Vringo Verdict And Future Royalties Against Google On Shaky Ground

| About: FORM Holdings (FH)

The Vringo (VRNG) v Google (NASDAQ:GOOG) patent infringement trial resulted in a verdict for Vringo's I/P Engine affiliate of $31M, even though the expectations were much higher, starting at nearly $700M and then later revised down to $493M. I predicted Vringo would win the trial and be awarded $95M, so even though I was short at the time, believing the expectations of the market were way too high, I actually still somehow overestimated Vringo's strength in the case.

The Judge will soon turn to addressing any post-trial motions made by the parties, including a motion by Vringo for a permanent injunction and/or the imposition of an ongoing royalty against Google. There has been mass confusion about whether the jury awarded an ongoing future royalty against Google, with some articles flat out wrongly saying, "On a going forward basis, the jury awarded a 3.5% royalty rate on the 20% increase in revenue generated by GOOG." This is 100% incorrect as a matter of law and it outrages me that non-lawyers make such misleading and indisputably incorrect statements to the public.

Let's be 100% clear about this, juries do not award future relief. They are only tasked with providing a verdict for past injury, so in this case, that means damages for past infringement. The confusion arises because the amount of damages a jury is to award for past infringement is called a "reasonable royalty." But that's for the past infringement, and not an award of a future royalty. Only the judge can award an ongoing future royalty payment and he will set the royalty rate at what he thinks is appropriate. While he can of course take into consideration the jury's findings regarding past infringement, they aren't binding on him.

While Google will likely renew its motions for the judge to rule Vringo's patents are not infringed and/or are invalid despite the jury's verdict, until all those briefs are submitted, I can't opine on their merits.

However, Google has filed a response to a motion by Vringo for enhancement of the jury's verdict through the addition of interest and an extra month or so of damages for the period up through the verdict. In its brief opposing Vringo's request, Google already indicates that it intends to challenge the jury's award of damages and clarify the royalty base against which any royalties were awarded. In short, Google summarizes:

... for all the reasons set forth in Defendants Rule 50(a) Motion for Judgment as Matter of Law of No Damages (D.N. 752.) and those that will be set forth in Defendants' post-judgment motions, Plaintiff is not entitled to any damages, including a running royalty, from any defendant.

Thus, what I had assumed to be true has now been confirmed, Google will fight any request Vringo makes for an ongoing royalty, and it will also in fact fight to have the jury's verdict award for past damages overturned or reduced. Google does realize that it's possible that the Judge will award an ongoing royalty, and so says on that point:

Assuming, however, that the Court determines that Plaintiff's request for a running royalty is appropriate, Plaintiff's calculation that a royalty rate of 3.5% should be applied to a royalty base of 20.9% of revenues for the accused products is not supported by the jury's findings. Based on the jury's response to the interrogatories in the verdict form, the maximum I/P Engine could be awarded as supplemental damages would be a running royalty rate of 3.5% applied to an apportioned royalty base of 2.8% of Defendants' revenues from the accused systems.

This raises the issue I've pointed out to countless misguided folks who think the 3.5% royalty rate means Vringo is entitled to hundreds of millions of dollars in future royalties. As I've said to them and am saying again now, a royalty rate is only half of the equation that determines a royalty amount. One needs to also know what the royalty base is to which the royalty rate applies. In other words, we need to know 3.5% of WHAT. Google further explains its argument on this point as:

Plaintiff's request vastly overstates the apportionment percentage and is completely divorced from the jury's damages award. Plaintiff asserts that 20.9% of the revenues for the accused products is the appropriate royalty base to which the 3.5% royalty should be applied. (D.N. 793, 11.) Plaintiff ignores that the amounts the jury awarded do not equate to a royalty base apportioned at 20.9% of revenue of the accused products.

... The jury awarded total damages from Google of $15,800,000. (D.N. 789, 11.) Using the information from the slide that Plaintiff represented covered the allowable damages period, and accounting for the 3.5% royalty rate, the apparent effective apportionment of the revenue base for Google is approximately 2.8%.

