36 comments

Much discussion has taken place regarding the source of the 35% value used in calculating damages in n I/P Engine (VRNG) vs. AOL Inc., et. al. and how it could relate to a mistake by the jury in the results of damage calculations found in jury Verdict Form.This is a bit of a "picture is worth a thousand words" piece.I believe the 35% figure came from a specific slide presented during the trial. It's found in "Defendant's Notice of Lodging of Demonstratives" found here:http://bit.ly/TxlVrm[The original may work:

https://docs.google.com/file/d/0ByyR-FelC5OTYnBxSDNHNG0zazQ/view?sle=true&pli=1]The slide is #12, PDX 43 in the lower right corner. A picture of it is further below.I believe the jury, after hearing VRNG was limited by "laches" decided to go to the high end of the range for "running royalty" damages based on what is in that slide.This 35% number is of course somewhat critical because of the questions swirling around part C of section III of the Verdict Form regarding a 35% vs 3.5% calculation.Here is the Verdict Form, page 11 is the section III Damages page:http://www.scribd.com/doc/112457351/Vringo-v-Google-Jury-Verdict-2012-11-06One must first understand how parts A, B, and C relate within section III of the Verdict Form. Section III provides the jury's opinion to the judge on reasonable damages. Since the decision between a one-time "lump sum" or a "running royalty" form of damages has not been decided, the form asks the jury how they think both forms should be calculated as well as which form they think appropriate.Part A asks the jury which they think is a more appropriate damage compensation, a "Lump sum royalty" or a "Running royalty"; the jury clearly indicated running royalty.Part B asks the jury what they think the rate should be IF the damages are to be compensated via "running royalty" payments.Part C asks the jury what they think the "sum of money, if any, if paid now in cash" should be IF the damages are compensated via a lump sum payment.The jury is making recommendations to the judge whodecides the final award.It is also important to note the jury asked two questions during deliberation. One which specifically asked if the defendants could be held libel for both lump sum and a running royalty damages and if so how would that be calculated. The jury's questions and the judge's answers, as passed through the machinations of internet boards and twitter, were not specific enough to ensure the question and answers were not open to being interpreted in more than one way.Setting the above point aside for now, let's look at the numbers on the Verdict Form and those presented to the jury during trial in the "Defendant's Notice of Lodging of Demonstratives".These relate because 3.5% shows up in the "Defendant's Notice of Lodging of Demonstratives" and the same document gives some solid rationale behind why the 35% number may have been chosen.The pictures below come from the "Defendant's Notice of Lodging of Demonstratives" showing how a "reasonable royalty for use", according to VRNG, should be calculated.Notice the 20% and the 3.5% in the below in their graphical representation of Google's revenue.The above is slide 15, numbered PDX 46 in "Defendant's Notice of Lodging of Demonstratives", link: http://bit.ly/TxlVrmNotice how the 20% and 3.5% are applied to arrive at the "reasonable royalty for use" that VRNG thought it was due.The above is slide 16, numbered PDX 47 in "Defendant's Notice of Lodging of Demonstratives" , link: http://bit.ly/TxlVrmThis is where the 3.5% number used in part B [running-royalty rate] section III came from.Now look at this slide next slide, from the same document.It comes from a Google explanation of how "SmartASS" impacted revenue and clicks.Remember, this is a Google marketing piece to entice customers to use their product.Notice the "an immediate 20% gain" and the "Now difference is probably >40%".

The above is slide 12, numbered PDX 43 in "Defendant's Notice of Lodging of Demonstratives", link:http://bit.ly/TxlVrmThis is where I believe the jury came up with the 35% number used for part C [lump-sum] of section III in the Verdict Form.Google product citing the performance impact of "SmartASS". Ironic name, huh.So, there is reasonable rational, supported by court documents and Google's own words, for the 35% number to be used for the lump-sum calculation of Google's damages to VRNG.

