Is Apple Flip Flopping Over Heat From Its Enterprise Customers?

| About: VirnetX Holding (VHC)

If you read my last article involving Apple (NASDAQ:AAPL) you were able to deduce that Apple lost its court battle with VirnetX (NYSEMKT:VHC). Shortly thereafter, Apple said that it was ready to "remove" the VPN On Demand feature due to VirnetX law suit that it had recently lost. Surely, its customers must be up in arms about that statement.

Some Background:

VirnetX originally sued for patent infringement on August 11, 2010. It filed a complaint against Apple in the United States District Court for the Eastern District of Texas, Tyler Division. The original complaint includes allegations of patent infringement regarding technology patents owned by VirnetX, U.S. Patent Nos. 6,502,135, 6,839,759, 7,188,180, 7,418,504, 7,490,151.

VirnetX was successful in court and on February 26, 2013, the United States District Court for the Eastern District of Texas, Tyler Division, issued its Memorandum Opinion and Order ("Order") regarding post-trial motions resulting from the prior $368 million jury verdict for VirnetX in the ongoing patent infringement action between VirnetX Inc. and Apple Inc.

The Texas court further denied Apple's request for a new trial on the liability and damages portions of the verdict. The Court also granted VirnetX's motions for pre-judgment interest, post-judgment interest, and post-verdict damages to date. Apple was ordered by the court to pay $33,561 in daily interest up to final judgment and $330,201 in daily damages for infringement up to final judgment for certain Apple devices included in the verdict. Also, parties were ordered to mediate over a license for 45 days, which expired on April 15, 2013. VirnetX filed a motion on the 16th per the judge's orders.

The Flop:

No immediate deal has been announced yet, but according to new information from another source, there is a possibility that a "deal" may be in the works. This remains to be seen. If the source is correct, then Apple is not going to change the behavior of the VPN On Demand feature.

The significance of the "seamless" VirnetX VPN feature vs. the attempted Apple technology removal is as follows:

1) The VPN On Demand feature was effective, so why fix it? Keep in mind that VirnetX was only seeking a 1% running royalty rate. This is not egregious by any means.

2) The removal, by Apple's own admission, was in response to losing the recent lawsuit with VirnetX. Some might say that Apple was admitting infringement by making this bold move.

3) Enterprise customers had no choice and were literally "thrown under the bus" by Apple's removal decision.

Furthermore, the source stated, "Apple no longer plans to change the behavior of the VPN On Demand feature of iOS 6.1 for devices that have already been shipped. The 'Always' option will continue to work as it currently does on these devices," wrote Apple.

One has to wonder if Apple tried to remove VirnetX's technology, but was unsuccessful? I believe this may have been the case regarding FaceTime and iMessage, which suffered significant outages over the past week. Apple's customer satisfaction ratings must be at an all-time low at this point.

Continuing with the story and following the judge's ruling, Apple originally posted a support document to its website earlier this month detailing how the settings would change when iOS users connect to VPN networks. This announcement, combined with the drop in Apple's stock price from $550 in January down to a recent low of $385, really couldn't have come at a worse time.

Now, it appears that Apple may have changed its mind. You might call this the "ultimate flip flop." Currently, Apple stock is on a rebound this week. Hopefully, the reversal will continue in a positive direction for Apple shareholders. Certainly, this immediate change in direction gives some hope to its enterprise customers that Apple is listening.

Lastly, wouldn't this be an opportune time for a major player in the Android community (a strong competitor to Apple) to step in and do a deal with VirnetX for VPN On Demand and capture Apple's enterprise business?

VirnetX could not be reached for comment today.

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.