Google Vs. Vringo: Vringo Delivers A Knockout In Round One

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On April 1, I wrote about the patent lawsuit between Vringo and Google. A lot of things have happened since then so I wanted to provide an update. First off, what's the lawsuit.

20 years ago I went to graduate school with a guy named Ken Lang. We were classmates. His particular area of study was how to determine what documents on a network were more relevant than others. He ultimately patented his discoveries and started a company called WiseWire which was purchased by Lycos. Ken became CTO of Lycos.

For all the finer details of the case, please see my earlier article and the discussions that resulted. Specifically, Ken patented a method to rank search results and started a company which has a definitive merger agreement with Vringo (VRNG). Ken's patent, they claim, is being willfully infringed upon by Google (NASDAQ:GOOG) in their Adwords product, which has resulted in over $60 billion in revenues since it was launched. They claim willful infringement (and this is all a brief summary of the above linked article) because the Lang patents were mentioned in the trial between Google and Overture (bought by Yahoo) so Google was aware of them. Willful infringement implies the eventual payment could be 3 times damages.

Again, I go over the specifics of the patents in my earlier article and why I think Vringo will win. Several things have happened since the article.

1) Mark Cuban bought 7.5% of the company. Cuban has specifically stated in the past that he can't stand patent trolls. And yet he took a position here. I believe that in this case Vringo is not a patent troll since the inventor himself is with the company. But, regardless, the merits of patent law is not what this case is about.

A company that wins a patent case can command a significant multiple over the settlement number. Vringo is not only suing Google for potentially billions plus ongoing royalties but they are suing AOL, InteractiveCorp (IACI), and Target (NYSE:TGT) as well since these companies also use the same Google technology. So the results of this lawsuit is critically important to those companies. If Google loses or settles then the settlements will be non-stop with every company that uses the Vringo patent, including, and probably, Yahoo (YHOO) and Microsoft (NASDAQ:MSFT).

2) The Markman hearings took place on June 4 but the judge's rulings came out yesterday. These are hearings that determine what language the jury will hear when determining whether or not the patent will be infringed. In this case, for example, Vringo claims they "scan a network". Google wants to narrow the definition to "spidering or crawling a network". How the judge rules will determine how Google and Vringo can argue their case.

Often patents contain very technical language that a jury would not understand. Both sides try to construct language out of the patent that mean the same as in the patent but that a jury would understand. How the judge rules is very important. If he broadens a definition slightly, the Plaintiff (Vringo) can argue more easily for infringement. If he narrows a definition, the Defendant can argue that prior patents may be in place. There were about ten items being defined.

For instance, for "scan a network", the plaintiff proposed: "looking for items on two or more computers". Google, the defendant, proposed "spidering or crawling a network". A much more narrow definition. What did the judge say? "looking for or examining items in a network". This is very similar to the plaintiff's suggestion. (Note: I'm of course not a legal expert but I do consider myself an expert in search engine technology and went to grad school with Ken as the software underlying these patents were being written).

The next phrase from the patent that was under debate was "scanning system". The plaintiff wanted "a system used for searching information". The defendant wanted "a system used to scan a network". The judge ruled exactly how the plaintiff suggested: "a system used for searching information".

In some cases the judge just simply kept the language in the patent. This happened with most of the claims. This almost always favors the plaintiff since it's the plaintiff's patent that is being discussed. No Google patents were being discussed. (Again, see prior article as to why).

Here's another statement from the patent: "demand search". This does seem to me a phrase that might be confusing to a jury. Sometimes search is not on demand (for instance, if you are continuously scanning a search engine for mention of a brand name). The plaintiff wanted: ""one-time search performed upon a user request"". The defendant wanted "search engine query". This is a broader definition which includes search engine requests that are made continuously. The judge ruled: "
"a single search engine query performed upon a user request". Since it specifically refers to the "user request" it is the same as what the plaintiff wanted, as opposed to the continuous search.

Personally, I think all of these are subtleties and that ultimately a jury will decide. However, I would examine not only what the judge chose to do but the frequency with which he sided with one side versus another. Ultimately the jury will be looking for the judge for his cues. The judge repeatedly sided with the plaintiffs constructions. The plaintiff no longer has to worry about the definitions in some cases being too narrow to argue their patent, or too broad that perhaps other patents might apply.

All in all, this was a very successful and positive outcome for Vringo. Of course, Google could take this to trial and beyond. But in the prior article I gave details on the judge, the district, the lawyers involved, and presented a case why Google would want to settle or even acquire Vringo. Furthermore, I gave some analysis about what the damages could ultimately be. If I'm even remotely correct and you discount back several times, Vringo could easily be a $30 stock. Time will tell but I'm satisfied with the outcome of these Markman hearings.

Disclosure: I am long VRNG.

Additional disclosure: I have been equally long VRNG since my initial article.

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