Now on to the 35% vs 3.5%.

It is clear the jury used 35% consistently for four of the five defendant calculations in part C.

Yet used 3.5% for only one of the five, that being GOOG's damages.

Now look at the following calculations using 35% for AOL, IAC, Gannet and Target, and 3.5% for Google.Notice all are very close to those found on page 11, part C section III, of the Verdict Form.

3.5% formulaGoogle $451,190,903 x 3.5%= $15,791,681Verdict Form # 15,8000,000.0035% formulaAOL$22,693,517 x 35% = $7,942,730Verdict Form # ------------> 7,943,000.00IAC $18,917,570 x 35% = $6,621,149Verdict Form # ----------> 6,650,000.00Gannet $12,348 x 35% = $4,321Verdict Form # ----------> 4,332.00Target$282,380 x 35% = $98,833Verdict Form # -----------> 98,833.00The first numbers in the calculations above are from the VRNG provided "Reasonable royalty for use of patented technology" numbers resulting from their calculations shown in the "Reasonable Royalty" slide above. They are:Google $451,190,903

AOL$22,693,517IAC $18,917,570Target$282,380Gannet $12,348So which makes more sense?A. The jury was trying to figure out a way to calculate the correct "lump sum" number and "running royalty" number so as to keep the judge from being too light handed or heavy handed by applying either or both calculations. So they decided to reduce GOOG's potential lump sum damages to 1/10th of the other companies?Or.B. The jury all agreed the defendant most active in the participation of infringement, GOOG, should receive a 1/10th as punitive punishment of those who merely bought their services?Or.C. The Foreperson, and possibly the person who wrote the numbers on the Verdict Form - they could be different people - missed the error simply because they were not familiar with large numbers and do not have an experienced based "that doesn't make sense" subconscious trigger?Look at the numbers on the Verdict Form in another way, with the error of 3.5% vs. 35% used,with the decimal moved left four places.butGoogle $45,119 x 3.5%= $1579AOL$2,269 x 35% = $794IAC- $1,891 x 35% = $662Gannet $1.00 x 35% = $0.35Target$28.00 x 35% = $9.80Does anyone really think none of the juror's, after seeing the above, would have said "That doesn't sound right. $1600 bucks for stealing $45,000 and only $800 bucks for stealing $2000?"The fact isfew of people are really used to seeing really big numbers.I think the 3.5% calculation will be appropriately and correctly addressed by the court in VRNG's favor, after the judge talks to the jury.

{Full Disclosure: I am long VRNG and have been for some time. Over that time I have increased and decreased my exposure. I have never been short VRNG or taken positions which would benefit from a fall in VRNG's price.}

Disclosure:I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.Instablogsare blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.## Share this Instablog with a colleague

Comments(36)2. Must take 20% of US sales because this is the agreed upon increase in profit Google saw after implementing VRNG technology.

3. Must take 3.5 % of #2 in order to calculate the past royalty rate total sum. This number was used because this is what VRNG asked for.

4. The Laches ruling limited past royalty rates to 1 year (i.e. starting from the time VRNG filled the case in 9/2011). This value is equivalent to 35% of the total sum calculated in #3.

- VRNG asked for the 3.5% only with regard to "running-royalty" damage calculations. VRNG never asked for it to be applied to "lump-sum" award calculations.

- Please show the math. Otherwise it's simply an opinion...

- If your number 2 assertion is flawed, what you calculate after is flawed.

