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  • VirnetX (VHC) investors (long and short) are closely watching for a decision in the Court of Appeals for the Federal Circuit (CAFC) case between VirnetX v Cisco (Apple in reality).
  • Fact seekers can be easily confused and misled by half-truths and partial details; this is particularly problematic as a pending binary event looms.
  • Analysis of the damages theories used by VirnetX’s expert are supported by CAFC case law, and VirnetX’s approach was favorably cited in a recent Precedential Opinion.
  • In the face of a potential victory over Apple (AAPL), VirnetX is highly shorted; however, VirnetX management has commissioned a forensic specialist to track suspicious trading and report it.


Investors await a monumental CAFC decision with regard to VirnetX's (NYSEMKT:VHC) case with Apple (NASDAQ:AAPL). If the District Court ruling is upheld, the pending CAFC decision will be remarkable for VHC, as the implications are worth potential billions to VHC, which is a fraction of AAPL's cash balance. On the other hand, it will impact AAPL's margins, which definitely captures senior management's attention.

As with any Intellectual Property (IP) investment involved in litigation, there are many complex pieces to the puzzle. These areas can be misconstrued or otherwise interpreted in an unclear manner. This article is an effort to isolate a few of these confusing points and share details that provide a more accurate view. I have read articles (I,II,III) and Twitter activity that offer limited views on relevant events, this blog will expand on the facts.

The VirnetX Expert - Weinstein's Principles:

As an investor in VirnetX, one of the key areas of debate is whether or not the damages methodology used to discern the cost of Apple's infringement holds water or not. This is a significant point argued at the CAFC oral hearing.

The presiding judge from the District Court, Chief Judge Leonard Davis, documented that Mr. Weinstein adequately support his theories in calculating damages.

"Mr. Weinstein adequately supported his alternative damages theory. First, he calculated the contribution of the "FaceTime" feature to Apple's total profits by estimating the price differential between the accused product and the last previous version of the product not capable of supporting the feature. 11/01/12 p.m. TT at 143:13-144:17; 219:1-6. Mr. Weinstein then reduced this revenue by the percentage of the revenue associated with the addition of the "FaceTime" feature. In this analysis, Mr. Weinstein relied on the price of the camera, because the addition of the camera enabled the feature. See 11/01/12 p.m. TT at 215:18-22. Additionally, Mr. Weinstein accounted for the 45%-55% profit split in his analysis, explaining that VirnetX would have been in a weaker bargaining position at the time of the negotiation because of its financial situation.9 11/01/12 p.m. TT at 216:5-217:4. Accordingly, Apple would have benefitted from this inequity in bargaining positions, and Mr. Weinstein modified the profit split to reflect this. Contrary to Apple's assertions, VirnetX did provide substantial evidence to support its alternative damages theory.

The Court has already addressed the sufficiency of Mr. Weinstein's data and the reliability of his alternative damages model. Additionally, prior to the trial, the Court made a preliminary determination that Mr. Weinstein's testimony was admissible because his opinions were well-reasoned and tied to the facts of the case, thus placing the burden on Apple to discredit his testimony at trial. See Daubert v. Merrell Dow Pharm., 509 U.S. 579, 595 (1993). (Source)

In total, Judge Davis stated that Mr. Weinstein's theories are adequately supported due to his calculation of the price differential between the accused product and the last version of the product that did not have the feature. This feature being FaceTime which the old product did not support. FaceTime is a primary application that VirnetX is litigating against Apple in addition to VPN on Demand.

Judge Davis explains why Mr. Weinstein's methodologies are fair as the latter reduced the amount of revenue by the percentage of revenue associated with the addition of the FaceTime feature. Further, he relied on the price of the camera since this is required to use FaceTime. Then he accounted for a 45%-55% profit split due to VirnetX being in a weaker bargaining position at the time of the negotiation due to its financial situation - so Mr. Weinstein modified his profit split to account for this.

Overall, Judge Davis explains that VirnetX did provide substantial evidence to support its alternative damages theory. The Judge takes this another step further and addresses the use of Mr. Weinstein's model itself in stating that the Court previously addressed the sufficiency of Mr. Weinstein's data and the reliability of his alternative damages model. Further, that prior to the trial the Court made a decision that Mr. Weinstein's testimony was admissible because his opinions were well-reasoned and tied to the facts of the case.

Moreover, Mr. Weinstein used three different approaches to calculating Apple's infringement. These include the smallest saleable unit method as the primary theory and two alternative theories. Due to the CAFC upholding the use of "similar methods involving comparable benchmark products" that will be discussed later, Weinstein's alternative theory becomes more relevant to the discussion. His alternative theory, using the Nash Bargaining Solution, or NBS, compared Apple's products before and after it contained FaceTime. As shown above in Judge Davis' opinion, he upholds and explains how Mr. Weinstein adequately supports his alternative damages theory.

