As Google prepares to take on giant patent aggregator Intellectual Ventures, one would think that perhaps this would be the most significant patent battle in Google's immediate future. But maybe not. We've noted that there is a good deal at stake in that battle, but at the moment it is Vringo, a tiny little New York City-based company - that is never the less publically held - that may prove the bigger immediate thorn in Google's side.
That thorn would need to be particularly hefty in order for Google to really feel it and Vringo may just end up being the little old thorn that could. Vringo doesn't have much of a track record, and it has no real revenue coming in from any real product that we could find. In fact it now more or less hangs its entire hat on a patent portfolio full of a variety of patents - including a hefty collection from Nokia.
Two days ago the company's stock was trading as low as $1 per share in 2012. It spiked very briefly to just under $5 per share at the end of 2013 and two days ago was trading at about $3.70. It is hard to believe the company is public - it has as far as we can tell 28 employees, losses, significant legal expenses and according to Yahoo Financial company data it pays its 36 year old CEO, Andrew Perlman $409,000 a year. Someone is doing fairly well.
For Google Vringo began to jab that little thorn in its side back in 2012. In 2011 Vringo managed to acquire various patents from Lycos - an old search engine competitor dating back to the mid-1990s that sank with the dot bomb era. Vringo then spent much of 2012 looking to use those patents to extract licensing fees from Google (the little thorn), claiming Google's AdWords platform infringed Vringo's patents.
When that didn't pan out Vringo decided to take Google to court and managed to win the trial, with a jury finding Google guilty of infringing Vringo's patents in December 2012. The win certainly helped Vringo to create a mid-sized thorn in the form of a $30 million award. That sounds well and good - the only problem for Vringo with the award is that the company believed that Google owed it hundreds of millions of dollars. Those hundreds of millions are based on what Vringo believes should be a 1.36 percent royalty on Google's U.S.-based AdWords revenue.
Had the jury opted to agree with Vringo on royalties the thorn would have instantly gotten much larger. And yesterday Vringo finally got that large thorn fully in hand when it was awarded almost exactly what it was originally looking for, as determined by US District Judge Raymond Jackson.
Judge Jackson had been overseeing court proceedings to determine if Google had suitably modified AdWorks to create a non-infringing work-around of Vringo's IP, and ruled last week that in his judgment the AdWords program was not "colorably different" from the original version that Vringo won its lawsuit against. Judge Jackson made it clear that "Defendants' misconduct continues presently and Defendants have taken no remedial action. In fact, they have redesigned a system that clearly replicates the infringing elements of old AdWords."
There is much more Judge Jackson had to say about Google's failures to not infringe. But the above is enough to get the point across.
A Larger Thorn
Judge Jackson then gave the two companies one last opportunity to settle on a royalty rate. Google no doubt saw very little incentive to settle - it is still banking on overturning the original jury ruling on appeal - and Vringo no doubt wanted nothing less than its original 1.36 percent.
Having come back to the court with no settlement in hand Judge Jackson then tossed what must have seemed a rather huge and likely surprising curveball at Google by setting a royalty rate himself that resulted in almost exactly the rate Vringo was seeking - an overall running royalty rate of 1.3585 percent. There is in fact some interesting math behind how Judge Jackson came up with the rate, but we'll skip the calculations - what is important is the final result.
Well that is now a large thorn indeed. Following yesterday's pronouncement by Judge Jackson Vringo's stock jumped to as high as $5.82 though it has now fallen back to about $5.12 - still a hefty gain from $3.72.
Big thorn and award now in hand, whether or not Vringo will ever actually collect on any royalty dollars is still completely up for grabs. Taking a position in Vringo stock carries a great deal of risk as to an ultimate payout. Deep pocketed Google's lead patent lawyer on the Vringo lawsuit, Jennifer Polse, says that Google has already appealed the jury verdict and will certainly appeal yesterday's royalty award as well.
If we hypothesize that Vringo will win both appeals, it stands to collect royalties in at least the hundreds of million dollars range. Actual dollar figures are impossible to calculate at this point and would be based on Google's actual revenue. There is more possible upside however. Vringo had sued Microsoft over ads in its Bing search engine as well, and in that case Microsoft opted to settle - and agreed to pay Vringo $1 million plus 5 percent of whatever Google ultimately pays. We suspect someone at Microsoft who voted to settle is possibly whispering "whoops."
No doubt Vringo's patent attorney Jeffrey Sherwood would love that hypothesis and no doubt believes it is much more than that. Sherwood says, "Google has a huge inventory of ads, and they have to get it down to the few that are the most relevant to their users. Vringo's patents describe a way to do it. And our position is that this is exactly the way Google does it."
Joe Mullin, Tech Policy Editor at Ars Technica, pulled together an interesting possible dollars scenario in the case Google loses its appeals that is worth co-opting and paraphrasing here:
Google doesn't break out AdWords revenue clearly but the company made $9.39 billion from "Google-owned sites" in the last quarter. The company will likely make more than $35 billion in 2013 in this area. The majority of that is surely AdWords, since estimates for YouTube range from $3.7 billion to $5.6 billion. As much as 55 percent of the Google's overall revenue comes from its U.S. business. Based on these estimates a very rough calculation suggests U.S. AdWords revenue is somewhere in the range of $15 billion to $18 billion annually.
If that's right it suggests that Vringo is looking at somewhere like $200 million to $250 million annually in royalty payments. The Vringo patents expire in 2016, and Google is liable from November 2012, which is the date final judgment was entered after the trial. Further, if Google loses it will owe interest on the royalties as well. Clearly the hypothetical numbers are already high enough that Google has no choice now but to fight through the appeal process.
Is it possible that Vringo could conceivably end up with a total royalty award that reaches the billion dollar mark? That would indeed be quite the score! Would Microsoft then need to follow the Google payout with $50 million more from its end ($1 million plus "5 percent of whatever Google ultimately pays")?
In his article Mullin also underscored that this payout would be amazing considering that the entire thing is based on "…old Lycos search technology that not even Vringo believes Google actually copied…" At some level this is exactly what patent trolls (we mean aggregators) live for.
In our article on Google and Intellectual Ventures we focused some attention on how that trial might affect the ongoing debate in Congress about patents. We believe how that case goes, given giant Intellectual Ventures role, will have a significant impact on the congressional patent debates.
We wouldn't have thought that a little thorn like Vringo might also sway congressional debate - but apparently we'd be wrong.
Joe Mullin's full article is available at Ars Technica and includes additional details worth reading.
TechZone360 Senior Editor
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