Speculation about the damages sought by Vringo in its patent infringement case has been rampant of late. Yet, hard numbers backing such speculation have been entirely lacking in our view. So our team at Enhydris Private Equity, Inc. has decided to release our estimates to the larger investing community, and give a brief explanation of our damage estimate. We do so now with the belief that the real damage estimates will be made public in the coming weeks.
Our estimates use to the “entire market value” rule for patent infringement, and we firmly believe Vringo’s case against Google’s AdWords meets the criteria set forth for this rule. Namely the entire market value rule for patent royalties requires adequate proof of three conditions: (1) the infringing components must be the basis for customer demand for the entire machine, including the parts beyond the claimed invention; (2) the individual infringing and non-infringing components must be sold together so that they constitute a functional unit or are parts of a complete machine or single assembly of parts; and (3) the individual infringing and non-infringing components must be analogous to a single functioning unit.
Using the entire market value rule, Google’s revenue from AdWords since 2005 as the royalty base, and the ratio of the amount actually awarded by juries in similar cases (i.e. "reasonable royalty rate"), we believe a jury would award Vringo a handsome amount. Our calculations using these three criteria give us a kingly sum of $1.33 Billion as the base amount awarded plus future royalties spanning up to 2016; an amount not significantly different than that awarded in the recent Apple v Samsung case.
Keeping in mind that Vringo is claiming the infringement is willful in nature, they would therefore be awarded approximately $4 Billion (triple damages) plus future royalties. We believe the floor for a settlement in this case sits at roughly $600M (roughly a 50% discount from the base amount). Another interesting fact is that Vringo's in-house legal team has averaged $560M in past patent litigation cases, giving more weight to this $600M estimate as a starting point for settlement negotiations.
Even so, the really fascinating part is the potential pay off for investors willing to take the inherent risk of such cases. Based on our analysis of the potential damages and a modest forward multiple of 6, our conservative estimate for year-end VRNG PPS is $64. With such a risk/reward ratio, we felt that VRNG was a must have for our portfolio.
Disclosure: Enhydris Private Equity, Inc. is long VRNG.
Disclaimer: Enhydris Private Equity, Inc. @blogspot is a publication of general circulation under SEC v. Lowe, and does not act as investment advice in any way, shape or form. Enhydris does not advocate the purchase or sale of any security or investment for any specific individual.