Vringo is a tiny company that purchased some patents from Lycos, an old search engine, in 2011 and then used those patents to sue Google. In December 2012, Vringo won $30 million in a jury trial, but that was far less than the hundreds of millions it was seeking.
Today, Vringo got the payout it was looking for: a 1.36 percent running royalty on US-based revenue from AdWords, Google's flagship program. US District Judge Raymond Jackson had already ruled last week (PDF) that the AdWords program, which was tweaked by Google after the Vringo verdict, wasn't "colorably different" from the old infringing program. He gave Google and Vringo one last session to hammer out a royalty rate, and when they couldn't, he went ahead and set it (PDF)—at almost exactly the rate Vringo was seeking.
Because some aspects of Google's revenue are opaque, it's impossible to know exactly what Vringo's win would be worth—and the company is a long way from cashing a check. But if the royalty rate were to be upheld on appeal, Google would surely have to pay hundreds of millions of dollars.
Whatever its worth, the victory will lift the hopes of patent-holding companies around the nation. A 2006 Supreme Court decision makes it almost impossible for so-called "patent trolls" to get an injunction that would knock a product out of commission; in the context of 2014 case law, a solid running royalty is a troll's dream come true.
Jackson followed the methodology laid out in an East Texas case in which Yahoo was found to infringe an online advertising patent owned by famed patent troll Acacia. The math is a little confusing. Today's order sets a royalty rate at 6.5 percent, on a "royalty base" of 20.9 percent, for an overall rate of 1.3585 percent. The royalty base is supposed to calculate what the Vringo-owned patents add to Google's search system.
"My reaction is pretty darn positive," said Jeffrey Sherwood, the lead lawyer on Vringo's trial team. In Vringo's view, the patents describe Google's ad-filtering system, which ranks various possible advertisements against each other in an auction. "They have a huge inventory of ads, and they have to get it down to the few that are the most relevant to their users. These patents describe a way to do it. And our position is, that's the way Google does it."
Jennifer Polse, Google's lead patent lawyer on the Vringo case, said that the company has already appealed the jury verdict and will appeal today's royalty award as well. "We believe strongly in our pending appeal in this matter, and we anticipate seeking Federal Circuit review of today's decision as well," said Polse in an e-mailed statement.
AOL, Gannett, Target, and IAC were named as co-defendants in the lawsuit for their use of AdWords. However, they've been indemnified in this case by Google, which is handling the litigation. Vringo brought the case under the name I/P Engine, a subsidiary it created to hold the two patents it purchased, numbered 6,314,420 and 6,775,664.
Vringo also sued Microsoft over ads in its Bing search engine. Microsoft settled that case in May, agreeing to pay $1 million plus 5 percent of whatever Google ultimately pays.
While publicly traded Vringo also has a "video ringtone" business, its financial statements describe its business as now being focused on patent assertion. The company has 28 full-time employees, has generated "no significant revenue to date," and had more than $10 million in legal expenses in 2012.
Vringo stock rose 13 percent before trading was reportedly halted.
Redesigned system wasn't different enough
In today's order, Jackson awarded Vringo almost exactly the royalty it wanted. The company's expert argued for a royalty of 5 percent, and Jackson chose to award 4.6 percent. Vringo wanted a 40 percent increase on the rate because Google was found to be a willful infringer, and Jackson agreed that was reasonable. Knocking up 4.6 by 40 percent comes out to 6.44 percent, which the judge rounded up to 6.5.
That's significantly more than the 3.5 percent royalty that the jury suggested, which was "only a starting point in the analysis," wrote Jackson in today's order.
Even though there was no evidence of copying—Vringo admitted as much—a willfulness adjustment was still appropriate, the judge found. "Defendants' misconduct continues presently and Defendants have taken no remedial action," wrote Jackson. "In fact, they have redesigned a system that clearly replicates the infringing elements of old AdWords."
In last week's order, Jackson said that Vringo had proven infringement of both the old and new AdWords systems. While he didn't go into the details of changes Google made, he did write that all Google had done was apply the "LTV" or "long-term value" score at a different point in the ad-selecting process. It was basically the same: "[I]t is undisputed that new AdWords continues to use a candidate advertisement's LTV score that includes a predicted click-through rate in the process of choosing which advertisement will ultimately be shown to the individual performing the query."
Becker, the Vringo expert who convinced the judge on most points, has testified as a patent damages expert in many cases, including past cases over AdWords. In 2010, he argued that Google should pay patent-holding company Bright Response LLC between $64 million and $128 million, because AdWords infringed its patents, as well. Google won that case. Last year, Becker served as the damages expert for TQP Development, which won a patent trial against Newegg.
Back-of-napkin math on the Vringo win
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. Around 55 percent of the company's overall revenue comes from the US.
Accepting those estimates, an extremely rough calculation suggests US AdWords revenue is somewhere in the range of $15 billion to $18 billion annually. If that's right, it would place the Vringo royalty win somewhere in the realm of $200 million to $250 million annually. The patents expire in 2016, and Google is liable from November 2012, which is the date final judgment was entered after the trial.
And of course, if Google loses, it will owe interest on the whole shebang.
It's all pretty academic at this point; the numbers are clearly high enough that Google is likely to fight this tooth-and-nail through the appeal process, and the parties have agreed to stay earlier judgments until the appeal is resolved.
Still, a royalty award that could potentially push the billion-dollar mark—on old search technology that not even Vringo believes Google actually copied—could become additional fodder in the ongoing patent debates in Congress.
In an interview today, Sherwood emphasized that debates in Congress over "patent trolls" don't apply to Vringo.
"The criticism doesn't relate to cases like this," he said. "There are situations where plaintiffs are filing cases that have no merit and extorting money out of defendants, because it's cheaper to settle. Obviously, in this case, we had a very good federal judge and jury come to the opposite conclusion."
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