VirnetX (VHC) has taken on the largest technology giant in the world for infringing on their very valuable patents. Many investors believe that taking on a company so large and powerful could have serious repercussions to the strength of the company's patents if they did not prove infringement in court, although, they did prove infringement to the tune of $368 million as a start.
This is not the first time VHC has been in court with a powerful technology company. In 2010, VHC secured a $200 million settlement from Microsoft (MSFT). At first, the jury in the Microsoft case awarded VHC $105.75 million on March 16, 2010. Soon after, on March 18, 2010, VHC filed a follow-up lawsuit against MSFT for patent infringement regarding Windows 7. Windows 7 was not included in the first lawsuit because it was released in 2009, while the first lawsuit was filed in June of 2008. Two months later, on May 17, 2010, Microsoft settled with VHC for $200 million to cover both legal suits. The Microsoft case is a near mirror image to the lawsuit with Apple (AAPL).
After securing a $368 million victory against AAPL on November 6, 2012, VHC announced a new lawsuit on November 9, 2012 which included the iPhone 5, iPod Touch 5th Generation, iPad 4th Generation, iPad Mini, and the latest Macintosh computers. These products were not included in the first lawsuit due to their release dates being after when the first lawsuit was filed. VHC is sighted to win the second lawsuit due to the fact that the same patent infringement that was argued in the first case is being argued in the second case - just against the newer products. Company press releases regarding the victory can be found here and the newly filed lawsuit can be found here.
On January 4, 2013 Judge Davis ordered AAPL to provide up-to-date sales figures for newly-released infringing products including the iPhone 5 by January 10, 2013 at the earliest, but no later than January 15, 2013. This would put to rest the argument of sunset damages. AAPL filed the sales information minutes before midnight on January 15, 2013 as shown in Pacer docket number 647 that can be viewed here. The Judge can more than see AAPL filing at the 11th hour, not a good idea to get on the bad side of a judge. The Judge can enact a permanent injunction if AAPL does not settle, and after the Maps dilemma in 2012, AAPL should seek to avoid negative press of having problems with Facetime and Imessage. Many intelligent posters on Investor Village believe the Judge already has his judgment formula ready, he just needs the new sales information to fill in the blanks. It is my opinion that the final judgment will be significantly higher than the first verdict and the second trial will be avoided due to settlement. On another note, the trial with Cisco (CSCO) is slated for March. VHC is seeking willful infringement with treble damages. This should be an easy win for McKool Smith again, since the willful infringement is described in Cisco's product manuals. The case against Cisco also includes a much broader scope of product infringement and more accused products.
That only leaves one question--where is Kendall Larson's opinion about negotiations with AAPL? It is hard to guess, but in my opinion Kendall Larson has, since early on, stated that the rate would be higher if the case went on to a trial. Say 1% before a trial and 1.5% if a trial had occurred, for example, in this case it has. Kendall Larson may also believe that arguing for an injunction, mixed with his belief that the rate will be higher since they did not settle pre-trial, will grant them an even higher rate than simply arguing for a compulsory rate to begin with. This is because Kendall Larson can negotiate a much higher rate and settlement amount when AAPL is faced with the inevitable threat of an injunction. AAPL claims they could comply with this in court to achieve a lower judgment, but in reality they cannot. AAPL argued that a workaround would be easy to comply with in court to diminish the value of VHC's patents. Although, after losing the case, AAPL changed their stance saying an injunction would take 12-18 months and cost millions of dollars.
VHC is arguing for an injunction that is more than warranted. How can VHC market its technology when AAPL gives it away to users for free? Intelligent poster Jstevenbaker on Investor Village hit on this point perfectly with his statement "the key here and what VHC argued with regard to an injunction is that VHC will never be able to compete with AAPL with their OWN CUSTOMERS when AAPL makes it available for free via their devices. There is no mistaking that fact regardless of the market opportunity with Android users, etc. Nobody knows what AAPL is going to do, but I certainly believe it will cost them a lot more to play the delay game." This key fact makes an injunction more than possible against AAPL. There is no way VHC can market their technology when AAPL gives it away for free. This fact implies an ordered injunction, which would give Kendall Larson more negotiation power for both a higher royalty rate and settlement.
AAPL argued in court that an injunction would be cheap and easy to comply with. In post-trial motions, they stated that a workaround would take 12-18 months and cost significantly more than they previously argued. AAPL is trembling, as they know a workaround is impossible, and an injunction would be a deadly blow to user experience, a press nightmare and very costly to their company's name and profitability. Since Facetime and Imessage are used to compete with Android and Windows phones, the retroactive cancellation of these services through an injunction would lower their product marketability and user experience. Although having the inevitable threat of a permanent injunction gives the ability for Kendall Larson to call the shots during negotiation for a higher royalty rate with AAPL. Qualcomm receives 3%-5% for each CDMA device sold. VHC can more than achieve a 1% or greater rate for their patents which AAPL has been found guilty of infringing upon.