All in all, Mr. Weinstein's methodology is well reasoned, fairly calculated and supported by Judge Davis not only on the model itself, but by the use of the alternative damages theory overall.

How Do The CAFC Judges View This Methodology:

Since Judge Rader's retirement at the end of June, there are two CAFC panel judges remaining to resolve Apple's appeal - Judge Prost and Judge Chen. Investors and readers who have seen Judge Prost's work outside of this case may be confused as they try to translate her opinions from other cases.

More specifically, Judge Prost had a dissenting opinion in the case between Apple v. Motorola, which included the citation to the VirnetX v. Apple case. Some bloggers have tried to project that her dissenting views suggest a negative outcome for VirnetX's. When examined more diligently, they are not negative.

Here is some of Judge Prost's dissenting opinion in the Apple and Motorola case:

"It is true that our precedent supports looking to the cost of benchmark commercial products in determining the value of a defendant's infringement. See, e.g., i4i Ltd. P'ship v. Microsoft Corp., 598 F.3d 831, 853-56 (Fed. Cir. 2010). However, as even Apple concedes, the Trackpad "contains none of the function asserted from the '949 patent." Motorola Response Br. 39; see also Apple Reply Br. 70 (acknowledging that "[t]hat is true"). Napper therefore began his analysis from a highly questionable starting point.

However, unlike the majority, I do not believe the district court abused its discretion in excluding Napper's testimony as unreliable. The district court determined that Napper's reliance on the Magic Trackpad to calculate the value of the claimed functionality was unreliable because that product was not a sufficiently comparable benchmark." (Source)

Within Prost's dissenting opinion in Apple v. Motorola, she supports the use of benchmarking as a reliable approach to valuation. This is the approach used in VirnetX's alternative methodology at trial for calculating Apple's damages. Further, she states that the District Court is within its discretion when the judgment is a well-reasoned conclusion.

Overall, when looking at Judge Prost's opinions on a separate trial through a clear glass, her viewpoints are favorable to VirnetX at the CAFC. It is worth noting that the i4i ruling was brought down by Judge Davis in District court.

Judge Prost dissented in Apple v. Motorola because she stated that the benchmark was not relevant to the patent in question - this is not the case with VHC. Further, Judge Prost stated that the lower court did not abuse its discretion to make a determination on the back of a foundational explanation - as with Judge Davis's more than adequate decision.

CAFC Judges Have Upheld The Use Of These Methods In Other Trials:

As mentioned, the damages methodology used in the case between VirnetX v. Apple was cited by the CAFC in a decision regarding Apple and Motorola:

"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)." (Source)

This is very unique to cite as the case is still under appeal at the CAFC but was used within a Precedential Opinion. It goes a very long way to support the methods used by VirnetX at trial as the CAFC itself is citing and confirming the use of these methods.

An Additional View On The Case:

Investors and readers can benefit greatly from taking another look back to a different section of Judge Davis's order in the VirnetX v. Apple case. One of these areas which the CAFC will be able to clearly view while making their determination is how Apple did not provide a credible alternative to VirnetX's damage calculation.

"Additionally while Apple contests the royalty base, it failed to advance a credible alternative. At trial, Apple argued the royalties should be calculated using $29 as the base for all the accused devices. This price was the price of a software upgrade for the Mac computers. See 11/05/12 a.m. TT at 147:16-149:6 (Mr. Vellturo, Apple's damages expert, noting that this upgrade allowed the computers to use the accused features).7 However, Apple never charged its customers for a similar upgrade for its iOS devices, including the iPhone. 11/05/12 p.m. TT at 28:20-29:7. Apple never produced any other testimony or evidence regarding how one should properly calculate the damages for the iOS devices, instead it relied solely on the upgrade price for a dissimilar product. If Apple had advanced a different theory showing the iOS device was not the smallest saleable unit, there may have been a different result."

"VirnetX did present substantial evidence at trial to support its proposed royalty rate. Mr. Weinstein provided a detailed reasonable royalty analysis to the jury. 11/01/12 a.m. TT at 97:23-122:8. VirnetX presented evidence why such a royalty rate would be justified in light of the value of the technology, noting the accused features were key to Apple attracting potential enterprise customers that valued security in their communications and offered the ease of operation valued by Apple customers. 11/01/12 p.m. TT at 114:1-119:20. Indeed, the accused features have been used extensively by Apple customers, with over 2.6 billion FaceTime calls being made since June 2010.11/01/12 p.m. TT at 119:13-20. Additionally, VirnetX introduced several license agreements and its own licensing policy to further support the royalty rate. While some of these license agreements postdate the hypothetical negotiation, they help demonstrate what entities would be willing to pay for the technology at issue. See 11/01/12 p.m. TT at 108:7-110:16. VirnetX also introduced evidence related to its own licensing policy, though VirnetX never exclusively relied upon its policy alone to justify the royalty; instead it considered the policy in light of all the other Georgia-Pacific factors"

