On November 6th a jury in Tyler, Texas, unanimously found Apple (NASDAQ:AAPL) infringed on multiple claims in VirnetX's (NYSEMKT:VHC) '135 patent, '151 patent, '504 patent, and the '211 patent. The jury also found that Apple did not provide clear or convincing evidence that any of the asserted claims in the above listed patents were invalid. The jury then proceeded to award VirnetX a $368,160,000 judgment for past infringement by Apple.
The match has been struck, the fuse has been lit and is burning straight for a massive powder keg.
What kind of high-explosive powder is in that keg?
1. Future licensing revenue from Apple. The Honorable Judge Leonard Davis, who presided over the trial, has ordered VirnetX and Apple to attend mediation by December 14, 2012 to hopefully work out a future licensing agreement (if they cannot work it out Judge Davis will decide for them). Apple's latest quarterly revenues were $36B while selling 26.9M iPhones and 14M iPads (just two of the infringing products). The potential licensing revenue that VirnetX would receive for licensing a fraction of that revenue that uses VirnetX technology at VirnetX published rates would dwarf the past infringement damage award.
2. Cisco (NASDAQ:CSCO), Avaya, and Siemens (SI) are scheduled to appear in the same court room with the same judge in March of 2013 to face alleged infringement of VirnetX patents. I cannot believe after VirnetX has successfully asserted its intellectual property in two separate court cases against Microsoft (NASDAQ:MSFT) in 2010 for a $200M judgment and now Apple in 2012 for a $368M judgment plus yet-to-be-determined future royalties, survived multiple patent re-exams with every single claim intact, and has licensed Aastra, Mitel, NEC, and Microsoft that Cisco, Avaya, and Siemens will not initiate negotiations immediately and settle. Cisco is alleged to have "willfully" infringed which could means they face paying triple damages if a jury decides they infringed.
3. Future 4G/LTE licensing for all companies that use VirnetX patented VPN and secure domain technology. The plan is to develop a lucrative and functioning licensing model similar to a Qualcomm (NASDAQ:QCOM) and only litigate if companies are unwilling to pay for the technology.
4. There is a huge and stubborn short position in VirnetX. As of 10/15/2012 there were nearly 16M shares of VirnetX sold short which is nearly 40% of the free float. I wrote about this previously and some of the unusual events that can occur with such a large short position. As the VirnetX story continues to unfold - those large short sellers are going to have to unwind their positions which will increase upward pressure on the share price. I believe VirnetX will be revisiting the $41.93 52 week high in short order (no pun intended) on the way to over $100 per share.
The future looks very bright for VirnetX. I believe at $34 VHC presents a compelling buy opportunity. Some have said Apple may appeal the November 6th verdict. Apple can only successfully appeal if they have a legitimate reason to appeal such as a legal error, an appeal will not be granted just because the decision didn't go Apple's way or because Apple is not happy the way VirnetX's legal team, McKool Smith, soundly demolished Apple's high powered legal team and multi-million dollar hired experts. Also, the Honorable Judge Leonard Davis was recently named by Baylor Law School as 2012's Lawyer Of The Year and, based on my searching, has never had a case overturned on appeal.
Disclosure: I am 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: 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. I do not short stocks nor do I invest in options.