Vringo: What You Really Need To Pay Attention To

| About: FORM Holdings (FH)

If you have been paying attention to small-cap company Vringo (VRNG) anytime over the past year plus, you are probably familiar with the lawsuit against Google (NASDAQ:GOOG). If so, you probably remember more of the pitfalls over that time, including: the much speculated pre-trial "settlement that never was", the laches doctrine decision by Judge Raymond Jackson that sliced the past damages amount, the supposed decimal point transposal error in the past damages amount (which I will cover later on), and the absence of much happening post-trial, so far. In fact, not much has happened since the jury rendered its verdict back in early November. On many Vringo forums, I consistently read regrets, anger, and "would have, could have, should have" statements. However, there is much to think about going forward, which I will try to explain in this article. There is relatively no new, earth-shattering information. I will attempt to cover both sides on why investors should and should not like Vringo, and then give you my opinion based on the information I have laid out.

Reasons to be Bullish on Vringo

a.) Federal Rule of Civil Procedure 50(b)

The Federal Rules of Civil Procedure (FRCP) are the blueprint on how a civil trial is conducted in the United States. There are two that are extremely relevant in this case right now. First, is FRCP50(b), a judgment-nonwithstanding verdict (JNOV), that Google enacted to try to nullify the jury verdict (which was, after all, very positive for Vringo). The complete text of this rule can be found here. If this motion gets denied by Judge Jackson, this represents a huge catalyst for two reasons. One, the nuclear JNOV would be out of the way, and two, GOOG and VRNG will have meaningful settlement discussions. These are some excerpts from Google's January 3rd Reply Brief in Support of Defendants' Motion to Extend, docket filing [853] (found here.)

Top of pg. 9:

"Plaintiff's criticism that Defendants do not intend to negotiate regarding post-judgment damages because they have not yet contacted Plaintiff overlooks the fact that negotiations are most effective when the parties are aware of relevant facts."

Middle of pg. 9:

"Defendants also do not yet know how the Court will rule on the parties' Rule 50 and 59 motions, which would be useful for purposes of negotiating any potential future royalty amount."

Note: Rules 59 & 52(b) have already been ruled upon by Judge Jackson on 1/31.

Any astute person who can comprehend the [853] document understands that these excerpts are apart of a bigger paragraph asking the Court for a delay so that the Defendants can assess their own view of the ongoing royalty. However, the Defendants don't necessarily need the Court to rule upon the Royalty Rate and Royalty Base to tell them whether or not a design-around is feasible and/or whether or not they have a decent rebuttal.

One last excerpt from the bottom of pg. 9:

"The Court should follow the Federal Circuit's direction and allow the parties time to negotiate any potential royalty, with the commonsense understanding that an agreement is more likely when the parties have the relevant evidence at their disposal."

This signifies to me that once Rule 50 is decided upon, GOOG will have had enough time by now to go to the settlement table armed with information that could lead to a settlement. Notice how in this sentence, which precedes the sentence about Rule(s) 50 and 59 above, they don't ask for the court to rule upon the Royalty Base and Royalty Rate first. Instead, they ask for a delay to allow BOTH parties to negotiate a future royalty on their own. Although GOOG has not conceded a running royalty, these excerpts indicate that they need "relevant facts". Whether or not this means Rules 50 and 59 being decided, or a ruling by Jackson on the royalty base and royalty rate, is subjective depending on which passage of [853] you select. Obviously, a settlement is without a doubt the best choice of action for Vringo. Yes, GOOG probably will appeal, and can appeal (Judge Jackson's final judgment, for example, is appealable. Look here). This would eliminate the appeal risk (making it easier for them to be valued) and VRNG could allocate their resources towards other suits (more on that later).

b.) Federal Rule of Civil Procedure 60(a)

Recall that much has been made of the jury's odd choice of $15.8 million v. $158 million in past damages. More on this can be found via docket [896], found here. This FRCP rule (found here), states "The court may correct a clerical mistake or mistake arising from oversight or omission whenever one is found on a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice." I refer back to Vringo's December 7 [813] motion, which, in the footnote on page 15, states:

"It is apparent that the jury made a simple decimal point transposition error in arriving at its damages amounts."

The wording of "decimal point transposition error" is genius, and I would venture to say just to satisfy Rule 60(a). Look at this precedent from Soverain Software v Victoria's Secret, et al, where it states,

"Specifically, the demonstrative used by the defendant in closing transposed the numbers its expert had testified to."

"But Judge Davis noted that "the jury's Avon award-after transposition-almost mirrors the 95%-5% division of online orders between the two sites," and accordingly ordered the numbers transposed, citing his authority under FRCP 60(a) to correct clerical mistakes "in a judgment, order, or other part of the record."

There's more! Look at this (from the same trial above), on p. 13. It states the FRCP 60 precedent of Robert Tyer & Assocs., Inc. v. Envtl. Dynamics, Inc., which "recognizes the broad discretion courts have under Rule 60 to correct errors in verdict forms." Of course, the "decimal point transposition error" has to be deemed an error before ANY action whatsoever can take place.

c.) Nothing really has changed since the verdict!

Contrary to seemingly popular belief, Vringo still actually WON the case against Google (outlined by Clider in his informative InstaBlog post.) Vringo still went up against Google, the legendary search engine company, and won at their own game. Big companies like Google probably have countless intellectual property (IP) concerns from big companies to no-name trolls, and the fact that a relatively no-name company beat them (and Quinn-Emanuel, a very notable patent litigation firm) is significant.

