VirnetX's (NYSEMKT:VHC) recent move against Cisco (NASDAQ:CSCO) is extremely positive news for investors. VirnetX is motioning the court for a JMOL (judgment as matter of law) of infringement on the asserted claims of the '759 patent and for a brand new trial on infringement and damages for all asserted claims. This motion by VirnetX is being filed not because it lost the trial against Cisco, but because of Cisco's conduct during the trial. VirnetX has unloaded its legal arsenal against Cisco, and with merit. The legalities of this warranted motion will be explained in detail below. A link to the order can be found by clicking here.
VirnetX and its legal team have appropriately pointed out, "…VirnetX had to approach the bench 28 times during trial (page 4), and the court had to give curative instruction to attempt to correct hours and hours of Cisco's improper argument." In addition to Cisco's behavior as demonstrated by this excerpt, VirnetX has motioned the court to seek a new trial on infringement because it wants a fair trial. A key point in this motion is that the company is not seeking a new trial on infringement because it lost the jury verdict, it is because it is seeking "…a fair trial where both sides engage on the factual issues as called for by the claims of the patent and the Court's constructions and where the Court's instructions are not undermined or distorted" (page 4). This powerful move by VirnetX to obtain a fair and reasonable trial, based upon the factual issues surrounding the claims and constructions of the patents, is warranted. A judgment as a matter of law can allow a directed verdict on the '759 patent, that may allow a trial to decide damages for infringement on that patent if set forth by the judge.
VirnetX argues in its motion that Cisco's intentional (and successful) efforts to confuse the jury warrant a new trial. The company points out to the court that they have spent an enormous amount of resources securing its patent rights with the USTPO while prosecuting patent applications that resulted in the asserted claims in this case. Moreover, over the more than two years that VirnetX has litigated against Cisco, the court decided on the legal scope of VirnetX's claim terms in its constructions. This lengthy process allowed VirnetX to litigate against Cisco for the infringed patent claims under the court's constructions. This was no easy task as the company had to find out exactly how Cisco's products infringed the USTPO granted claims of VirnetX's asserted patents and as interpreted by the court. VirnetX has stated in its motion, "VirnetX…expecting a fair trial where both sides would present competing evidence of infringement of the claims as granted by the USTPO and as construed by the Court. The Trial was anything but that" (page 6). VirnetX has motioned for a new trial on infringement because instead of presenting opposing evidence, Cisco's main intention was to confuse the court and the jury.
Cisco's Bedrock Facts Provided Confusion:
Patent litigation is a very specific process surrounding the claims granted by the USTPO and the legal scope of the claim terms set by the court. VirnetX has argued, as clearly demonstrated by Cisco's counsel, that Cisco began confusing the jury as early as their opening statement. Cisco told the jury that they should "…render their verdict according to the 'bedrock facts' instead of the Court's instructions and constructions" (page 6). Cisco used several bedrock facts to direct the jury to decide the issue of infringement instead of the Court's instruction to the jury to find the issue of infringement based on the claims of the patents and the Court's instructions.
Cisco's Bedrock Facts: (page 6)
- (I) "VirnetX did not invent VPNs. Instead, they invented a very special type of VPN and a very specialized DNS." Id. at 36:16-18.
- (ii) "Cisco's products do not use VirnetX's special VPNs. We use industry standard VPN technology that has been on the market since 1995." Id. at 36:21-23.
- (III) "Cisco's IP Telephones use the SIP industry standard. They do not use VirnetX's specialized DNS." Id. at 36:24-37:2.
VirnetX goes on to argue that throughout the entire trial, Cisco's counsel instructed the jury to base its deliberations on the presented bedrock facts. An example of this is portrayed by: "If you follow these bedrock facts you will render the only just and fair verdict in this case" and "I'm going to remind you about those bedrock facts. I'm going to remind you and tell you how I've proved them, and then I'm going to ask you for a verdict of no infringement for Cisco." (page 7). VirnetX goes on to state that Cisco's alleged bedrock facts had no basis in the court's instructions, the asserted claims, or the Court's constructions and it was improper for Cisco's counsel to instruct the jury to follow the bedrock facts instead of the claims of the patents and the court's instructions.
Cisco Distorted the Court's Construction for "VPN":
VirnetX goes on to state in its next argument that "…Cisco distorted the court's construction for the term "VPN" to confuse the jury and in direct contradiction of Cisco's representations during Markman." It goes on to state that these arguments provided no purpose other than to confuse the jury, and that the court can grant a new trial if the court "suspects that the jury verdict reflects confusion" (page 12). VirnetX has a very strong order with clear evidence of Cisco's confusion as demonstrated by:
"Further, Cisco's argument that it uses industry standard VPNs as opposed to the "special VPN" in VirnetX's patents - i.e., the Court's construction for VPN - was an attempt to confuse the jury into thinking that VirnetX's patents cannot be practiced using ordinary VPNs or prior-art VPNs. This repeated, improper argument forced the Court to give a curative instruction to the jury." (pages 10-11)
VirnetX has presented the court with clear and convincing evidence that Cisco attempted to distort the meaning of a virtual private network in order to confuse the jury. VirnetX goes on to state that Cisco's "special VPN" argument contradicts representations that Cisco made to win its construction for the term. Regarding Cisco's distorted view of the Court's construction for the term "VPN" to confuse the jury and being in direct contradiction with Cisco's representations during Markman, VirnetX states that these arguments served no purpose other than to confuse the jury and the court has the right to grant a new trial if it suspects the jury verdict reflects confusion.
