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VirnetX Holding Corp (NYSEMKT:VHC) stock has jumped a whopping 700%+ year to date, leading to much interest in the formerly overlooked company. Earlier this year VirnetX grabbed headlines by defeating Microsoft (NASDAQ:MSFT) in court and soon after landing a $200 million dollar settlement. Currently, the elephant in the room is the current VirnetX lawsuit against Cisco (NASDAQ:CSCO), Apple (NASDAQ:AAPL), NEC (OTC:NELTY), and Aastra (OTC:AATSF), recently filed in early August. I have been researching to get a better grip on the litigation, as well as determining if there is an investment opportunity here. As of Friday, the defendants took their first shot at responding to VirnetX’s allegations of infringement. Their defense appears quite similar to Microsoft’s. This time however, the facts of the case are even more tilted in VirnetX’s favor. Below is a breakdown of the litigation and where I see the case going from here.

VirnetX again wisely choose the same Eastern District of Texas to battle their targets. They also have the same judge presiding over the case as before. The defendants of course deny any infringement. And, like the former target, assert that the patents are invalid.

But that was then.

Now, VirnetX has had their patents’ validated by a jury, and confirmed—under great scrutiny—by the US Patent and Trade Office, and also have a license from tech giant Microsoft.

The only major difference in the defense now is that Cisco et al are crying foul on the reexamination. In December of 2009, a reexamination of the ‘135 and ‘180 patents was granted to Microsoft by the USPTO because they had presented ‘prior art’ that brought patentability of the patents into question. ‘Prior art’ is evidence that the idea behind a patent existed before it was patented and would therefore make the idea unpatentable or invalid. It was no surprise however, that the USPTO decided to take another look at these patents; it is a fairly routine practice. In fact, 96% of all third party requests for inter partes reexaminations are granted. One of these prior art items Microsoft cited was an Aventail Administrator’s Guide. In the current litigation, Cisco et al argue that the examiner threw out Aventail after being unable to successfully find a specific date to pin down Aventail as ‘prior art’. According to the defendants, VirnetX knew of a date Aventail was released because Microsoft had provided one at trial and they did not argue against it. They claim this information was material to the reexamination and should have been given to the examiner. They have pleaded with the judge to this consider this an unethical act, thus prohibiting VirnetX from recovering any damages related to the patents. They also argue that this patent being in ‘unclean hands’ should invalidate the rest of the patents, which are part of the same family.

This argument, which is essentially the only one that differs from what Microsoft already failed at arguing, is weak for a couple of reasons. For one, in inter partes reexaminations, the requestor (in this case Microsoft) remains involved in substantive communication with the USPTO. Thus, Microsoft had every opportunity to inform the examiner of a specific date the Aventail guide was released but did not do so (they provided only a range of 1996-1999). Thus, it seems clear there is a discrepancy of when the publication was actually made available. Secondly, and more importantly, the examiner stated that regardless of the date, Aventail failed to invalidate any of the patents’ claims. In other words, even if Aventail was public knowledge at a date prior to the filing of the patents, Aventail does not invalidate the patents. Microsoft proposed 10 items to the USPTO examiner that they felt were prior art and would invalidate the patents. But they were all rejected by the examiner on each and every claim. To show how air tight these patents truly are, only 4% of inter parte reexaminations result in full confirmation of all claims as these patents did.

So, to me, it appears as if Cisco et al are on their heels, and are throwing everything at the wall to see what sticks. But like Microsoft, they will fail. The new case is taking place in the same place with the same judge with essentially the same facts. But now, VirnetX has an even more substantial case with more solid patents. If Microsoft’s savvy lawyers tried everything and failed, why would anyone else be successful?

Investing in VirnetX based on litigation is speculative, but may be worthwhile when one compares the current litigation to the Microsoft case. In my view, the current litigation greatly favors this company. The stock has exploded over the past year. Any news of court victory or settlement will send shares soaring—and I think the chances of that are good.

Disclosure: Long VHC

Source: Trial Update: VirnetX vs. Cisco et al