In the recent suit by VirnetX (VHC) against Cisco (CSCO), the jury failed to find infringement, how is that a win you ask? The most important conclusion by the jury was that VirnetX's patents are valid. Damages for past infringement would have been nice but most important is that in three trials with major companies (Microsoft (MSFT), Apple (AAPL) and Cisco) and multiple re-examinations by the USPTO, VirnetX's patent portfolio is still intact.
One must understand VirnetX's strategy to understand why I consider this decision a big win for VirnetX. VirnetX intends to build a revenue stream by licensing its technology to cell phone manufacturers who are introducing cell phones using the latest 4G LTE advanced technology. The latest 4G specification requires use of the secure protocols that are patented by VHC. Invalidation of their patents would have been a significant blow. In order for these potential customers to license the technology, they need to understand that the patents are valid. Damages for past infringement have little impact on overall valuation for VHC, the royalty stream is the major factor.
Additionally, this decision puts additional pressure on Apple to settle with VHC. In November 2012, VHC won a key infringement victory against Apple. The judge presiding over the case, Judge Davis, has given Apple 45 days to negotiate a settlement with VHC, which will expire on April 12th. Now with the patents further validated, this puts additional pressure on Apple to settle. In Judge Davis's remarks in February, he seemed to support a royalty rate of 1% or more. If Apple does not settle it is expected Judge Davis will award VHC a royalty of 1% or more in his final ruling. Of course Apple can always appeal, but without patent invalidation, there is little chance of the verdict being overturned.
Other positive factors are related to any potential buyout of VHC. With the patent portfolio now fully tested, the value of VHC increases. Earlier this year, there was a rumored offer by Google (neither VHC or Google would comment on the rumor) of $50 a share. Now with invalidity issues out of the way, suitors may appear. The three main potential suitors are Apple, Google (GOOG) and Samsung (OTC:SSNLF). Each of these companies will have to eventually license these patents for their 4G products. At a 1% royalty, it would make sense for one of these companies to purchase VHC and collect royalties from the others. Purchasing VHC could provide a product cost advantage to any company in this ever more cost competitive market.
Other companies have already settled with VHC including Aastra (OTC:AATSF) for 1.6% royalties, Mitel (MITL) for 1.15% royalty and NEC at 1.6%. Siemens (SI) has also settled but the rate has not been made public. One can only assume it meets the guidelines that VHC has set up for royalties. These settlements establish a baseline for royalty payments and establish a rate going forward for future agreements. There exists an excellent white paper that uses the above information to establish a reasonable stock price as VHC moves forward. The valuation established by J.P. Moreno is $133 per share.