Cisco Adulterated the Court's Preliminary Instructions about Prior Art:
During the trial, the court gave preliminary instructions advising the jury on the role of prior art and invalidity in patent infringement cases. VirnetX has argued that Cisco twisted the interpretation into an improper non-infringement argument. Specifically Cisco argued, "...there can be no infringement if Cisco uses, as part of its infringement, prior-art VPNs or elements from the prior-art SIP standard" (page 13). VirnetX goes on to state that Cisco's counsel purposely attempted to confuse the jury with arguments such as, "Cisco's counsel knew that IPsec and SIP were only part of the accused functionality" (page 13). Overall in this argument, VirnetX has stated that Cisco's contamination of the Court's preliminary instruction served no actual purpose and was merely intended to confuse the jury on how to decide the issue of infringement. The court has full discretion to order a new trial if it "suspects that the jury verdict reflects confusion" (page 13).
Cisco Invited the Jury to Disregard the Court's Claim Constructions and Grafted Extraneous Limitations onto the Claims:
VirnetX argues that Cisco's confusion did not stop there and that it even directed the jury to disregard the Court's claim constructions for the term "cryptographic information." Furthermore, Cisco's counsel invited the jury to use their understanding of the term "domain name" instead of the Court's construction for the term. VirnetX further goes on to list a set of extraneous limitations on the asserted claims that served no legitimate purpose, and was only meant to confuse the jury on what was required for infringement. In closing, the plaintiff again states that the court has the authority to order a new trial if it suspects the jury verdict reflects confusion and has the authority under a separate rule to order a new trial on the basis of Cisco's misrepresentation and misconduct.
Cisco's Legal Misconduct
VirnetX states its awareness that the previously argued litigation misconduct by Cisco to confuse the jury was enough to warrant a new trial, however it does not stop its argument here. VirnetX states that Cisco attempted to confuse the jury to exploit possible political sentiments by comparing Mitt Romney to VirnetX's CEO Kendall Larson during opening statements. Furthermore Cisco's counsel faulted Dr. Short and Mr. Larsen for not opining commenting on infringement. Although the argument is deemed "specifically prohibited by the Court Order because Dr. Short and Mr. Larsen were prohibited from reviewing Cisco's confidential information." One of the most striking accusations against Cisco is its improper "Golden Rule" argument as shown below.
"Imagine if one of your students came to you with that sort of report
and said: You know what, I got an idea that somebody infringes,
but I just can't find anybody actually doing it? Would they get an F
on that? You wouldn't give them an A on that, would you?" (page 16)
VirnetX has stated that this statement by Cisco's counsel was specifically directed to Juror 7 who became the jury foreperson and is a teacher. VirnetX goes on to show that, "The Fifth Circuit has forbidden...counsel to explicitly request a jury to place themselves in the plaintiff's position and do unto him as they would have him do unto them" (page 16). The plaintiff states that these arguments encourage the jury to decide the case on the basis of personal interest and bias rather than on the evidence itself. The plaintiff closes with "The Court has full authority to order a new trial on the basis of Cisco's many misrepresentations and misconduct" (page 17).
JMOL of Infringement of the '759 Patent Is Appropriate:
VirnetX has stated that "In addition to its motion for a new trial, VirnetX moves for JMOL on the '759 patent because the uncontroverted evidence demonstrates that Cisco infringes this patent." The company goes on to state that "In the Fifth Circuit, JMOL is proper when 'there is no legally sufficient evidentiary basis for a reasonable jury to have found for that party with respect to that issue" (page 17). The plaintiff goes on to state that Cisco's defenses were only attempts to confuse the jury and that the uncontroverted evidence demonstrates that Cisco's products meet all the claim elements of the asserted claims; therefore, Cisco infringes the '759 patent as a matter of law. VirnetX goes on to explain how Cisco's engineer confirmed that the accused products do not require the user to enter any cryptographic information.
There is no dispute that the VPNs practiced by the accused products meet the Court's construction of VPN. "As Cisco has admitted, these VPNs are 'industry standard' VPNs, and at the very least, Cisco should be judicially estopped from arguing that industry standard VPNs do not meet the Court's construction" (pages 17-18). Later, VirnetX presents each element of judicial estoppel and how each element is met. In conclusion, VirnetX stated that "Cisco had no legitimate defenses to infringement of the '759 patent, and the uncontroverted evidence establishes that Cisco's accused products infringe. For these reasons, JMOL of infringement of the '759 is appropriate" (page 18). This is a strong stance by the company as they are not letting any misstep go unnoticed.
How Does this Affect the Long-Term Investment In VirnetX?
Long-term investors should applaud VirnetX for executing its legal strategy in its fullest effect. The most recent order demonstrates a company that is committed to its long-term goals, one of those is making those infringing upon the company's technology pay for infringing. This order is expertly detailed, and if granted will allow VirnetX a fair chance to obtain the $258 million it was seeking in the first trial. This amount for past damages, if awarded, will compensate the company for Cisco's past usage of the company's technology. The clock is also ticking on the 45-day negotiation period with Apple (NASDAQ:AAPL), this is set to expire on April 12. If no deal is reached, VirnetX can file the correct motion and have the judge set a royalty rate.
VirnetX has taken a very strong legal stance in its case against Cisco. Although Cisco may have confused the jury, there is no confusion in VirnetX's move for a new trial on infringement and to have the JMOL of infringement of the '759 patent. VirnetX properly asserts that Cisco's legal strategy was to confuse the jury to take away all clarity on how the issue of infringement should be decided. This is a very detailed and valid motion and there is a high likelihood that VirnetX will be granted a new trial and the price per share will recover. I applaud the company for its excellent execution of its legal strategy against Cisco. Time will tell, and the only voice that is worth listening to now is the judge's response to this intelligently built order. Although I am not a lawyer, this analysis can help to provide a window into the intelligent movements of VirnetX.
Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Always do your own research and contact a financial professional before executing any investments.