Kendall Larson does not just want to settle with AAPL and see what happens, he wants VHC to be a more successful Qualcomm. He wants every cent he can get for VHC's patents to further develop VHCs technology, patents, GABRIEL Connection Technology, licensing and Secure Domain Services.
A popular poster on the informative Investor Village site, Ming, states "this is the sort of thing that could happen when a retentive company doesn't part with the stray $1.8 billion to buy a 25% fully-diluted stake in a certain company for $100 a share when opportunity presents itself and they have more than $130 billion stuffing their closets here and abroad doing nothing but suffering from entropy. All this makes one wonder just how bright the captains of industry really are." This is in relation to the fact that AAPL is either arrogant or senseless to not take a stake in VHC. This is a very intelligent option proposed by Ming, although AAPL has not chosen to be sensible, they have chosen to be arrogant. AAPL is going to have to take out a license with VHC for their 4G LTE-A patents as well.
Don't get discouraged, as there is a lot of short manipulation and influence by Jim Cramer, Herb Greenberg and SAC capital. This cycle has happened before and we should be in for a wild ride before the Judge rules on the AAPL case mid-February if a settlement is not reached earlier. An example of this manipulation was demonstrated on a Jan 16, 2013 Seeking Alpha article which was sent out stating that the USTPO has rejected all claims of it's '949 patent. This sent shares down nearly 7% only to recover later in the day when The Fly from Ibankcoin.com contacted Greg Woods of VHC. The author stated "I just spoke with Greg Wood from VHC and he said there weren't any patents rejected, as stated in Seeking Alpha article. He said they are simply 're-examining' new patents with the ITC that are only 1 1/2 years old. He said 'this is standard procedure' and this news leak was nothing more than 'scare tactics' by short sellers trying to profit. Also, he said, this in no way affects the current suit with AAPL and 'everything is still on schedule'." This puts to rest any concern over the patent in question. Moreover, Robert Tango of Gilford Securities stated that "The patent re-examination of '181 should not come as a surprise - claims 1-29 being 'rejected' was expected (in our opinion) and is similar to all other patent re-exams that have occurred. It is a non-final action and all claims being 'rejected' simply means they will be reviewed - it does not imply the patent is invalid or will be invalidated." These examples of responses to fake headlines prove the well-known short interest in VHC do not get caught up in the manipulative games being played. The IBankCoin post can be found here and the Gilford Securities statement can be found here.
A friend of mine Brady Clarke known as $.10 Superfecta on Investor Village created a timeline of events for the manipulation that has been affecting VirnetX.
· On July 17th 2012, Jim Cramer states on his show Mad Money " I am not against it, I am with it...Buy Buy Buy". VHC stock closed at $38.96 that day.
· Then on July 23rd 2012, Herb Greenburg states on an interview on CNBC that there are Hidden Risks at VirnetX, because CEO of VirnetX Kendall Larson has leveraged his holdings of VHC stock to secure a line of credit of $5 million. VHC stock closed at $34.15 that day. This article can be accessed by clicking here.
· Next up on July 25th 2012, Herb Greenberg publishes Hidden Risks at VirnetX Part II and states: "My take: There's no doubt that it has intellectual property, but the ultimate question: What's the value? The bulls believe it's worth more than $3 billion. To me, until current lawsuits gets through the legal system, VirnetX is no less speculative than any biotech stock that hasn't cleared Phase 3 trials. Maybe it'll be a big winner; maybe it won't. A gamble worthy of the casinos." VHC stock closed at $29.15 that day. This second report can be found by clicking here.
· Afterwards on July 26, 2012, Do you believe in Fairytales by Special K, now Value Bulldog was posted and VHC stock tanked to close at $25.28 and at $22.67 the next day. This post can be viewed by clicking here.
· On Aug 7, 2012, Do you believe in Fairytales Part II is published, and the VHC stock closed at $27.66, then $25.50 the next day. This post can be viewed by clicking here.
· On January 16th, 2013, after a federal jury found AAPL guilty of infringement on all 20 claims of the 135, 151, 504, and 211 patents (while at the same time finding AAPL's invalidity contentions on all 20 claims to be a resounding "NO"), we get another attempt by a Seeking Alpha contributor to slander VHC's legal position, thus temporarily today affecting the price per share of the stock.
This wild ride should continue with VHC until a floor for the share price is established mid-February or sooner with a settlement. The adjusted sum-of-parts price target of $132 by Justin Moreno outlined in his white paper update is an accurate price target. More information regarding his report can be found at vhcreport.com or by clicking here. There is no limit on the success of VHC as they continue to successfully execute their legal plan in defense of their intellectual property. Past legal battles have shown that VHC's intellectual property is rock solid and that all that is left to do is a short amount of paperwork.
Disclosure: I am long VHC.