In this article I will demonstrate that, using simple logic and common sense, VirnetX (NYSEMKT:VHC) appears to be on the cusp of a U.S. Court of Appeals for the Federal Circuit (CAFC) precedential decision affirming its September 2012 $368M jury award against Apple (NASDAQ:AAPL).
Note: Before continuing, although not necessary to understand the premise and investment thesis of this article, the author assumes readers are up to date regarding the VirnetX patent, licensing, and litigation history surrounding its essential secure communication technology.
In reviewing the appeal sequence step-by-step the logic becomes clear...
CAFC Oral Arguments:
On March 3rd, 2014 the CAFC heard the oral arguments from Apple and VirnetX regarding the Apple appeal of the September 2012 $368M jury award against Apple in favor of VirnetX. Apple chose to focus on two issues at the orals: Claim Construction and Damages. The judges who sat on the panel included Chief Judge Randall Rader, Sharon Prost, and Raymond Chen.
Chief Judge Rader was keenly focused on damages and the majority of the discussion centered around damages and the methodology of how they were calculated by the VirnetX damage expert. The orals wrapped up after approximately 40 minutes.
During the oral arguments Chief Judge Rader took an aggressive tone in questioning and discussing the damage methodology leading one VirnetX short seller and Seeking Alpha Contributor Mike Farmwald to pen an article, in part, detailing why he felt the damage portion of the verdict had a strong chance to be overturned. VirnetX stock subsequently dived from around $20 per share to under $13 per share.
April 25th Bombshell Citation in Apple v Motorola:
Fast forward to April 25th, 2014 - 51 days after the oral arguments outlined above and we see a precedential opinion published in a separate case - the Apple v Motorola appeal (Case No. 2012-1548 and 2012-1549). The opinion was authored by Chief Judge Rader. Incredibly Rader cites the damage methodology in the VirnetX v Apple case (which is still under appeal) as "upheld" and "reliable"...the citation is direct:
Contrary to the district court's determination, Napper's
methodology is not inherently unsound; rather it is
"the product of reliable principles and methods." FED. R.
EVID. 702. This court has upheld the use of similar methods involving comparable benchmark products in the past. See, e.g., i4i, 598 F.3d at 853-854; see also VirnetX Inc. v Apple Inc., 925 F. Supp. 2d 816, 839 (E.D. Tex. 2013).
Judge Rader citing the VirnetX v Apple damage methodology as "upheld" and "reliable" from the district court decision that was and still is currently under appeal by the very same court (CAFC) would seem to be a significant hint that the CAFC will rule in favor of VirnetX affirming the $368M jury verdict against Apple. Also consider that Judge Prost sat on the panel for Apple v Motorola and there was no mention of dissent in the citation. So we have Judge Rader and Judge Prost (who both sat on the VirnetX v Apple panel) now citing those damage methodologies as "upheld" and "reliable" in the Apple v Motorola case!
Wait a minute you say...What about claim construction? Wasn't claim construction the other issue before the CAFC in the VirnetX v Apple oral arguments?
Claim construction was an issue at the VirnetX v Apple oral arguments but let's ask a couple of common sense questions:
1. If the CAFC, specifically Judges Rader, Prost, and Chen were going to remand, reverse, or overturn based on claim construction why would they even proceed to damages? That would be a waste of the court's time and against all principles of judicial economy if claim construction was not going to hold up. See the recent Lochner v Vizio decision at the CAFC, the judges did not consider damages because the case was remanded at the first step - whether the patents were valid or not. Damages are always the last step in the appeal the CAFC judges consider.
2. Would the CAFC, specifically Judges Rader and Prost cite the VirnetX v Apple damage methodology as "upheld" and "reliable" in a different case if they were going to turn around and remand, reverse, or overturn on damages? That does not make sense. In fact the Apple v Motorola decision and this citation has been out since 4/25/14 and is certainly being used as law by lower courts.
Personnel Changes At The CAFC:
Judge Randal Rader retired from the CAFC effective June 30th, 2014 and Judge Prost was installed as the new Chief Judge of the CAFC. The opinion for VirnetX v Apple has not been published yet and nobody knows who was assigned to write the opinion between Prost, Chen, and Rader. Many assume Rader would want his name on this decision due to its significance and his career focus on damages but the fact that it wasn't published prior to his June 30th retirement rules him out for writing the opinion and being listed on the decision based on normal CAFC internal operating procedures as it relates to retirements and judges leaving the bench.
In my opinion the likeliest outcome is Judge Chen and Chief Judge Prost are in agreement (again no dissent noted on the Apple v Motorola citation to this case) and whomever is writing the opinion between the two of them is taking great care to write an airtight precedential opinion, again, due to the significance of this decision. If Judge Chen and Chief Judge Prost were not in agreement then Chief Judge Prost would assign a third CAFC judge to break the deadlock. We are now one week past Rader's retirement and no new judge has been added to the case.
As many a burned litigation stock investor can attest to - legal outcomes are notoriously difficult to predict and are often painfully slow due to the backlog in our legal system. Based on logic and common sense I think investors have an excellent chance to accurately predict how the CAFC resolves this appeal - I believe it will be a full affirmation for VirnetX and I have invested accordingly.
Disclosure: The author is long VHC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has 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.