Vringo's Suit Against Microsoft - What The Past Tells Us
February 3, 2013 | 6 comments | about: MSFT, VRNG
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More...)
Intellectual property company Vringo (VRNG) is, through its subsidiary I/P Engine, suing Microsoft (MSFT) allegedly for infringement on two of its patents: U.S. Patent Nos. 6,314,420 and 6,775,664, entitled "Collaborative/Adaptive Search Engine" and "Information Filter System and Method for Integrated Content-Based and Collaborative/Adaptive Feedback Queries," respectively. The patents relate to the foundation framework for functioning of search engines.
Vringo says that Microsoft has and continues to infringe on the patents, and is seeking an award against Microsoft's "past and future compensatory damages amounting to no less than reasonable royalties, prejudgment interest and any other damages based on any form of recoverable economic injury." Such suits are sometimes initiated with the purpose of forcing defendants to make a settlement. Is this also one of them? I wrote extensively about Vringo and Google in the last months of 2012, and now I wish to follow up with those articles to see what we can understand about the present lawsuit.
Vringo: A Quick Recap
Formed in 2006, Vringo is a developmental-stage company. It is in the business of developing and monetization software for mobile phones and intellectual property. It provides a platform that allows consumers to create, download, and share mobile entertainment content in the form of ringtones.
Last year, the company merged with an intellectual property firm I/P Engine, which is in the business of licensing patents. In July 2012, Nokia (NOK) sold 500 patents and applications for pending patents to Vringo, which sold 9.6 million shares for $31.2 million in August 2012 to fund the purchase. The patents involved in the lawsuit with Microsoft were originally created by Lycos, an Internet search company.
This is not the first time Vringo is suing a tech giant. It has earlier taken on Google (GOOG), AOL (AOL), and three other companies. Vringo went global in its fight to enforce intellectual rights and filed a lawsuit in the U.K. High Court of Justice against ZTE Electronics (ZTE), a Chinese telecommunications equipment company that is also an OEM for other retail brands and the world's fifth largest in the telecommunications equipment industry. Microsoft is its latest target. Microsoft, incidentally, partners with Nokia in the smartphone space.
The Earlier Lawsuit
The jury validated infringement of patents and awarded damages based on running royalty, which meant that Vringo did not get what it was fighting for. While it got what it wanted for future royalty, it got only $30 million in past damages. The total sum awarded, $30 million, was bifurcated between the five respondents as follows:
Google: $15,800,000
AOL: $7,943,000
IAC: $6,650,000
Gannett: $4,322
Target: $98,833
Vringo has chosen to raise revenues by focusing on enforcing intellectual property rights. In the process, once it started taking tech behemoths to court over intellectual property rights, the company caught the attention of investors who support reforms in U.S. patent laws -- including Mark Cuban, who became a major shareholder in Vringo.
The company's shares have been reacting to news. When Google's application for a summary judgment was rejected, the stock went up 35% in one week. VRNG shares lost 8% in late-afternoon trading the day the judgment was announced and it became clear that Vringo was awarded only $30 million in past damages instead of the amount it wanted. On the announcement of Vringo's lawsuit against ZTE Corp., the company's shares went up 17%.
Summary
As I said earlier, such lawsuits are often filed in order to push the defendant to reach an out-of-court settlement. In the earlier lawsuit, Google went all out to fight the claim, while AOL came to a partial settlement of $100,000 for the patents it was using for "in-house products, but not for [its] use of Google's products." It now depends largely on Microsoft whether it is going to fight the case, or try for a settlement out of court. The charge is that Microsoft is infringing on the same patents through its search engine, Bing.
This is a big if, but if I am correct in my assumption then Vringo can hope only for running royalty (calculated at 3.5% in the previous judgment), and forget about past damages. However, it would not be a bad idea to invest in Vringo as a hedging strategy just as Mark Cuban's investment in the company was a strategy for hedging against his investments in companies that are exposed to patent infringement.
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