Got VirnetX? A Fruitful Recap Of The Past 2 Weeks

| About: VirnetX Holding (VHC)

Avaya's Settlement With VirnetX

On August 8th, VirnetX (NYSEMKT:VHC) entered into an interesting cross-licensing agreement with Avaya. Under the terms, VirnetX has agreed to license certain patents to Avaya in exchange for multiple payments to VirnetX and a reasonable ongoing royalty rate through the life of the patents. More interestingly, Avaya has agreed to license certain of its patents to VirnetX for its ongoing Gabriel technology product development. This agreement is considerably important for five reasons.

  1. Kendall Larson and his team were able to work up an unorthodox agreement with Avaya that satisfies both parties. Some critics thought Avaya may not have the money to enter into an agreement and it may overhang their possible IPO, although VirnetX's team was able to secure an agreement.
  2. This settlement sends another message to Judge Davis that another company has settled with VirnetX, the first one to settle that was accused of willful infringement.
  3. Avaya did not wait for the Cisco (NASDAQ:CSCO) retrial news, any USTPO updates, any appeal news or the Apple (NASDAQ:AAPL) royalty rate news to be decided upon prior to settling. Their company came to the conclusion that VirnetX's patents and intellectual property is real, valid and they infringed upon it, thus leading them to settle.
  4. This is the largest settlement so far, based upon estimates being around $25,000,000.00, although an exact number is unknown.
  5. VirnetX having access to Avaya's technology in this cross licensing agreement can aid the further development of Gabriel.

In my opinion the Avaya agreement is worth more than the monetary value of the settlement and royalty rate. It clearly demonstrates that a company VirnetX accused of willful infringement has decided that the company's patents are valid and infringed upon. Moreover this sends a message to the Judge just as it is, that the technology is valid and Cisco and Apple should be held accountable for infringement as well; arguably more so for going through the litigation process instead of settling in good faith.

Third Party Reviews

There was some pushing back by VirnetX recently regarding inter-party reviews of some of the company's patents by outside companies. There were three motions to suppress the subpoenas filed in Florida, Delaware and Massachusetts. VirnetX has not instituted any new legal actions; instead in accordance with the ongoing litigation between the company and Apple in the Eastern district of Texas, VirnetX has requested discovery requests on these companies. Afterwards, these companies opted to file motions attempting to quash the subpoenas in their own state. This action by VirnetX to gain insight into the companies filing inter party reviews of their patents can offer valuable insight into the companies motives for filing these motions. Since these companies can file inter party reviews that can be included in the litigation, it would be fair to allow VirnetX to have insight into who and why is filing these reviews, especially since they are a party that is not involved in the current litigation between VirnetX and Apple.

Growing The Patent Portfolio

Following the press releases by VirnetX, an important statement has been augmented. The company's statement following the settlement with Siemens (SI) stated "The Company's patent portfolio includes 20 U.S. and 32 International Patents and over 100 pending applications" has changed to "The Company's patent portfolio includes 23 U.S. and 41 international patents and over 100 pending applications". Giving credit where it is due, poster Amadeus on Investor Village nailed this recent development with his post:

"In my opinion VirnetX has been filing patent applications which systematically map claim elements to specific products suspected of infringement, meaning we are likely to see new actions in the near future similar to what we saw with the recently granted '697 patent, possibly targeting new defendants. We have heard of many instances of suspected infringement both at the ASM (e.g. Qualcomm) and as far back as the Microsoft trial (e.g. Intel, Hewlett Packard). Now that Avaya has settled, and Apple and Cisco are relatively progressed, management bandwidth is presumably the least burdened by litigation issues than has been the case in years, opening for the door for exploration of new avenues of monetization beyond the existing crop of defendants."

Investors like to see a company that is fueling its future growth as much is attending to its current needs, VirnetX is aptly growing its patent portfolio both at home and overseas for the future thus increasing the value of the company and one's investment.

New Patents Asserted Against Apple.

