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Weekend Trial Analysis: This Comes Down To Google Management

|Includes: GOOG, XpresSpa Group (XSPA)

Much has been made during the past week of how Quinn Emanuel (QE), who is representing Google in its patent infringement case with Vringo in the Eastern District Court of Virginia, is the "B" team of lawyers…and that is why Google will likely lose this case. After analyzing it for months and having sources in the courtroom as recently as Thursday and Friday, I can tell you that is not a good assessment. QE is in fact an "A" Team of attorneys putting on the best case that they can.

It is likely that QE knew full well whom they had as an expert witness in Dr. Lyle Ungar. It should be noted that Dr. Ungar did argue for invalidity and non-infringement, and even under withering cross-examination he essentially stuck to his story. The problem is that it appeared his story was spoon-fed by Google and rather than being an expert, he may have been a pawn. I believe they thought Dr. Ungar would play better than he did but Google may have been constrained in terms of how many "experts" they could get to simply tell their story. While Dr. Ungar's previous difficulties in court testimony were not allowed to be heard by the jury, it seems that Google may have embraced those difficulties in vetting him and perhaps thought that they could create enough confusion to sway this jury. On the other hand Dr. Ungar may have spun himself and his qualifications to Google. In any event as I said in a court report Friday afternoon, Dr. Ungar was a miscalculation and any reasonable, fair-minded juror would have had a hard time finding him credible when it was all over.

So now you have one expert witness (Ungar) who was actually bad enough in whole to have helped the Plaintiff and probably significantly. As it sits today, Dr. Keith Ugone who is Google's damages expert has given his testimony (Friday) as to what he thinks the damages in this case are worth. Dr. Ugone has yet to be cross-examined by Vringo. In this instance Google's calculus seems to be clear. Ugone has stated that he believes, based upon a hypothetical negotiation between Google and Lycos (the prior owner of the patents in suit), that the damages in this case amount to $3-5 Million. Using past experience analyzing dozens of jury awards it seems that Google is attempting to get the Jury to "split the baby" or maybe better. So if Vringo's damages expert Dr. Becker thinks the damages are worth about a billion dollars including running royalties and Google thinks they are worth just north of zero, then they could be looking at an award of say $500M if the baby were split. Incidentally, this is the exact amount that Google is rumored to have offered Vringo in settlement negotiations though I have seen nothing credible to support that.

So here's where it gets interesting. If you were Google's management and you were in a bubble fighting this thing with no cause to worry about additional consequences then ok, let it rip. Problem is, that is far from the case here. I have seen many people ask which side has more to lose. On first inspection one might say Vringo. They are a start up with some cash but not a lot and if they lose this case the effect could be devastating. At the very least it will be a strong left hook to the face, their market cap could dip by 75% (perhaps a few hundred million) in the immediate aftermath and perhaps the black eye sustained from the punch sticks around the next time they are looking for money to support a case. Shareholders are bummed; Ken Lang sees his patent get used as bathroom tissue and so on. Pretty bleak, right?

Now lets look at this from Google's perspective (more later on exactly who has more to lose). This case has clearly moved along further than they ever intended it to. I think if you asked Google's senior management and QE in a moment of candor, they would both likely concur. Amazingly, and conveniently from Google's perspective, there has been scant mainstream news coverage of this case. From email exchanges I've had with reporters from a few notable publications it seems that enterprise journalism is a dying art (in fact it should be noted that The Virginian-Pilot is caddy corner from the courthouse and they stopped their coverage on the first day of trial). But consider for a moment the negatives in this for Google. My guess is that if you did a random straw poll of 100 Google investors less than 10% would know about this case and that number may be generous.

So imagine what it would mean for Google to lose $500M. Steve Kim in a recent article has rightly stated that $500M is like a mosquito bite to Google. It would be easy if that's all there were to it. When unsuspecting investors wake up to find that Google has lost a jury verdict in a case which goes to the heart of their core search technology and produces some 90% of their revenues, they are likely to be both angry and worried. Not worried that Google is going broke, worried that Google's management has mishandled an issue that now casts the company in an extremely negative light and where the share price may drop meaningfully. So is it possible that a $500M loss turns into a 10% drop in Google's share price? Who knows? The investment community will surely be saying that losing this case and then being under the cloud of a potential FTC antitrust suit is a pretty big back-to-back blow. And if Google can lose 10% of their market cap from a botched early release of negative earnings I'm guessing 10% here (maybe $20-25 billion) may not be too far-fetched.

