Google (NASDAQ:GOOG) is in trouble. The closely watched Vringo vs. Google search patent litigation took a major turn this week, in favor of small Vringo (VRNG). The notice furnished by the USPTO (United States Patent and Trade Office) effectively checkmates Google into accepting that further protest to the validity of the Lang Search Patents is a fruitless enterprise. David has beat Goliath. Now all that remains for Google is overcoming the denial of how much it must pay in the forthcoming royalty motion decision, pending Federal Judge Raymond Jackson's court room. Vringo won a unanimous jury decision slapping Google with a recommended royalty motion and penalties for infringement of the Lang search patents last year. It's up to Judge Jackson to decide whether Google has a billion dollar problem or not. Where does Google go from here?
USPTO Appeal is effectively dead
The recent USPTO exparte decision in essence validates the '420 patent. This in turn plays poorly on any future possibilities of invalidating the jury award, via the USPTO. Google had always hoped that this strategy would eventually succeed and neutralize the jury verdict that found them infringing on Vringo's coveted '420 patent. This strategy is off the table and now Google is left with fewer options, as Vringo moves its chess pieces closer to mate. With the USPTO action nullified, Google must retreat into the filed appeal, based on what it believes are flaws in the jury trial. However, this process does nothing to stop the soon to be ruled on post trial royalty motion. That decision could lead to Google owing potentially more than $1 billion in damages and infringement royalty payments. Clearly Vringo's position just grew exponentially stronger.
Mediation is possible; outcome unclear
Previously stated in several articles, I have opined the possibility of a Google mediation as an option. Other Seeking Alpha authors have suggested that this won't happen, that Google will continue litigation regardless of the outcomes, possibly asking the U.S. Supreme Court to hear the matter. I respectively disagree. History has shown that Google does settle, and for large amounts. Nowhere is this clearer than the Yahoo (YHOO) vs. Google settlement of 2004. Fate is not without a sense of irony, as those patent licenses purchased were to protect its core Adwords business, which now has fallen victim to the Lang '420 patent. Clearly Larry Page bought the wrong patents and now will pay a very dear price to remedy the problem. The Appeal process is already underway, and it's my opinion that Vringo will be negotiating from a position of absolute strength, as they may be entering said mediation armed with more than a $1 billion dollar royalty award.
Buyout is possible
Faced with the reality of the USPTO rejection and the withheld royalty motion verdict, the timing for a purchase by Google may never be better. Trading at $3.05 a share, Vringo stock has yet to fully appreciate as Wall Street has not factored in a win beyond the jury recommended 3.5%, (discounted heavily for the appeal). Google could take advantage of this timing and launch a bid to acquire Vringo between $5-7 per share. Given the trepidation and frustration that longs have felt since the trial award, at those levels they might gain enough common shares to take controlling ownership. The window for this opportunity is closing quickly as the royalty award has the potential of doubling, if not tripling the current stock price. It may be time to embrace a proactive strategy that includes a buyout, clearly the strategy embraced by Google attorneys Quinn Emanuel is not working.
Conclusion: Vringo holds all the cards
In some corporate board room at Google a risk manager is uttering the following words, "When all options spell defeat, it's time to limit the losses." I have no doubt that this conversation has or will be taking place shortly. The question of Vringo's right to assert these patents against Google has been answered with full force. There's no running to the Obama administration to claim unfair business practices on the part of Vringo. The United States Patent and Trade Office has sent the message that Vringo's patent rights are to be protected and upheld, our system of judicial equality must work equally for all. Clearly Vringo holds all the cards in this epic patent lawsuit. In short, Judgment day has arrived for Google and the only strategies that make sense are settlement or buy-out of Vringo.
Disclosure: I am long 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.