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Disclosure: I am long VRNG. (More...) As the case

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cgraut   Friday, 09/27/13 01:45:51 PM
Re: piratica post# 43676
Post # of 56142 
Disclosure: I am long VRNG. (More...)
As the case I/P Engine v. Google (GOOG) is finished in the District Court with regards to past damages, it is time to look at what is at stake in the Appellate Court. Just for a brief review, Vringo (VRNG) was awarded $30.5 million for past damages on November 6, 2012, when the jury came back with a verdict in its favor. The $30.5 million accounted for past damages, but the Judge has recently ruled that VRNG is entitled to supplemental damages including a royalty base of 20.9% of Google's relevant revenue and interest. You can find out more about future damages and the royalty rate in my previous article here. This article is to focus on the issues VRNG is appealing in the Appellate Court [pdf].
1. Laches

The main issue Vringo is appealing is the District Court's laches ruling. On October 31, 2012, Judge Jackson ruled that damages would be limited to starting on September 15, 2011, which was the day it filed the complaint because of the doctrine of laches. VRNG was originally seeking damages going back to September 15, 2005. In a patent infringement case, you can seek damages within the last six (6) years unless laches applies. The ruling significantly hurt VRNG's hopes for the hundreds of millions of dollars that shareholders were hoping for.
However, VRNG is appealing this issue and I believe it has a decent chance of getting this overturned. VRNG asserts that the District Court erred when it found a single 2005 blog post by Google put Vringo on constructive notice of infringement from that day forward. Constructive notice requires the notice to be pervasive, open and notorious. VRNG states:
The district court's laches decision, if upheld, would impose on all owners of over a million-and-a-half patents a new and onerous burden to continuously monitor the internet for an and all public activities, posts, and discussions relating to potential infringers, and then to investigate any information that might suggest possible infringement.
In addition to disagreement about constructive knowledge, VRNG alleges that the District Court erred in failing to allow Vringo to put forth evidence to rebut the presumption of laches. It also states that even without the opportunity to rebut the presumption of laches, there was still enough evidence in the trial record to rebut the presumption.
2. Post-Complaint to Trial Damages

Besides laches, Vringo also is appealing the amount of past damages from the period beginning of complaint until trial. VRNG agrees that the jury's finding of a 3.5% rate was proper but that the jury used the wrong royalty base. It is only challenging the total damages award. The jury accepted the testimony of Vringo's experts regarding a running royalty and Google in fact, only provided experts who claimed a lump-sum award was proper. VRNG is asking for this issue to be remanded back to the District Court to calculate the correct damages.
Conclusion

When the laches ruling hit the wire, Vringo's stock went from a high of $4.47 to a low of $1.75 and with a ruling overturning this, we could very well see the stock react similarly in the opposite direction. At this point, the overturning of laches is not valued into the stock at all. I believe the Appellate Court will adjust the past damage award in one way or the other. Both parties claim that the award of $30 million in past damages is not consistent with the evidence at trial and I believe VRNG has the better argument. At the very least, I believe that VRNG's damage award will be adjusted from $30 million to over $100 million. However, this is far from a certainty and the Appeal will not be heard for a long time. Shareholders will not find out about the Appeal for a long time as the Appellate process could take about a year's time. In the best-case scenario, both issues will be overturned and VRNG will receive around a half a billion dollars in past damages.
It is important to note that Google is also appealing multiple issues in this case attempting to get the jury verdict overturned. I do not believe there are any arguments that look to be sure fire issues in its appeal. This does provide some risk to the investment but at this current time, I believe that it is a great time to buy shares of VRNG. Shareholders who cannot stomach the day in and day out fluctuations are not a great fit with this stock, but shareholders who have room for a speculative play may find VRNG to be a great pick. For your own due diligence, I recommend reading the recent filings and get a more detailed explanation of the case.
Please take this piece as a reminder that the Appeal is under way and do your own due diligence with the separate issues. I did share my beliefs with regards to the issues but there are no certainties in lawsuits.
Additional disclosure: The information contained herein is for informational purposes only. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.
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