Importantly, the blame for this conundrum cannot fall with QE. If your lawyer laid out a set of facts in a case that appeared to be moving quickly against you and asked how far you wanted to take it and you said all the way up to the edge of the cliff, whose fault is that? If anyone should be acting like a cowboy here it's the small company taking a shot, right? Instead it seems to be the $220+ billion company. But wait, Google can still win you say. True, but they pretty much have to run the tables from here, expecting that Ugone's testimony stands taller after cross than it does now and that the jury has amnesia with respect to Dr. Ungar's testimony. Then the jury must also completely disregard Dr. Becker's damages assessment. Yeah, but Google has two more witnesses you say. Right, except that they cannot testify as "expert" witnesses so they will not be able to express an expert opinion about invalidity, infringement or damages. Those witnesses are sort of like having the warm-up band play after the main act.

If you are Google right now and willing to look in the mirror you know that Ugone's paltry damages calculation is not likely to be taken seriously by the jury, but in keeping with your splitting the baby strategy you had to put it out there. Additionally, since your attorneys are smart and have studied jury verdicts and awards you know that juries often lump invalidity and infringement together. Therefore in this case where your infringement expert Dr. Ungar has been picked apart and a finding of infringement is pretty likely at this point, the idea that invalidity is going to win the day is pretty remote. This is accentuated in this case, as Dr. Ungar was the expert witness for both invalidity and infringement. That gets us back once again to damages…how much? I'd say splitting the baby may be a good bet at this point but what if Dr. Ugone gets destroyed on cross and is made to look almost as bad as Ungar? What too if Judge Jackson decides to let the jury hear about some of Google's pre-trial tactics (a motion which is still pending and relates to the question of damages)? Is it possible for Google to see a $2 billion award against it? Sure, though I can't see why Google would take that chance. It would seem irresponsible, reckless even, and would not seem to be putting the interests of their shareholders first.

The coming week does not offer much in the way of rehabilitation for Google's case and instead more danger. But it is not QE that should shoulder the blame here. They have acquitted themselves well in this case. For example, prior to Dr. Ugone's being called to the stand and with the jury absent, QE attorney Robert Wilson was able to overcome numerous objections raised by Vringo's counsel Jeffrey Sherwood. The objections were related to some of the slides that were going to be offered during testimony as well as some of the verbal testimony itself. Wilson showed himself to be quick witted, clear and extremely bright. Google's attorney David Perlson was also excellent. He was able to rehabilitate Ungar to the extent that one is able to rehabilitate someone that, to use Judge Posner's now famous words from another case in describing Ungar "is singularly lacking in credibility." It certainly seems these lawyers are every bit as good as Vringo's but they simply do not have the goods.

So back to the question of who has the most to lose. It's really not close the answer is Google. The potential loss of billions of dollars of market cap along with a loss to your customers, partners and shareholders seems pretty untenable. It is time for Larry Page or Eric Schmidt or someone, anyone at Google who can adequately assess the lay of the land here, to step up and stop what appears to be a slow moving train wreck. Settling and claiming victory would avert potential disaster and ill will. You have already proven that you will not be cowed or steamrolled by frivolous lawsuits...that much is clear. The problem is what you do when one of them (like this one) sure doesn't appear to be frivolous. Don't forget that when the jury finds that you infringed your $3-5 Million Lycos argument is going to ring hollow with Leonardo Davinci, a/k/a Ken Lang sitting in the courtroom. Just because Lycos may have been unaware of what they had doesn't mean the jury won't see what that benefit has been to Google. A 20% increase in real dollar terms is pretty significant to them.

Hypothetically lets say Google offered Vringo the $500M before or during the previous settlement conference and they turned it down. Since then, to use a football metaphor, the ball has moved from mid-field to Google's 30-yard line with 1-minute to play, a tie score and Vringo driving. It's 3rd down with five yards to go. Vringo's field goal kicker is perfect for the season and pretty much the only question now is will it wind up being 7 points or 3 for Vringo. If its 7 points I'm guessing Vringo is awarded in the area of $750-900M from the jury. If its 3 I'm guessing we split the baby. Now that Vringo seems pretty secure in coming away with points, it is high time for Google to instruct Quinn Emanuel to back up from the edge of the cliff. The lawyers for Vringo should likewise be instructed to act reasonably given the importance of this case to the future of their company.

Disclosure: I am long VRNG.

Additional disclosure: Disclaimer: This article and its contents should not be relied upon to make any investment decisions nor does EDVA take responsibility for any investment decisions made as a result of this article. Every investor is advised to do their own due diligence prior to making any investment decision.