XpresSpa Group Inc (XSPA)

[ThinkingMan]

SA article: Vringo: Court May Have Telegraphed Decision Worth 40% Of This Stock's Market Cap

by -> Adam Gill

http://seekingalpha.com/article/1211761-vringo-court-may-have-telegraphed-decision-worth-40-of-this-stock-s-market-cap?source=email_rt_article_title
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Disclosure: I am long VRNG, GOOG, AAPL. (More...)

Regardless of your views on patents and patent litigation, the dynamic nature and high stakes involved result in trading and investing opportunities. Patent litigation is currently an important issue for many corporations: Apple (AAPL) is in an epic worldwide patent battle against Samsung (SSNLF.PK); Motorola (GOOG) is at war with both Microsoft (MSFT) and Oracle (ORCL); and Carnegie Mellon University just won a $1 billion judgment against Marvell Technology Group (MRVL).

Patent litigation has even greater importance for smaller companies that derive much or all of their revenue from patent licensing: VirnetX (VHC) recently won a $368 million jury verdict against Apple and is scheduled to begin trial on the same patents in March against Cisco (CSCO). Intellectual property company Vringo (VRNG) - the focus on this article - prevailed against GOOG in November, obtaining a 3.5% royalty rate for past damages on two patents relating to search engine technology developed by Lycos, Inc in the 1990s. I have previously written about the VRNG vs. GOOG (a.k.a. I/P Engine v. AOL et al.) case here, here and here.

This article analyzes the post-trial motions in the VRNG v. GOOG case on the issue of damages, and the related requests for new trials. Briefing on these issues was completed last Friday, February 15. As an initial matter, it is clear from Google's latest filings that GOOG has not conceded to a running royalty, as some commenters previously suggested. GOOG devotes an entire section in its Reply to its argument that a running royalty is not appropriate. (Dkt. 894)

The parties' damages motions are meaningful to VRNG's valuation. VRNG, which has a $250 million market cap., is seeking to increase the jury verdict for past damages by approximately $100 million (its motion for future royalties would further increase the award by an even larger amount) through a request for a new trial on the limited issue of the dollar amount of past damages. (Dkt. 825) The dollar amount assigned to GOOG in the verdict form (reprinted below) does not equal 3.5% (the awarded rate) of any royalty base that was urged by VRNG or anyone else during trial. GOOG seeks a denial of all damages, or in the alternative a new trial on all issues. Because VRNG is such a small company, the outcome of these motions will likely have a significant impact on its share price.

Judge Jackson has a great deal of discretion in how to proceed. As a legal matter, the new trial requested by VRNG is authorized but not required by the Federal Rules of Civil Procedure. For the reasons discussed below, however, I think the most likely outcome of the damages motions (although other motions are also pending) is that Judge Jackson will grant a new trial, and that the scope of the trial will be the dollar amount of past damages (i.e., question III.C. from the Jury Verdict form). This would be an excellent outcome for VRNG as it would give VRNG the chance to increase past damages without risking its wins in the other areas of the case.

The Facts

After each party had presented its case but before closing arguments, Judge Jackson held that laches applied to VRNG's claims against GOOG (for a discussion of the laches issue, see here). This decision eliminated six years of damages prior to the filing of the complaint in 2011. As a result, the Court was faced with the question of whether to have the jury determine damages for a new shortened period, or on the full period that was presented by both sides throughout trial, with judge adjusting any award as needed. The judge was initially inclined to do the latter:



(Trial Tr. at 1813). GOOG counsel successfully argued against this approach and Judge Jackson ultimately had the jury determine damages for the new, shortened period.

During deliberations, the jury asked four questions, three of which showed confusion over the damages period and the related calculation: 1. "Is there a date to use when considering the question of third party infringement;" 2. "If a royalty rate is determined, are we to apply the rate to a certain figure for each defendant;" and 3. "To what figure do we apply the rate." (Trial Tr. at 2141-2149) The Court answered yes to questions 1 and 2, and instructed the jury to use their memory of the evidence to determine the figure to apply to the rate.

The jury returned a verdict finding the patents valid and infringed, a 3.5% running royalty rate for past damages, and assigned a damages amount to each defendant. However, the verdict appears internally inconsistent on the damage amounts. Google, which had over 90% of the infringing revenue, only had a little over half of the awarded damages. Moreover, the damages amount assigned to GOOG does not line up with 3.5% of any amount that was argued or discussed during trial. In short, the numbers do not line up with themselves, the 3.5% royalty, or the evidence presented.