Re "The best reason for reducing the $451mm number by 35% is the obvious one, which Cmasseri pointed out to you, but which you have not bothered to address:"

- IF, IF the numbers work out where "the last year's revenue was about 35% of the entire five-years' total revenue" then it is NOT required of the jury make it "exactly what the royalty should be based on." The jury can literally make up whatever number or formula they want. I agree the rational makes sense and it could be correct. But it is still no different than what I offered, a theory.

http://bit.ly/Th0wFc

AOL $22,693,517 = 20% x 3.5%

IAC $18,917,570 = 20% x 3.5%

Target $282,380 = 20% x 3.5%

Gannet $12,348 = 20% x 3.5%

Google = $15,800,000.00 = 20% x 3.5% x 3.5%

AOL = $7,943,000.00 = 20% x 3.5% x 35%

IAC = $6,650,000.00 = 20% x 3.5% x 35%

Gannet = $4,332.00 = 20% x 3.5% x 35%

Target = $98,833.00 = 20% x 3.5% x 35%

AOL $22,693,517 = 20% x 3.5% x Total Ad Revenue

IAC $18,917,570 = 20% x 3.5% x Total Ad Revenue

Target $282,380 = 20% x 3.5% x Total Ad Revenue

Gannet $12,348 = 20% x 3.5% x Total Ad Revenue

AOL: $22,693,517 / 20% / 3.5% = $3,241,938,714

IAC: $18,917,570 / 20% / 3.5% = $2,702,510,000

Target: $282,380 / 20% / 3.5% = $40,340,000

Gannet: $12,348 / 20% / 3.5% = $176,400

= $493,093,718

- agree

- Although I've not seen the actual court records, I've taken the numbers as being from VRNG.

- If by "they" you mean Google then we agree.

- regarding your "20 to >40%": - per PDX 43 "Ads before SmartASS" is a GOOG advertisement and as such a GOOG claim, not a VRNG one.

- regarding your " suggested 20% to be used to be conservative": I agree this is what VRNG has stated in court it considers "fair"

- regarding your "3.5": I agree with the 3.5% number and, more importantly, with the "of that 20% increase"

- I agree, but for clarity I'd write it this way -> (Total GOOG Ad Revenue * 20%) * 3.5% = $451,190,903

- I'll get picky here, "deduct already" is not the wording I'd use.

- I'd say -> "So, these values are based upon an assumption of a 20% increase in GOOG's revenue due to VRNG's patents"

- format of the equation aside, I agree.

- Okay, I see what you are saying. And I agree, but. :)

- I was focusing on the 3.5% vs 35% discussion that was going on among VRNG followers, not on whether or not their starting number was valid or not.

- In my piece I said "The first numbers in the calculations above are from the VRNG provided "Reasonable royalty for use of patented technology" numbers resulting from their calculations shown in the "Reasonable Royalty" slide above."

- What I should have made more clear is I was taking the numbers being used on MB's [EDVAcourt, etc.] regarding part C [the 3.5% vs 35% discussion] at face value. I wasn't analyzing or commenting on the validity of their value. To me the discussion centered on how one defendant, GOOG, could be using a 3.5% calculation and the others a 35% calculation.

- Again, I was focused explaining how one could argue the 3.5% was intended to be 35% - not on whether it was a fair calculation for damages.

- Agree. Explanation of what I was thinking in "Re 7"

- Agree

- Agree. Like I said in "Re 6" I wasn’t focused on/speaking to that question in the piece.

- I agree with your math and reasoning, but I wasn't suggesting what you say. I was only focusing on the 35% vs 3.5% use in the part C (lump-sum) calculation and saw your reference to using 20% only as a substitution.

1) the royalty base percentage (20%) and

2) the royalty rate (3.5%).

Google $451,190,903 x 3.5%= $15,791,681

Verdict Form # 15,8000,000.00

- Look at the links. I am taking them at face value.

- The court creates the form based on the judge's instructions, the juror's fill out the form.

- Decimal in the wrong place, not a comma. The decimal results in the comma in the "wrong" place.

2) times by .96 (96% revenue from ads)

3) times by US revenue (this number is a hard one to know without seeing there books so anywhere from 45-60%)

4) times by the gain percent from Lycos patent VRNG said 20.9% but could be as high as 40 so .209-.40)

5) Time by 3.5% royalty rate for the patent .035