Vringo’s Crusade for Enforcing Intellectual Property Rights
Shas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
After the court awarded Vringo (NYSEMKT: VRNG) $30 million in the patent infringement lawsuit against Google (NASDAQ: GOOG), and others, it was expected that the company would go after others who were using the same search related patents owned by it. Vringo chose Microsoft (NASDAQ: MSFT) as its next target and filed a similar case claiming past and future compensation. However, in this case it claimed that the infringement was willful as Microsoft’s application for a similar patent was rejected by the USPTO in 2003 citing one of the patents referred to in Vringo’s lawsuit.
Giving it a Second Shot
Like the earlier case against Google et al, the case against Microsoft has been filed through a Vringo subsidiary, I/P Engine. While Vringo received $30 million in past damages plus running royalties amounting to 3.5% until 2016 in the Google case, in the case against Microsoft, Vringo did not specify the quantum of damages it was claiming. Vringo investors would have to wait till the ruling before they come to know how much Vringo will get from Microsoft. There are also other issues involved that can influence the outcome of the case.
- The doctrine of laches dictates that Vringo can only hope to get past damages from the day the case was filed, which in this case is Dec. 31, 2012. However, Vringo has made a post trial motion request for a Rule 59 trial in the Google case. The exact position on how much Vringo can hope to get from Microsoft will be clear only after the judge rules on that. This is assuming that willful infringement is not found against Microsoft.
- Microsoft’s Online Services Division (OSD), under which Bing operates, has not been doing well. Despite increase in revenues, there has been a concurrent increase in operating loss in online services. It depends upon whether past damages and future royalties are awarded on the basis of revenues that Microsoft’s OSD made or makes by using the patents owned by Vringo. In case the award is based on revenues, Vringo can hope to get anything above $500 million annually in running royalty. With 80.3 million shares, this amounts to more than $6 per share.
- Originally developed by Lycos, the patents belonged to Nokia from whom Vringo purchased them at the cost of $22 million. The fact that Nokia partnered with Microsoft may well work in its favor.
- If the court rules in favor of Vringo this time also and willful infringement is established, Microsoft may be required to pay three times more damages than arrived at after calculations.
In addition, Vringo has taken its war against patent infringement beyond America’s shores and filed a lawsuit in the U.K. High Court of Justice against the UK subsidiary of ZTET Electronics Inc., a Chinese electronics equipment manufacturer. In this case, the company has alleged infringement of certain European patents owned by it.
Moreover, this should not be seen as the end of Vringo’s crusade over protecting intellectual property rights. Seeing the hurry that the company has shown in filing the Microsoft lawsuit so soon after the Google ruling indicates that it will go after companies like Facebook, Yahoo and LinkedIn that have been using the same technology in their search engines for placing targeted advertisements.
Buy Indicators for Vringo
There are certain other factors that encourage buying the stock:
- Last August, Vringo spent $22 million to buy 500 patents and applications for pending patents from Nokia. The company sold shares for funding that purchase. It has more or less recovered that cost with past damages awarded in the Google lawsuit, and results are still expected from post trial motions. It is now a cash rich and debt free company. Whatever is awarded in future lawsuits is going to be a big boost for the company’s finances and future plans.
- The ZTE lawsuit is progressing on expected lines, and once a favorable ruling is announced in Europe, the company intends to sue other companies that choose not to take licenses for its patents relating to telecom infrastructure.
- In the quarter gone by, there has been an increase of 262% in shares held by financial and other institutions. If the stock is a good buy for institutions that have access to market data as well as inside information, it is a good buy for the average investor as well.
- The stock trading plan that allows members of Vringo’s Board of Directors to monetize shares owned by them when the share price is between $4.25 and $30 is another indicator that the management believes in the future of the company.
The Flip Side
The flip side is that Vringo has chosen to raise revenues through patent infringement lawsuits. This, in my opinion, is not a sound long-term strategy. There is only as much that it can get from its patents. Moreover, the award in the case of patents relating to search and targeted ad placement is for up to 2016. What after that?
Being a development stage company, raising funds through enforcement of its intellectual property rights is a good move for the short-term. However, for sustainable growth the company needs to look for newer avenues for making money from the patent portfolio of its subsidiary. The parent company, on the other hand, needs to focus on its core competency of developing software for mobile phones.
Alternately, though, IP litigation as a business model (as I have indicated elsewhere) can be a sustainable business model if a company proactively purchases patent portfolios from micro-inventors and starts enforcing them broadly. This will also help many inventors get the full benefit of their property rights.
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