"Here, VirnetX presented evidence Apple's proposed alternatives were not. While FaceTime calls could go through relay servers, VirnetX established that routing all calls through these servers would not be a viable alternative, in light of the projected costs and downgrade in service. See 11/01/12 p.m. TT at 215:23-216:4; 11/01/12 a.m. TT at 140:4-143:19. In sum, VirnetX presented substantial evidence to support Mr. Weinstein's reasonable royalty rate of 1%." (Source)

Apple failed to provide an alternative theory for the court to consider for iOS devices. Apple only argued that the $29 upgrade fee that allows for FaceTime on Macs should be used to calculate damages, although this is a dissimilar product. Further, Apple no longer charges this fee for Mac software upgrades, so this undermines their argument.

Apple also did not provide an alternative theory for calculating iOS device infringement. Whether Apple knew they did not have an alternative theory or they just did not provide for one, VirnetX's calculation of iOS damages is the only credible method offered to the court. The CAFC will see VirnetX's method as the only credible method, how Apple did not provide an alternative iOS damages method and how Judge Davis upheld the use of Mr. Weinstein's theories and allowed his testimony in a preliminary hearing.

Judge Davis and The Jury Provided More Than A Balanced Viewpoint:

It is easy to think that Judge Davis and the jury just agreed with VirnetX 100% of the way, and the CAFC needs to check this notion. Even though this in itself is not the way the court system operates, let's explore Judge Davis's objectivity more closely.

Out of the three damage methodologies calculated by Mr. Weinstein and set forth by VirnetX, the jury did not award the amount in any of them. These methods were using a 1% royalty on the smallest saleable unit, the Nash Bargaining Analysis on the value of FaceTime based on the addition of the front facing camera and the Nash Bargaining Analysis based on the value of FaceTime from a consumer survey. At trial the jury cut all of the damages models in half. Further, VirnetX only needs one of its three damages models to be supported by admissible evidence - as per Judge Davis's order he more than supported the use of Mr. Weinstein's alternative damages model.

Outside of this, it is also worth noting that Judge Davis has been overturned on appeal, but he has never been overturned on damages awarded by a jury, as covered in my post. Judge Davis and the jury's objectivity coupled with Judge Davis's record on appeal should not go overlooked.

Potential Reason VirnetX's Stock Is Shorted:

A separate article analyzed the current events surrounding VirnetX and concluded that due to the downside VirnetX is the most shorted stock in the world. Technically, this statement is wrong as VirnetX is not the most shorted stock in the world.

As covered in my article following a trip to Lake Tahoe for VirnetX's annual shareholders meeting, management is taking a dead aim at manipulation.

"VirnetX Takes Dead Aim At Manipulators, Reverse Conversions and Naked Shorting:

During the meeting, one of the first items discussed was something many investors are fully aware of - reverse conversions and naked shorting using the market makers exemption to create air shares to control the share price. CEO Kendall Larsen stated that there really are 60M shares outstanding, above the roughly authorized 52M shares currently available. That means there are 8M shares above the 52M shares currently outstanding which are being used to manipulate the share price.

VirnetX introduced the Shareholder Intelligence System, which will allow the company to track the manipulation and report directly to the compliance departments of the firms in play. Overall, this system allows for several key features:

  1. Tracks share movement
  2. Identifies fails to deliver (often associated with naked short selling)
  3. Identifies and tracks the parties buying and selling, "Behind The Street Name" or firm name
  4. Provides analysis of peer group buying and selling

Management stated that they are aware of the firms manipulating the share price, and have taken this action as a step to end the manipulation of its share price - and this illegal activity." (Source)

On the flip side of this other article's short basis conclusion, an affirmation by the CAFC can provide a permanent and not a temporary run up in the stock price. This is due by the fact that the CAFC could affirm Apple's infringement, damages and the technology which VirnetX could then use as a basis against other infringers - such as the Android world which is 80% of devices compared to iPhones less than 20% threshold - this would be in the future with regard to 4G LTE-A. For an example of a short squeeze, investors should take a look at the long term chart of Volkswagen.

A Clear View On How The CAFC Must Act And Judge Prost's Viewpoints:

In a significant case between i4i Limited Partnership v. Microsoft Corp a $290M verdict for the plaintiff was found over an infringing document technology patent within certain versions of Microsoft Word. Judge Prost was the judge on the appellate court who then heard the case afterwards. Judge Prost upheld the damages award, and a portion of her decision is very compelling as to her standing as to how the CAFC must act on appeal.

