Vringo (VRNG) investors were stunned Friday with the reversal of its district court win against Google (NASDAQ:GOOG) by the CAFC (Court of Appeals for the Federal Circuit). Vringo's stock cratered over 70% and many patent/NPE (non-practicing entity) stocks fell in sympathy with the ruling. However, VirnetX (NYSEMKT:VHC), an NPE, actually saw its shares rise and in fact the shares finished the day up over 1%. VirnetX's $368M judgment against Apple (NASDAQ:AAPL), which is more than 10X higher than Vringo's judgment against Google, is currently before the CAFC and is ripe for a ruling. On its face the Vringo reversal would appear to bad news for VirnetX for a few reasons - both are NPEs, both rely on software patents and both took on deep-pocketed industry giants in Google and Apple. However, I do not think the Vringo reversal was bad news for VirnetX in fact I think it yielded some very important clues that VirnetX's $368M judgment against Apple will likely be affirmed by the CAFC.
Judge Chen's Dissent
The Vringo reversal was a 2-1 majority decision with Judge Chen writing the dissent. Judge Chen is one of two judges on the VirnetX v Apple appeal panel - the other being Chief Judge Sharon Prost (Judge Rader was the third judge but resigned in June). We have already had a glimpse into the mind of Chief Prost in regards to being deferential to the finding of facts by juries and district court rulings - please read Tom Shaughnessy's recent SA article for those quotes - but we haven't really been able to delve into the mind of Judge Chen. The language Judge Chen uses in the Vringo dissent gives me confidence he will have the appropriate deference to the jury and the district court decision in the VirnetX v Apple case to not retry the case at the appellate level. Below are some selected quotes from Chen's Vringo dissent that make this point:
In my view, the majority fails to accord sufficient deference to the jury's finding of facts.
...we should tread lightly when reviewing a legal conclusion - reached by a trial court - that rests upon a jury's finding of fact.
Where a jury's findings concerning the prior art are supported by substantial evidence, and where a trial court makes its obviousness determination based on those findings, I would exercise caution in wielding our own common sense as part of our review of the judgment.
In the face of conflicting testimony about what Culliss disclosed, the jury was free to credit the opinion of I/P Engine's expert.
When you factor that Judge Chen and Chief Judge Prost are the only two judges on the VirnetX v Apple panel (due to Rader's resignation) and no third judge has been assigned (yet) - it indicates that Chen and Prost are in agreement in regards to the case which increases my confidence for a VirnetX affirmation especially considering their past opinions and dissents.
Damages Are Looked At Last
In the Vringo v Google reversal the CAFC shows us clearly that damages are considered last - only after all other issues are resolved. In this case they state it on page 19 of the majority opinion:
Because we conclude that the asserted claims are obvious as a matter of law, we need not reach issues related to infringement and damages.
The VirnetX v Apple Damage Model Citation
So, as clearly shown above, the court does not consider damages unless the rest of the case regarding patent validity or infringement is resolved. This is why the citation to the VirnetX v Apple damage methods in the Apple v Motorola case is so incredibly telling. The VirnetX v Apple appeal hasn't been adjudicated by the CAFC yet the CAFC is citing the damage model as "upheld" in another precedential opinion? The take-away is obvious here - The VirnetX v Apple panel must've made it to the damages portion of the case meaning the patent issues are resolved. Furthermore, it was even cited in a different case as "upheld" meaning the methodology is sound.
Here is the actual citation from the Apple v Motorola decision:
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).
One must also consider that two of the judges on the Apple v Motorola panel were also on the VirnetX v Apple panel - Prost and Rader. Of course Rader ended up resigning leaving only Prost and Chen on the panel - again, no third judge has been assigned (yet) meaning that Prost and Chen must be in agreement and I believe they are in agreement to affirm VirnetX's $368M judgment based on all the available data.
I am long VirnetX shares and call options.
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.
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