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Vringo soars after judge boosts patent royalty rate from Google

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Investors are reassessing Vringo (VRNG) to the upside after the tiny company with a couple of mega-patents won a key ruling against Google (GOOG) late Tuesday.

Shares of Vringo jumped as much as 37% to $5.43, an all-time high, in morning trading on Wednesday after U.S. District Judge Raymond Jackson increased the royalty rate Google must pay for violating patents related to its AdWords business.

Vringo owns several patents related to search advertising that were developed by the Lycos search engine in the 1990s. A jury ruled in 2012 that Google’s AdWords violated the patents. Judge Jackson said Google must pay 6.5% of a portion of its U.S. AdWords revenue as a royalty, higher than the jury's 3.5% rate and more than analysts had expected.

That could total more than $1 billion through 2016 when the patents expire, analysts said. Vringo’s market cap was just over $420 million at Wednesday’s stock price, according to FactSet.

"A good couple of weeks" for Vringo

Robert Wasserman, an analyst at Dawson James Securities in Boca Raton, said he is reviewing his current price target of $5.25 in light of the new ruling. “It’s been a good couple of weeks for Vringo in court,” Wasserman said. “Google can delay but they’re still going to have to pay in the end.”

Google has denied violating the patents and is appealing the jury verdict and later rulings by Judge Jackson.

"We believe strongly in our pending appeal in this matter, and we anticipate seeking Federal Circuit review of today's decision as well,” Google patent counsel Jennifer Polse said in a statement.

Shares of Google were off 1% to $1,113.29 in mid-morning trading, amid a broad market selloff.

The appeals could drag on but the latest ruling gives Vringo more leverage in settlement talks as well, says Mark Argento, an analyst at Lake Street Capital Markets in Minneapolis. Argento had valued Vringo at $6 per share but that was calculated assuming a royalty rate of 3.5%. The royalty applies to 20.9% of U.S. revenue from Google’s AdWords service, which matches advertisements to specific search terms.

Given the judge’s new ruling, “our price target could have an upward bias assuming that rate is upheld,” Argento wrote in a report.

The appeals proces could be "quite convoluted," says patent attorney Daniel Ravicher, who is executive director of the Public Patent Foundation at the Benjamin N. Cardozo School of Law.

But Google only has to win on one of the many issues it is appealing to avoid paying damages, he adds. "Even if the Court of Appeals upholds the finding of validity and infringement, they may overturn the damages award, either in whole or in part," Ravicher says.

Vringo started out selling mobile apps and video ringtones. It acquired the Lycos patents in March 2012, when it merged with a company called Innovate/Protect, which had sued Google and others in 2011. Vringo chief technology officer Andrew Lang, who joined the company as part of that merger, was the CTO of Lycos.

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