In June of 2013 New Bay Capital, LLC petitioned the Patent Trial And Appeal Board of the United States Patent and Trademark Office (USPTO) for four separate inter partes reviews (IPR) in an attempt to invalidate multiple claims in four VirnetX (NYSEMKT:VHC) patents.
Who is New Bay Capital, LLC? Before we answer this question let's recap:
1. We know VirnetX and Apple (NASDAQ:AAPL) have been embroiled in a multi-year federal district court battle regarding Apple infringing on several of VirnetX secured communication technology patents with the first suit culminating in a $368.2M past damage jury award to VirnetX in November 2012 while declaring VirnetX patents not invalid.
2. We also know Apple has appealed this verdict.
3. We know VirnetX has filed a new lawsuit against Apple for the latest Apple products not covered in the first suit.
4. We know on August 15th of 2013 there was a hearing before a federal judge with Apple and VirnetX to determine a future running royalty rate Apple will be ordered to pay VirnetX for infringing on VirnetX patents that were litigated in the November 2012 trial. The running royalty rate ruling has not come as of submission of this article.
5. We know VirnetX and Cisco (NASDAQ:CSCO) finished up a jury trial in federal district court in March of 2013 with the jury finding Cisco not to be infringing on certain VirnetX patents but also finding those same patents not invalid.
6. We know VirnetX has filed motions for a retrial against Cisco for various reasons and a JMOL (Judgment as a Matter Of Law) to find Cisco did in fact infringe on VirnetX technology. The judge has not ruled on these motions as of submission of this article.
Which VirnetX patents and claims is New Bay Capital, LLC petitioning the USPTO in an attempt to invalidate and how do those patents and claims compare to the most recent trial results of VirnetX against Cisco and Apple?
6,502,135 ('135 patent)
- New Bay's IPR challenge - claims 1,3,7,8
- Apple Trial Results - Apple infringed claims 1,3,7,8
- Cisco Trial Results - Cisco did not infringe claims 10,12
7,490,151 ('151 patent)
- New Bay's IPR Challenge - claims 1,13
- Apple Trial Results - Apple infringed claims 1,13
- Cisco Trial Results - not disputed
7,418,504 ('504 patent)
- New Bay's IPR Challenge - claims 1,2,5,16,21,27
- Apple Trial Results - Apple infringed claims 1,2,5,16,21,27
- Cisco Trial Results - Cisco did not infringe claims 36,47,51
7,921,211 ('211 patent)
- New Bay's IPR Challenge - claims 36,37,47,51
- Apple Trial Results - Apple infringed claims 36,37,47,51
- Cisco Trial Results - Cisco did not infringe claims 1,8,23,27,31
As one can clearly see New Bay Capital, LLC is petitioning the USPTO to invalidate precisely the same VirnetX patents and exact claims that Apple was determined to be infringing on in the November 2012 federal district court trial.
New Bay's IPR challenges almost exclusively cite Kiuchi as prior art. The reader should be aware that Kiuchi, as prior art, has been rejected in all federal court trials to date and was also cited in the 5 newly issued patents for VirnetX in 2013:
So who exactly is New Bay Capital, LLC? New Bay Capital, LLC is the subsidiary of Eastern Shore Capital, LLC - both are new entities that were formed on May 8th, 2013 just 46 days before the filing of New Bay's petitions for inter partes review with the USPTO in June of 2013.
In all four of New Bay Capital's petitions to the USPTO it contends that it and Eastern Shore Capital, LLC (its parent company) are the only "real parties in interest" in the USPTO proceedings. VirnetX is disputing this and subpoenaed New Bay Capital, LLC and people associated with it to uncover who is behind these companies. From the latest publicly available VirnetX court filing regarding the subpoenas:
In early June 2013, New Bay Capital filed a petition with the United States Patent Office ("USPTO") to invalidate VirnetX's patents. In this petition, New Bay Capital contended that it and its parent company are the only "real parties in interest" in the USPTO proceedings. This contention is simply not credible-New Bay Capital and its parent company, Eastern Shore Capital, are shell companies that were created just 46 days before the filing of their petition with the USPTO. VirnetX has been unable to uncover any business or commercial activities conducted by New Bay Capital or Eastern Shore Capital that would result in revenue they could use to pay any costs or legal fees associated with prosecuting the IPRs. VirnetX has subpoenaed New Bay Capital and people associated with it - including its only employee, Joel Rothman - to uncover, who in truth, is behind these shell companies. It is critical to VirnetX's ongoing district court litigation that the court permits this discovery as the identities of the real parties in interest behind New Bay Capital and Eastern Shore Capital controls the application of collateral estoppel to validity defenses in district court litigation against any company (including Apple) that is surreptitiously providing assistance to New Bay Capital, Eastern Shore Capital, or its agents.
If, for example, VirnetX uncovers a connection or "privity" between Apple and New Bay Capital, Eastern Shore Capital, or its agents collateral estoppel could be applied in the ongoing district court litigation with implications for Apple's ability to assert invalidity of the contested patents and claims.
According to the USPTO website it costs $14,000 to file a petition for inter partes review - New Bay Capital filed four separate petitions. Four petitions would cost $56,000 just for the filing fees to the USPTO. Legal expenses are significant too. According to usptopost-grant.com:
The USPTO estimates the cost of an inter partes review to be about $193,000 to each party. If a patent is involved in more than one inter partes review, or in inter partes review and another post-grant proceeding, the additional costs to the patent owner will be substantial.
As one can see it is not an inexpensive endeavor to challenge or defend patents in an inter partes review.
In addition to the filing cost and legal fees likely incurred to file these types of IPR petitions the technical know-how required to understand, explain, and argue their interpretation of what constitutes prior art contained in these petitions is not something somebody not skilled in the art would likely be able to accomplish.
As one can see an inter partes petition of this nature is a highly technical document that would need prepared by legal and technical experts.
In trying to determine what New Bay Capital, LLC's motivations are for petitioning the USPTO to invalidate VirnetX patents perhaps the more important questions for the reader to ponder are:
1. Who would stand to benefit the most if the New Bay Capital, LLC petitions for inter partes review move forward and the VirnetX patents and claims in question were to eventually be ruled invalid?
2. Who would stand to benefit the most if VirnetX is tied up in multiple costly and time consuming inter partes reviews?
3. Given what we know is it credible that New Bay Capital, LLC and Eastern Shore Capital, LLC are the "real parties in interest" for the aforementioned petitions for IPR?
Lastly, Apple is feeling the heat too ...
The U.S. Patent and Trademark Office has decided to comply with anonymous requests to reexamine a total of three Apple patents, all of which pertain to litigation with Samsung, with one also being asserted against Motorola in Florida.
Are these inter partes petitions the start of a new kind of legal weapon by companies involved in patent warfare where shell companies are created to petition the USPTO with the intent to burden patentees, take multiple shots on invalidating patents, and allow litigants to avoid being stripped of validity defenses in federal district courts?
Or could this be a tactic employed by hedge funds that may have an enormous financial interest(short interest) to see a particular company's patents invalidated and the certain stock price plunge that would follow?
Being a VirnetX shareholder, I for one will be watching with interest to see if this tactic picks up steam and how the USPTO, Congress, or the possibly SEC might react if it does.
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. This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE. I do not short stocks nor do I invest in options.