Thus, the assumption that a 3.5% royalty rate will definitely result in hundreds of millions of dollars to Vringo for future royalties is flawed. For one, the jury awarded Vringo damages for a slightly larger than one year period beginning in fall 2011 through fall 2012 and, for that year, they only gave Vringo $31M. This has confused me how people then extrapolate that to mean that Vringo is entitled to hundreds of millions of dollars per year in the future. It makes no sense to say that $31M for 2011-12 leads to an expectation of $100M+ for 2012-13, 2013-14, etc.

In addition to giving the first signs of how it will seek to limit any potential future royalty obligation the Judge may impose, Google also states in its brief from last week that it will challenge even the $31M jury verdict itself. For one, it "double counts" the damages caused by Google's co-defendant customers. As Google explains:

Thus, any damages from the non-Google Defendants already would have been included in the damages awarded against Google and no further supplemental damages are appropriate at all.

Further, Google argues the damages amounts for the co-defendant customers is too large compared to that awarded against Google. On that point, Google explains:

... in Dr. Becker's demonstrative (which was based on a much
larger time period than the relevant damages period,) he attributed approximately $451 million in damages to Google and then a total of approximately $42 million to the non-Google Defendants - a mere 8.5%. (See Agudo Dec. ¶ 2 & Exh. A.) But the jury returned a verdict of $30,496,155 that allocated to the non-Google Defendants $14,696,155 - 48% of the total damages. (D.N. 789, 11.) No reasonable jury would award an amount of damages on a proportion far greater than what I/P Engine's own expert testified about at trial. That is incorrect as a matter of law. And as Defendants intend to argue in more detail in their post-trial motions, the jury's verdict with respect to the non-Google Defendants should be set aside for at least this reason, among others. (emphasis in original)

Google's arguments to revise down the jury's verdict even further are compelling to me and I expect them to be granted, at least in part, if not in full. I also believe Google's indication that it will dispute the royalty base against which any royalty rate should be applied in the future if the judge awards Vringo an ongoing royalty also has substantial promise. The judge is unlikely to force Google to pay more than a pro rata increase for years 2012-13, 2013-14, etc. over what the jury awarded for 2011-12. I just cannot see the judge saying, "Well, Google, the jury says you owe Vringo $31M for 2011-12, so I'm going to make you pay $100M+ for 2012-13, etc." Just doesn't make sense.

And there are also other risks to Vringo's ongoing royalty expectation as well, which could result in it getting nothing. First, Google could develop a design around that does not infringe the patents any more. Second, Google can win an appeal of either (or both) the findings of infringement and patent validity.

To be fair, Vringo can also appeal the Judge's ruling on "laches", in which he eliminated Vringo's ability to recover damages for the five year period of time prior to the filing of the lawsuit. For those unfamiliar with the issue, generally a patent holder can seek damages for up to six years in past infringement. Laches is a defense to patent infringement based on a delay in bringing the patent lawsuit that can be used to eliminate some or all of the ability to recover damages prior to the lawsuit's filing. In this case, the Judge denied Vringo the ability to seek several years of damages from Google and the co-defendants. Winning an appeal of the judge's laches decision will not be easy, as Vringo has to show the Judge abused his discretion, which is very tough to do. Other than that, I don't see much Vringo can do to increase its expectation from this case, while Google can do much to erode or eliminate Vringo's expectations.

Thus, as with the original expectation of $700M and then $493M in trial damages, which resulted in a verdict of only $31M, and may soon be shrunk even further, expectations that Vringo will receive hundreds of millions of dollars in future royalties are also, in my opinion, very unlikely to materialize. One thing I've learned about this stock, though, is that when people have faith, it's often blind. I've never received such personal attacks from giving my honest assessment of a stock in my life, and that emotional reaction gives me further confidence in the shaky foundation underlying this stock's investor base.

To me, I see nothing but negative catalysts possible for Vringo from this case over the next year. The only positive catalyst is perhaps winning an appeal of the Judge's laches decision, but that won't be until late 2013 at the earliest and will be very tough for them to do. This compares to all of the negative catalysts that are possible from the judge's post trial decisions and Google's ability to design around the patents. Some may speculate that Google could settle and make a payment to Vringo, but I doubt they'd be willing to pay much more than what the jury already awarded, and probably significantly less. In the meantime, I expect Vringo to issue lots of press releases about other patents it owns and other lawsuits it has filed as a way to give more hope to its longs to stick with them through 2013. I wish them luck.

Disclosure: I am short VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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