VirnetX Is Tightening The Noose Around Apple

| About: VirnetX Holding (VHC)

The Recent News:

Early this morning news broke that Apple's (NASDAQ:AAPL) requests for a rehearing on the decision to institute IPRs, or inter partes reviews, of certain claims of VirnetX's (NYSEMKT:VHC) patents was denied. In my last article I outlined how some of Apple's patent challenge applications were denied. This is excellent news for VirnetX as a it removes the risk related to these claims being invalidated through the IPR process.

Outlined in the ruling, the USTPO denied a request to rehear its decision on whether or not to institute inter partes reviews of claims 1-3, 5-8 and 14-60 of U.S. Patent No. 7,418,504. VirnetX has been the target of several IPR motions. New Bay Capital LLC hit VirnetX with IPRs on only the patents that Apple faced at trial. VirnetX is moving ahead with discovery on New Bay to see who is the real party of interest behind the entity, and part of the debacle has moved from Florida to Texas - where Judge Davis who is overseeing all of the company's cases resides.

After New Bay slid under the radar as they were facing discovery - the favorable termination of New Bay's IPRs surfaced. Soon after, RPX came out very soon after with IPRs against VirnetX on the very same patent claims. Let us not forget that Apple wanted to join in New Bay's IPR claims to avoid the one year restriction that they had passed. Although this fell through when New Bay's attempts were terminated.

So for those who were the belief that New Bay and RPX filed their IPRs for the same claims Apple filed their against to avoid the one year timeline - this no longer applies since Apple's IPRs have been denied and a rehearing has also been denied. Now RPX has to stand alone, and New Bay is facing discovery. If any of these parties is found to be in cahoots with Apple, Collateral Estoppel could apply.

Stick To Your Research

VirnetX trades down when there is a lack of updates or there is a wait in the timeline. Investors start to question every molecule of evidence and due diligence simply because the share price is low. These situations need a high amount of risk tolerance and understanding of the factors at play, although they can be worthwhile to those who stick to their guns. Always remember all of the technical research you put in on the company's technology and patents and all of the positive and noteworthy rulings on a case by case basis. A low share price does not dictate a reversal of everything related to the investment thesis, it simply makes it more attractive.

Looking Ahead

We are currently waiting on the royalty rate against Apple and the retrial and JMOL on the '759 patent against Cisco (NASDAQ:CSCO). These rulings have no set date and can continue to take longer than perceived. With an already long wait, I would not try to time the rulings. These are very important documents dealing with extremely complex technical information from both parties in the court room. Time is better spent reviewing the case documents than throwing various household items at your computer screen.

The ruling against Apple that is currently pending is monumental for VirnetX. The case law mentioned in my past articles demonstrates that VirnetX is arguing for a 1.52% rate on all infringing devices. Now Apple is also slated to go to trial a second time for newer devices as well. This can be circumvented if the court decides that newer products are not more than colorably different than past infringing devices. This is a very high mark to reach, although it is not without merit as Apple's newer products infringe VirnetX's patents in the same way in which Apple's older products infringe. This ruling could result in hundreds of millions or north into the billions for the company.

Keep in mind that several other companies have already settled, such as Mitel (NASDAQ:MITL), Aastra (OTC:AATSF), Avaya (Pending:AVYA), NEC, Siemens (SI) and even Microsoft (NASDAQ:MSFT) once. This trial is not going to get dragged out since Apple can just delay as some message board posters assume. Court rulings have deadlines and start dates - such as Apple's appeal which is slated for early March. Keep in mind that the devil is in the details, and Apple shot gunning various issues is not the correct route to take. The appeal process has a best chance when a few issues are argued diligently - although Apple may not have a strong basis to argue a few foundational points since the company is in the wrong.

There are many key items at play that are sometimes construed - here is a list of the certain topics at play:

  • New Bay's IPRs have been terminated, discovery to find the real party of interest is moving forward. These IPRs targeted the same patent claims that Apple faced at trial.
  • Apple's IPR applications were shot down for being over the year limit - they cannot join another party's requests (New Bay or RPX) if they do not have any themselves.
  • RPX filed IPRs following New Bay, on the same patent claims Apple faced at trial.
  • Apple's motion to have the board hear their arguments to institute their IPRs have recently been shot down.
  • We are waiting on the royalty rate judgment from the judge on past infringing devices, and whether newer products are more than colorably different than past infringing devices. There is no rush, this is an important document dealing with very complex issues.
  • We are also waiting on a JMOL on the '759 patent and the decision of a retrial with regards to Cisco. Cisco is important, although is a smaller player in the grand scheme of events, and VirnetX's patents were ruled not-invalid at this trial as well.

The noose is tightening around Apple, as their avenues of reprieve are slowly fading away. Apple should have settled like the various other companies who settled with VirnetX. An agreement between the two companies would not have a hostile ending either. A settlement would allow Apple to advertise the secure encryption and the other advantages that VirnetX's technology adds to its applications such as FaceTime and iMessage. These are advantages that Apple's competitors, such as Samsung (OTC:SSNLF), have no counterpart for. On the other side, Apple would be viewed as rightfully compensating another's inventions - VirnetX. Although Apple did not choose the easy route, and as such both parties are at the will of the court - albeit VirnetX in a better position in my opinion.

Best of luck to all investors - as always complete your own comprehensive due diligence as investing in VirnetX is a complex investment story. For my most comprehensive write up on Apple and VirnetX covering the important bases see my article: VirnetX: Short Term Alpha, Long Term Investment

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 in my own personal opinion, always do your own due diligence and contact a financial professional before executing any trades - always be responsible for your own trades.