"We must affirm unless the appellant clearly shows there was no evidence to support the jury's verdict …

Under this highly deferential standard, we cannot say that Microsoft is entitled to a new trial on damages. The damages award, while high, was supported by the evidence presented at trial, including the expert testimony-which the jury apparently credited. … On appeal, the question is not whether we would have awarded the same amount of damages if we were the jury, but rather whether there is evidence to support what the jury decided. … Here, the jury's award was supported by the testimony of Wagner, i4i's damage expert, who opined that a reasonable royalty was between $200 and $207 million. The award was also supported by the testimony of Wecker, i4i's survey expert, who explained that the survey's conservative assumptions (i.e., that none of the companies who failed to respond infringed) meant the damages figure was "really an underestimate" and "way low." As we have recognized previously, any reasonable royalty analysis necessarily involves an element of approximation, and uncertainty. ... Given the intensely factual nature of a damages determination and our deferential standard of review, we are not in a position to second-guess or substitute our judgment for the jury's." (Source)

To begin, Judge Prost stated a very powerful statement in her decision on how the CAFC must conduct its activities. The Judge stated that the CAFC must affirm unless the appellant clearly shows there was no evidence to support the jury's verdict. In the case between VirnetX v. Apple, Judge Davis clearly communicates why Mr. Weinstein's testimony is supported. The best part being that Apple did not provide an alternative theory for iOS devices.

Outside of this, Prost states that it is not the CAFC's position to make a decision on whether or not they would award the same amount of damages that the jury provided, but whether or not there is enough evidence to support the finding. As such, the CAFC is meant to interpret the evidence at play, not to substitute their opinion for the jury's.

Judge Rader's Retirement Is Not Detrimental:

Judge Rader, the Chief Judge of the CAFC, retired from the CAFC effective June 30, 2014. Judge Prost has taken over as Chief Judge and this is a key reason why we looked at Judge Prost so closely in this article. Due to the CAFC's standards, Judge Rader will not be writing the opinion in VirnetX v. Apple nor will he be listed on it.

Due to the high significance and far reaching nature of the case, it is perfectly normal that it has taken this long so far. Eight cases were heard on March 3, 2014, the day of the oral argument in VirnetX v. Cisco (NASDAQ:CSCO) (Apple). Of these, VirnetX is the only case that has not been ruled upon yet with two cases having a Rule 36 judgment applied to them and five having opinion orders.

Judge Prost and Judge Chen remain on the panel for this case and if they were in fact deadlocked, a third judge would have to be assigned to break the tie. Although we are nearly a month past Judge Rader's retirement, no new judges have been added. This leads to the assumption that the judges are not in fact deadlocked.

The Oral Arguments:

On March 3, 2014 Apple and VirnetX had their oral arguments at the CAFC encompassing the latter's award over the former to the tune of $368M in late 2012. Due to time constraints, only the most pertinent points can be focused on, and Apple chose claim construction and Damages.

The 40 minute oral arguments centered mostly around damages and how Mr. Weinstein calculated damages. Chief Judge Rader, at the time, focused on this area by asking many questions.

There is no way of knowing the reasoning behind the questions asked at the hearing or the viewpoint of the judges. Although the judges would not proceed to damages if they had concerns over claim construction. If there was a problem with claim construction, that would in turn impact damages itself. Damages are the last step for the CAFC judges to consider, and since they focused on it, it may be a hint that they are satisfied with claim construction.

The CAFC generally works on a three prong timeline, validity, infringement and then damages. If they had an issue with the first two steps, then there would be no reason to jump to the last. The CAFC reviews validity, infringement and then damages, with a loss at each step obviating any further review - meaning that time is actually on the side of investors. Also keep in mind Judge Prost's earlier view on damages - that it is not the CAFC's job to worry about the money at play but the evidence to support the methods used to find the amount.

Further, a longer timeline is actually a more positive note than a negative one. Since if the judges had an issue with one of the earlier steps in the process, it would take less time than justifying each step in the process. This is a small assumption, but something that is in the minds of investors. For a very detailed look at VirnetX's claim construction at the CAFC and why it bodes well for the company, I recommend investors read this technical post.


With so many complex and moving pieces at play, it is easy to lose sight of the facts at play. When looked at more closely, VirnetX's situation at the CAFC is much clearer than at first glance.

Half-truths have the potential to derail investor's confidence, especially due to the current binary nature of this investment. This is why it is so important to look at the facts in the clearest light possible. In my opinion, VirnetX has a high probability of prevailing at the CAFC based upon the facts. The CAFC decision will have a major impact on VirnetX and investors should understand the investment, know their risk tolerance and be prepared for any outcome.

This Article was released early to SecretCaps subscribers.

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. Always do your own research and contact a financial professional before executing any trades. This article is informational and in my own personal opinion. See disclosure on

Source: VirnetX: A CAFC View Through A Clear Lens