On August 6th, VirnetX reported that they had been granted two new patents by the USTPO, the "696 and "697 patent, which they asserted against Apple by adding allegations to the current suit with Apple that they infringe upon these patents as well. Furthermore infringement would surround Apple's iPhone 5, iPod touch 5th generation, iPad 4th Generation, iPad mini, and the latest Macintosh computers. These patent assertions against Apple only add to the burden Apple is facing by not entering into a complete licensing agreement with VirnetX to license their entire patent portfolio, since they are facing additional infringement on a newer set of patents.

Keen contributor Dustin Moore reported that VirnetX should also be granted the "117 patent soon, a patent that holds claims very similar to VirnetX's "151 patent that was asserted against both Microsoft and Apple. Moreover, Microsoft ended up settling for $200 million and Apple was faced with a $368 million dollar damages verdict for infringing VirnetX's patents that included claims 1 and 13 of the '151 patent. Mr. Moore aptly goes over the similarities of the recently approved patent and the "151 patent in his article. Keep in mind the USTPO goes over each patent application in depth, although the addition of patents can not only strengthen VirnetX's patent portfolio and help in asserting their intellectual property but can also help uniquely assert their IP against infringing companies. With a growing patent portfolio and an increasingly amount of patent and patent claims being upheld after litigation and USTPO reviews, VirnetX will have an easier time not only accusing future companies of infringement, although being able to avoid the courtroom.

Cisco Retrial and Apple Royalty Rate Hearing

On August 9th Apple and VirnetX met in good faith and were unable to reach an agreement. Now on August 15th the two parties are set to appear before the Judge regarding an ongoing royalty rate. As detailed in my last article, this royalty rate can mean billions of dollars for the company going into the future. It has been my personal opinion that the Judge granted the second past 45 day negotiation period as a way to make sure his severed judgment does not get recombined, and that there is a chance that he can rule from the bench his Thursday. Albeit unorthodox for a Judge known to take at least a few weeks to issue a ruling, I believe mixed with the extra negotiation period and the status conference there is a good chance he can rule from the bench, if not than anywhere up to six weeks thereafter the fifteenth.

As I have outlined in previous article, there is a good chance that VirnetX can be granted a rate north of 1% or even the 1.52% they argued for here (check footnote on page 7). Apple should not get a lower rate for going through litigation than every other company that met in good faith and settled with the company. Including the Judge's rock solid history as I have outlined, investors should have faith in his judgment regardless of the time it takes for him to rule.

Moving from Apple to Cisco, we are still awaiting news regarding the retrial or JMOL on the "759 patent. This news can of course come at anytime. Although many consider this small news in the wake of the fulfillment of the company especially since the jury found the asserted patents not invalid, the monetary gain to the company through a JMOL or retrial would be worth $100-$200 million dollars maximum. Regarding significance, the jury finding the patents not invalid was a key for the company beyond any monetary measure, aiding in assertions against larger infringers like Apple.


VirnetX reaching an agreement with Avaya is significant not only for its monetary value, but for its cross licensing portion that will aid the development of Gabriel and the message to the knowledgeable Judge that another company has found themselves infringing upon VirnetX's valid patents and settled. VirnetX seeking discovery on the parties filing inter part reviews of only the patents asserted against Apple in the EDTX can lead to valuable insight into the company's motives for filing such motions. Recent developments have shown VirnetX's ability to growth their patent portfolio and assert new patents against Apple, adding more value to any possible settlement or judgment. The Cisco retrial or judgment as a matter of law on the "759 patent can come at any time, just as the Judge can rule from the bench this Thursday or a few weeks there after regarding the Apple royalty rate. Understanding these recent developments is a must for long-term investors in VirnetX. I am not fond of technical analysis in my articles because I believe in due diligence on a company down to the building blocks, such as an understanding of the recent developments affecting the company would provide. Technical analysis can be helpful, although for a binary news driven company such as VirnetX, I view technical analysis as only conversation between news driven events.

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.

Additional disclosure: All in my own opinion, always do your own due diligence and contact a financial professional before executing any investments. Thank you to Amadeus for allowing me to quote him, and Penaki, Gloriason and VeryHappyCustomer for their uploads.