Reasons to be Bearish on Vringo

a.) The lack of an underlying business model to hold them over between suits

This to me is THE most glaring problem. Vringo's current business model (outside of being involved in patent litigation) is making "video" ringtones, called FaceTones. While this might seem cool, it does not generate tons of income. Prior to the merger with I/P Engine (the patent litigation division), Vringo had just over $2 million in total assets (SEC filing), with its main business having a minimal market share of an industry (phone applications) that is very crowded and is not extremely profitable (for all of you Boston Consulting Group Growth-Share Matrix fans, they would be classified as "dogs".) This is glaring, because you cannot run a successful, legitimate business based solely on patent litigation. Popular patent litigating companies, including VirnetX Holding Corporation (NYSEMKT:VHC), ParkerVision (NASDAQ:PRKR), QualComm (NASDAQ:QCOM), and InterDigital (NASDAQ:IDCC), all have sustainable & reliable underlying businesses. Revenue from patent suits don't appear overnight, and that is IF you win. Vringo needs something reliable to hold them over.

However, they might just have something! Refer once again to [813], page 7:

"Second, even if I/P Engine was a non-practicing entity(which it is not), it is entitled to prejudgment interest like any other patentee awarded damages."

My question is, why is Vringo holding this back on WHY they are not a non-practicing entity (NPE)? This blows my mind. Clearly they are holding a card that many people want to see, for no obvious reason.

b.) Gap of Time Elapsed Between Suits

This goes hand-in-hand with a.) above. Vringo currently has the GOOG case, a multi-pronged suit with ZTE subsidiaries, and Microsoft (NASDAQ:MSFT). Two separate suits against ZTE are based in the UK, and one in Germany (all information on these three suits can be found here). The case in Germany, against ZTE's subsidiary Deutschland GmbH in the District Court of Mannheim, is set to go to trial on September 24, 2013 (more details about that here). Keep in mind that these patents are from Nokia (NYSE:NOK), and are subject to a 35% royalty payment on any remedy. The case against MSFT was filed January 31, 2013 in the Southern District of New York (SDNY), based on the same IP used in the Google case. According to this PwC 2012 Patent litigation study, the SDNY has one of the longest time-to-trial (TTT) times with an average of 2.65 years (found on page 22, Chart 7d). Using this objective data, it can be estimated that I/P Engine v MSFT will not see a courtroom until September 2015, barring a settlement. Of course, a settlement is possible, probable even, since Google was found liable off the same technology. Google and Bing appear to be similar, but I am not a programmer by trade so I cannot comment on that. But I doubt a huge company like Microsoft is going to lie over and play dead without putting up some kind of a fight.

Either way, VRNG's schedule is very scarce, to say the least.

c.) Who will buy VRNG after a Google ultimatum?

This one is another glaring question in my mind. With no current underlying business model, nothing on the docket for approximately another six months, what is there for prospective investors to buy into? Just another reason why VRNG needs to disclose why they are not an NPE.

d.) Macro-Patent Reform, specifically including NPE's

It is no secret that macro-patent reform is coming. Yesterday (Wednesday, February 27th) Congressmen Peter DeFazio of Oregon and Jason Chaffetz of Utah presented H.R. 845, also known as the SHIELD Act (Saving High-Tech Innovators from Egregious Legal Disputes Act), which would make patent "trolls" financially responsible if they lose a case (more on that here). This bipartisan bill is meant to stop non-practicing entities like Vringo. Although this would not fit for the GOOG and MSFT cases since Andrew Kennedy Lang (CTO of Vringo) is the inventor of the patents, and most likely will not affect the ZTE litigation since they are filed internationally, it will have an effect on future American litigation. Taken from Congressman DeFazio's website, "In the past they most heavily targeted technology companies, but recently retailers, manufacturers, podcasters, and even municipalities have been the victims of patent troll lawsuits. The SHIELD Act protects all sectors from troll suits." It will be passed into legislation dependent upon the House of Representatives' Judiciary Committee's decision (should not be an issue, as this is a "revamped" update). President Obama is not a fan of patent trolls either. He mentioned the need for further patent troll reform in this "Fireside Hangout" session. Activist group Electronic Frontier Foundation developed the Defend Innovation project, specifically addressing software patents, which has over 15000 supporter signatures. The economists at the St. Louis Fed Reserve have also called for a change in the patent system, saying, "economists fought for decades -- ultimately with considerable success -- to reduce restrictions on international trade. A similar approach, albeit less slow, should be adopted to phase out patents."


It is tough to say what lies in Vringo's future. It would be much more clear if they disclosed to shareholders why they are not an NPE. Or at least something besides making a phone application. That would save them from initiatives like the SHIELD Act, and put them into a class of other successful patent litigation-and other "real" business companies- like VHC. Short-term, I am bullish on the company. Once the Rule 50(b) JNOV gets decided, a settlement could be obtained relatively shortly. As I stated earlier, this would be the best recourse for Vringo to take due to the immediate inflow of capital and the appeals risk being taken out. Long-term, I am undecided due to a lack of information and uncertainty surrounding Vringo.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in VRNG over the next 72 hours. 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.

About this article:

Tagged: , , , Multimedia & Graphics Software, SA Submit
Problem with this article? Please tell us. Disagree with this article? .