VirnetX Scores Big Court Win Against Apple

| About: VirnetX Holding (VHC)

Summary

VirnetX received a $625 million jury verdict against Apple for infringement by VPN on Demand, FaceTime and iMessage.

The infringement finding makes it possible that many more products sold by Apple that were not included in the damages calculation may infringe.

The willfulness finding makes it likely that the judge will find some enhancement of damages.

We attended the trial of VirnetX (NYSEMKT:VHC) vs. Apple (NASDAQ:AAPL) that started on January 25th, which concluded yesterday with the jury finding infringement by Apple on VirnetX's four patents at issue, and awarded VirnetX $625M in damages. Importantly, the jury found that Apple's products continue to infringe the VirnetX patents even after they attempted to design around the patents. Since the beginning of this dispute, Apple has released additional products such as the iPhone 6 which were not included in this case or the damages calculation. This means that there are additional 500 million units or so already sold by Apple that are likely also infringing but were not included in the damages award provided by the jury.

This verdict results from a trial that was a combination of two cases. The first piece was a remand of the last trial against Apple, after the Court of Appeals for the Federal Circuit (CAFC) vacated VirnetX's $386 million jury award and sent the trial back to the district court. The CAFC ruled that the damages model relied on by VirnetX was flawed (as we anticipated), as detailed in our Tinderbox article from the summer of 2014. Second, the CAFC ruled that the district court's claim construction was flawed with respect to patents that were found to be infringed by Apple's FaceTime. The CAFC did not overturn the finding that Apple infringed two VirnetX patents with their VPN on Demand Always On feature. Therefore, the remand was meant to determine two issues: what should the damages be for the Apple products that were found to infringe with VPN on Demand, and does Apple's FaceTime infringe the VirnetX patents under the new claim construction.

The second of the combined cases added infringement allegations related Apple's iMessage based on two of VirnetX's patents and added additional products that were accused of infringing. In addition, since the time of the first finding of infringement in 2012, Apple had made adjustments to its VPN on Demand and FaceTime applications in an attempt to design around VirnetX's patents.

The combined trial left the jury to decide four important questions:

  1. What was a fair royalty for Apple to pay for the past infringement based on VPN on Demand before the re-design?
  2. Does Apple continue to infringe VirnetX's patents after their attempted re-design?
  3. If there is continued infringement, what is a fair royalty that Apple should pay for that continued infringement?
  4. Was Apple's infringement of VirnetX's patents willful?

The jury concluded that all of Apple's features infringe VirnetX's patents and found that infringement willful. The jury awarded $334,980,374 for the past infringement by Apple's VPN on Demand feature, which included 237,523,953 units, which comes out to $1.41 per unit. For the units that included Apple's re-designed FaceTime and VPN on Demand, the jury awarded damages of $290,725,673 on 206,187,991 units, which is also $1.41 per device.

The finding of continued infringement by Apple after the re-design is perhaps the most important finding. If Apple was not have found to continue to infringe, the damages would have been limited to the 237 million units sold up to 2013. However, a finding of continued infringement by Apple not only increased the damages calculation by 206 million units, but it also added the likelihood that other products already sold by Apple could be found to infringe the patents. If that happens, this continued infringement could greatly increase the amount of royalties that Apple may eventually need to pay VirnetX if the case survives appeal.

Also very importantly, the two patents that were found to infringe in the first trial and appeal are under challenge with the U.S. Patent and Trademark Office through an inter-partes review that was instituted in October. If those patents are eventually found to be invalid under this challenge, and Apple was not found to infringe based on FaceTime or iMessage, VirnetX faced the very real possibility that it would not receive anything at all from Apple after years of litigation. The finding of infringement by FaceTime insulates them a bit from this challenge.

The finding of willfulness also is significant as it will be considered by Judge Schroeder as he contemplates enhanced damages. Under the law, the damages award could be enhanced by up to three times, but this type of adjustment is less likely than some smaller upward adjustment. For example, in the original VirnetX v Apple case, judge Davis adjusted the royalty owed by Apple from 0.65% for past damages for products sold before the trial to 0.98% for continued damages for products sold after the trial, an upward adjustment of about 50%. The reasoning judge Davis gave for this enhancement included the fact that the continued infringement was necessarily willful.

So, while this jury verdict was a huge win for VirnetX, this case is far from over. Rulings in the coming weeks about enhanced damages, requests for a mistrial from Apple, and the appeals process through the CAFC still stand in front of VirnetX's attempt to collect. In addition, there is some question about whether there may be other infringers of VirnetX's patents who might be more willing to take a license from VirnetX than fight through the court system after VirnetX's repeated success.

Disclosure: I am/we are 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.

Additional disclosure: We are long VHC shares and call options, and may buy or sell additional shares or options within the next 72 hours.