The award does make sense, however, if you move the decimal point for the Google damages number one place to the right, as VRNG shows in this table from its motion (825) and its opposition to Google's motion (Dkt. 871):

(click to enlarge)

The Parties' Current Positions

VRNG is seeking a new trial solely on dollar amount of past damages (Dkt. 825). Because the Court used a special jury verdict form with specific questions on the dollar amount of past damages, a new trial can be limited to this issue. The damages section of the verdict form follows:

(click to enlarge)

A new trial can therefore be limited to question III.C, leaving the liability, running royalty, and royalty rate issues in tact.

VRNG argued in its opening motion for a new damages trial (Dkt. 825 & 826) that a new trial should be granted because the verdict is inconsistent and against the weight of the evidence. GOOG opposes VRNG's request, arguing that VRNG waived the ability to object to an internally inconsistent jury verdict by failing to object before the jury was dismissed, and that VRNG failed to provide adequate evidence to support a running royalty, a 3.5% royalty rate, or a damages base to which a royalty rate can be applied. Google seeks JMOL on these issues or alternatively argues for a new trial on numerous issues, including other damages issues and liability.

VRNG's reply does not address the waiver of an internally inconsistent verdict, but focuses on the argument that the verdict was against the weight of the evidence. VRNG (correctly, I think) dismisses much of GOOG's damages argument as re-hashing issues that the judge and jury have already decided.

Analysis

As I mention above, I think that Judge Jackson will order a new trial, and that it will be limited to the issue of past damages. Both parties have argued in their damages motions that the jury did not have adequate information on the royalty base to which the royalty rate was applied. The reason for this is the application of the laches decision right before closing arguments. In the trial transcript, Judge Jackson was initially going to submit the entire damages period to the jury and apply laches later:



(Trial Tr. at 1813). GOOG counsel, however, convinced Judge Jackson to require VRNG to present the limited time to the jury. Even in accepting GOOG's argument, the Judge realized and commented twice that a new trial was possible as a result:



(Trial Tr. at 1814)



(Trial Tr. at 1892).

One of GOOG's main arguments against a new trial is that VRNG failed to present adequate damages evidence to the jury. GOOG also brought this up to the court during the laches discussion, but the Court thinks that there is adequate evidence in the record, even in light of GOOG's argument:



(Trial Tr. at 1964). GOOG repeating this argument in its briefs is unlikely to persuade the Court to deny VRNG all damages.

Additionally, the lack of evidence in the record that GOOG complains about is largely the result of GOOG fighting the introduction of damages evidence during the trial. The Court made clear, however, that if GOOG challenged the sufficiency of the evidence after getting it excluded, the Court was going to let VRNG put that evidence in the record:



(Trial Tr. at 828). GOOG now challenges the lack of specific damages evidence notwithstanding VRNG expert Dr. Becker's testimony - which itself is evidence. The Court's sentiments above are another reason that it may grant VRNG's motion and allow it to enter additional damages evidence.

If there is a new trial, the scope will be crucial. VRNG wants to limit a trial to past damages dollars only, to protect its wins on all the other issues; GOOG argues for re-trying the entire case so it can have a second shot. I see no need for the Judge to open the issues of liability, running royalty or royalty rate. Judge Jackson appears to be a very practical judge, and based on his comments in the trial and his decision on VRNG's laches JMOL before the briefing was even completed, it appears that he is not going to put up with more of the parties and their attorneys than he needs to. Therefore, if he is inclined to allow a new trial, I think it will be limited to what is needed to address the problem, which in this situation is the past damages amount. That would only require evidence regarding the royalty base for the period from October 2011 forward, and the application of the already-decided 3.5% royalty rate to that base. That said, opening the entire damages issue may be a reasonable solution as well, but GOOG is going for the whole trial, not just damages.

Conclusion

The current jury verdict on the dollar amount of GOOG's past damages is internally inconsistent in its current form, and is far lower than the 3.5% running royalty the jury awarded. Both sides have argued that the jury did not have the right information, and it is clear that the confusion stems in large part from the late laches ruling. The proper course would seem to be to fix the problem - which can be accomplished by a limited trial - rather than keeping an inconsistent verdict that appears to contain an error.

If there is a new trial on this issue, my guess is that VRNG will be able to establish a 20.9% royalty base, as GOOG's lump sum approach was rejected by the jury in question III.A (see above), and the experts will be limited to the expert reports submitted well before the trial. The ultimate result to VRNG could be the past damages being increased by nearly $100 million.

A note about the scope of this analysis: This analysis is limited to the motions discussed, and is without respect to issues such as GOOG's motions regarding invalidity (Dkt. 820) and infringement (Dkt. 831), which could add issues to a new trial if granted.