(Adds judge's granting of Vringo's motion to compel deposition of ZTE's general counsel and order for defense counsel and ZTE to show cause why they should not be sanctioned and required to pay Vringo's reasonable expenses in making the motion in last two paragraphs.)
Vringo Inc.’s (VRNG) accusation that ZTE Corp. with the help of Chinese regulators manipulated Vringo’s stock price to weaken its position in their multi-jurisdictional infringement war is more likely to attract the attention of the Justice Department than the Securities and Exchange Commission, securities attorneys and patent marker observers said.
The allegation was highlighted in a July 21 motion to compel ZTE General Counsel Guo Xiaoming to testify in a deposition in New York, filed in U.S. District Court in Manhattan before Judge Lewis Kaplan by Karl Geercken, a partner with Alston & Bird, who represents New York-based Vringo.
In an amended second complaint filed July 15, Vringo previously alleged that ZTE twice intentionally violated a non-disclosure agreement between the two companies in an effort to persuade Chinese antitrust authorities to open an investigation of Vringo in order to pressure the company to reduce its demands for a license to standard essential patents for 2G, 3G and 4G wireless applications on fair reasonable and non-discriminatory terms.
Geercken’s motion cited translated emails from ZTE officials showing ZTE’s “efforts to manipulate Vringo’s stock price” and “to give a blow to Vringo ’s share price in terms of brand to further affect its business activities.”
The motion also cited comments from ZTE officials that suggest they believed the litigation with Vringo was “the biggest [IP] risk for ZTE at present” and that “the share price is Vringo’s biggest weakness, and also the place where we can attack.”
Vringo is asking Judge Kaplan to order Guo to testify in New York because he “is at the heart of ZTE’s fight against Vringo — personally directing the Shenzhen litigation, as part of ZTE’s countermeasures against the litigation that is the biggest IP litigation risk to ZTE.
The Shenzhen litigation refers to the anti-trust lawsuit ZTE filed against Vringo in a court in Shenzhen, China.
“Mr. Guo’s documents and testimony are important to show ….his involvement in guiding ZTE’s strategy including breaches of the NDA and attempts to manipulate Vringo’s stock price, his lobbying activities on behalf of ZTE with Chinese government officials, his own interactions with news agencies, his own view on FRAND issues, and his interactions with ZTE business executives and ZTE’s lack of good faith in attempting to negotiate a license agreement with Vringo..…This is directly relevant to Vringo’s punitive damages claims.”
Securities attorneys and analysts said that even if everything Vringo alleged was true it may have a difficult time proving culpability and harm.
According to the SEC, stock manipulation “is intentional conduct designed to deceive investors by controlling or artificially affecting the market for a security."
It can involve a number of techniques to affect the supply or demand for a stock, such as spreading false or misleading information about a company.
The allegation that ZTE used regulators in China to its advantage in the dispute with Vringo “is a common tactic” and “is emblematic of the challenges all intellectual property owners doing business in China face,” said Jacob Frenkel, a partner with Shulman Rogers in Potomac, Maryland, and a former SEC enforcement attorney.
“We take extra precautions and measures as a law firm any time we’re dealing with technology matters in China,” he said.
“When a company is alleged to be acting in a wide range of deceptive manners in its business public relations, there is a rational basis, where there is a significant stock drop, to suspect stock manipulation,” he said.
But there has to be some evidence of false or misleading statements and an economic interest to qualify as stock manipulation, he said.
“ZTE by leveraging Chinese regulators in its dispute with Vringo could fall into the category of corrupt and deceitful behavior without falling into the false and misleading category," he said. "The definition of anti-fraud is broader than just false and misleading.”
“It’s not clear that the allegations in the complaint are such that the SEC would be interested,” he said. “The facts are not as compelling from the SEC’s perspective but it could interest the Justice Department because of the intellectual property dispute.”
Vringo currently doesn’t have enough evidence of stock manipulation, which is why they need discovery, he said.
Shares of Vringo fell to 44 cents in trading on Friday and have traded between 39 cents and $3.39 over the past year. They have lost more than 86% of their value over the past year.
But the biggest contributor to the plunge occurred in August after the Court of Appeals for the Federal Circuit invalidated the patents at issue in an infringement dispute with Google Inc. The appellate court also threw out the $30 million award and royalty Vringo had won from Google. The company is awaiting a ruling on its appeal of that decision by the Supreme Court.
Officials of New York-based Vringo declined to comment on the dispute and the stock manipulation and fraudulent inducement charges. They also declined to comment on whether the company had filed a formal complaint with the Justice Department or the SEC.
Vringo’s second amended complaint charges that ZTE’s efforts were in concert with the Chinese government and regulatory authorities including the National Development and Reform Council.
The second amended complaint alleges ZTE twice intentionally breached the NDA by using Vringo’s confidential material as the basis for filing a civil complaint in China, and by using the protected material as the basis for inducing a regulatory investigation against Vringo. It also alleges fraudulent inducement.
The amended complaint alleges ZTE brought the antitrust complaint against Vringo in Shenzhen court “in an attempt to force Vringo to accept non-FRAND licensing rates that would be far lower than any rates than any other court or arbitral tribunal would allow.”
