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+++ et quisquis scandalizaverit unum ex his pusillis credentibus in me bonum est ei magis si circumdaretur mola asinaria collo eius et in mare mitteretur ... Experienced speculator and student of the markets for 20 years. My professional experience in the financial industry has included:... More
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  • Vringo, Google And Where 35% Came From

    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:
    [The original may work:]

    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:

    One 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 who decides 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:

    Notice 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:

    This 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:

    This 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% formula

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

    Verdict Form # 15,8000,000.00

    35% formula

    AOL $22,693,517 x 35% = $7,942,730

    Verdict Form # ------------> 7,943,000.00

    IAC $18,917,570 x 35% = $6,621,149

    Verdict Form # ----------> 6,650,000.00

    Gannet $12,348 x 35% = $4,321

    Verdict Form # ----------> 4,332.00

    Target $282,380 x 35% = $98,833

    Verdict Form # -----------> 98,833.00

    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. They are:

    Google $451,190,903

    AOL $22,693,517

    IAC $18,917,570

    Target $282,380

    Gannet $12,348

    So 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?


    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?


    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, but with the decimal moved left four places.

    Google $45,119 x 3.5%= $1579

    AOL $2,269 x 35% = $794

    IAC- $1,891 x 35% = $662

    Gannet $1.00 x 35% = $0.35

    Target $28.00 x 35% = $9.80

    Does 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 is few 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.

    Tags: VRNG, GOOG
    Nov 09 7:21 PM | Link | 36 Comments
  • @ZenTrader - Jeff Pierce

    Jeff, here is your picture from you link:

    Notice how on the lower line of the channel it passes through the chart - right after the 23rd - not drawn to touch the two lowest lows in the period?

    Notice how on the upper line of the channel it only touches the two highest highs in the period?

    Most "channel" drawing tools maintain the parallel aspect of the channel lines.

    However, by definition, and if you want to get mathematically exact, the times that a channel drawing tool matches in a mathematically exact fashion exact fashion two exact highs, and two exact lows, and maintains an exactly equal parallel slope is rare.

    Hence why most experienced traders draw trend lines, in crayon, so as to get a more representative picture of what is actually going on. Rather than artfully "capture/force" the data of a given range period into the channel. Doing so ends up adding bias.

    Look at your example, the channel forces the perspective into a stronger up bias than drawing trend lines with consistency.

    Below I add two lines, one on each side: the one on the top matches the consistency of ignoring the high-high/low-low discipline that your bottom line used; the other on the bottom that maintained the consistency of touching the high-high/low-low that your top line used.

    (click to enlarge)

    Personally, I would have probably drawn them this way. If I were limited to using such sharp lines.

    60 min bar view, expanded to widest time range viewable

    (click to enlarge)

    5hr bar view of what was drawn in 60 min view, expanded to widest time range viewable

    (click to enlarge)

    daily bar view of what was drawn in 60 min view, expanded to widest time range viewable

    (click to enlarge)

    I always find it interesting where trend lines "go" when drawn on a small time frame chart and expanded.

    Of course the relative relationship of spacing between the x & y axis always greatly influences the "view".


    2012 08 23 Update

    Looks like my lines were lucky.

    (click to enlarge)

    Aug 23 10:50 AM | Link | 2 Comments
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