Wednesday, November 7, 2012

Vringo Versus Google: Did the Jury Make a Huge Error?

Yesterday, the jury in the patent infringement case involving Vringo (VRNG) and Google (GOOG), returned a verdict. They found that Google's search products have indeed infringed on both the 420 patent and the 664 patent. The jury recommended a "running royalty" of 3.5% going forward. This was a great thing for investors, however, the jury's ruling on past damages makes very little sense to me and I'm fairly certain they may have made an EXTREMELY crucial mathematical error. Here's how the jury breaks out the past damages due to Vringo (from the latest press release on Vringo's web site):

  • Google: $15,800,000
  • AOL: $7,943,000
  • IAC: $6,650,000
  • Gannett: $4,322
  • Target: $98,833

When this damage assessment first came out, for me, red flags immediately went up. Why on "God's Green Earth" would AOL be required to pay $8 million while search behemoth Google is penalized only $15.8 million. I thought, the award to Google should be magnitudes higher given Google's dominance in the search market?!

So, I began trolling the message boards for answers. On Steve Kim's web site, I noticed "MikeHD25" (a long-time and reliable in-courtroom resource) posted the following:

First of all I am an american and have complete faith in our legal system but I believe the jury had a misunderstanding about the past damages. Read over their questions the last two days and compare the following math. see what you think

Before the jury starting deliberating the were informed that all damages are to be calculated from 9/15/11 for google as well as co defendants. The only piece of evidence they had to use for codefendents in consideration of damages is a slide that vrng provided with each co-defendant listed seperatly with the following damages. Keep in mind these damages represent 3.5% of 20% of total revenue from smart ads

  • google-$451,190,903
  • aol-$22,693,517
  • IAC-$18,917,570
  • target-$282,380
  • Gannet-$12348

Now keep in mind the judge after reading the verdict page by page very careful asked for it back after it was read aloud by the court clerk to double check something that he obviously didn't see the first time.

now look at the following calculations.

  • aol $22,693,517 x 35%= $7,942,730 damage amount $7.9mil
  • Iac $18,917,570 x 35%= $6,621,149 damage amount $6.6mil
  • target $282,380 x 35%= $98833 damage amount $98833
  • ganet $12348 x 35%=$4321 damage amount $3432

GOOG $451,190,903 x 3.5%= $15,791,681 damage amount $15.8 million.

The jury applied the running royalty rate to the past damage amount that VRNG was seeking. THEY DID BAD MATH and misunderstood the answers the court gave to questons. I don't blame them. They wanted to go home and felt they were doing what the judge instructed.

One question the jury asked was "if a running royalty rate is to be used are we to apply to each defendant" They were asking if they needed to apply the 3.5% to damages for each defendent.

The question today was "If we assign a lump sum amount to be awarded is this in addition to the running royalty amount" They were asking if they award a lump some do they need to apply the running royalty % to this lump sum

The judge double checked the verdict in my opinion because he thought it said 158,000,000 for google and when read by clerk he realized it was incorrect. If he noticed this right away it would explain why after the 5 min recess he recessed for the day. This is all speculation but makes way to much sense. If the judge is in charge of the exact damages and has the power to change them I would look for this to happen if he figures this out. Just my opinion. This post should get some donations. I don't think anyone has come up with this scenario.

Now, I suppose MikeHD25 could still be wrong. However, as soon as I read Mike's post, I jumped out of my chair as all the pieces of this amazing Vringo story came together. The jury has likely made a mistake, and it is a big one.

Not only does this post illustrate a HUGE mathematical error, but the jury also went above and beyond the minimum 20% award for past damages which Vringo was seeking. From reading case transcripts and exhibits through, I know that Vringo's star witness Dr. Becker had been pushing for a range of 20% to 40% in regard to how the Lang patents boosted Google's revenue. Well, using the math above, it looks like the jury awarded 35%. This is obviously at the top end of the range and I believe it shows the intent of the jury to penalize Google almost as much as possible.

Also today, after the verdict was read aloud, I wondered why Judge Jackson asked for a 5 minute recess and then never reconvened court. That event did not make any sense either. Given the report above, this event now makes perfect sense to me. Judge Jackson, very likely, began taking steps to fix this error.

So, for me there are two BURNING questions in the plot-twisting saga of "Vringo versus Google", both of which will likely be answered tomorrow:

  1. Is this truly a mathematical error by the jury?
  2. If so, how will the judge rectify this error?
Good luck everyone!

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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