In this way, ZTE allegedly followed a similar path taken by Huawei International against InterDigital Inc. in December 2011.
“In 2013, the Shenzhen Court found that InterDigital violated Chinese antimonopoly laws and awarded damages; the Guangdong Appellate Court upheld the ruling later that year.”
In addition, the NDRC opened an anti-monopoly investigation against InterDigital and only dropped it after InterDigital reached a settlement with Huawei.
Similarly, the NDRC levied a $975 million fine against Qualcomm.
Officials for InterDigital and Qualcomm couldn’t be reached for comment.
Vringo alleged in the complaint that the NDRC threatened Vringo and some of its executives with fines and civil and criminal liability.
For instance, the complaint described a March 10 meeting Vringo’s Chief Legal Officer David Cohen attended with counsel under threat of penalty.
“During the meeting, which was attended by the head of the NDRC and other top officials, the NDRC asserted that should Vringo ‘not cooperate’ with the NDRC and/or be found guilty of violating China’s anti-monopoly laws, Vringo and Mr. Cohen (personally) could be subject to criminal and civil penalties, including monetary penalties and seizure of Vringo’s Chinese patents.
“Unprovoked and for no apparent reason, the Director of the NDRC mentioned several times during the meeting that the armed guards outside the NDRC were not working for the NDRC.”
The complaint also alleges that the director of the NDRC “yelled extensively” at Cohen and his counsel for not showing the NDRC the proper respect, such as “not sitting with a straight back and not exhibiting a sufficiently deferential demeanor.
“Given the extensive yelling and the number of times that the armed guards were mentioned, Mr. Cohen was significantly concerned for his personal safety.”
The Geercken motion alleged that “ZTE needed ‘to give a blow to Vringo’s share price in terms of brand to further affect its business activities….So, if we regularly release some news adverse to it , its share price will be affected and then its business activities will be affected.”
Moreover, the motion further quoted ZTE officials as asking for American and European public relations companies to help “give a blow to Vringo’s share price through media hype and disseminating predictions of its decline. We hope to apply pressure to the Vringo share price through proactive and planned propaganda, to facilitate Vringo to lower stance to initiate negotiation with us.”
The public relations firm Edelman has been handling ZTE’s outreach to the media during the infringement battle.
So far, ZTE has yet to respond to Vringo’s allegations of stock manipulation, though on July 23 it disputed some of Vringo’s assessment of Guo’s direction of ZTE’s litigation strategy.
“Vringo’s five-point ‘summary’ of documents purporting to prove Mr. Guo’s involvement is not an accurate characterization of those documents,” said Paul Straus, a partner with King & Spalding in New York.
“For instance, Vringo provides a highlighted list of purported ‘countermeasures directed by Guo,’ citing Exhibits C-H. Mot. at 2. But Mr. Guo’s actual participation in all of those exhibits combined is limited to a total of three words on the second page of Exhibit C: “please handle this.”
“Not one of the ‘countermeasures directed by Guo’ that Vringo quotes in bold highlighting – not a single word –
is attributable to Mr. Guo, who is merely copied on the emails along with more than a dozen recipients.
Straus’ motion in opposition continues to stress that Guo has no knowledge unique from the individuals who actually wrote the emails, whom ZTE has always agreed to make available for depositions.
The opposition brief adds that if the court decides to compel Guo to testify it should also the deposition to take place in Hong Kong, so as not to unfairly burden him.
Officials from Edelman declined comment. Officials from ZTE couldn’t be reached for comment.
In a July 21 response to a Vringo letter asking Judge Kaplan to compel disclosure from ZTE, Straus said “Vringo’s entire letter is based on the erroneous premise that ZTE is ‘withholding’ documents or information. To be absolutely clear: ZTE is not withholding anything.”
He said after “combing through ZTE’s voluminous response in a desperate effort to manufacture a dispute, Vringo now digs up a third set of all-new perceived deficiencies. Vringo’s arguments for sanctions are without merit. Simply put , Vringo is using discovery as a tactical bludgeon.”
In the federal court in Manhattan, Vringo is seeking sanctions against ZTE due to its efforts to delay the discovery process through overly broad confidentiality designations, delays in translating documents and the stripping out of metadata from documents.
Moreover, Judge Kaplan had previously ruled that ZTE had breached a non-disclosure agreement by including a settlement offer made by Vringo in materials sent to the Shenzhen anti-trust court. The judge has also previously said in a hearing that because of this Vringo was likely entitled to significant damages.
In the latest development, Judge Kaplan granted Vringo's motion to compel Guo Xiaoming's deposition and to produce documents and ordered that the deposition take place in New York.
In addition, Judge Kaplan said in his order that it "preliminarily appears that ZTE's opposition to this motion was entirely frivolous and, in any case, interposed for purposes of delay and harassment. Accordingly, Messrs. [Robert] Perry and Strauss and ZTE shall show cause, on or before August 7 , 2015, why they should not be sanctioned....and why they should not be required to pay movant's reasonable expenses incurred in making this motion, including attorneys' fees."
Straus and Perry didn’t respond to an email and a telephone message seeking comment.
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