VirnetX Highly Likely To Get Apple Injunction

| About: VirnetX Holding (VHC)

As discussed in my August 2012 article, VirnetX (NYSEMKT:VHC) has a number of patent infringement actions currently pending against Apple (NASDAQ:AAPL) and others. In early November, VirnetX received an extremely favorable jury verdict in one of its suits against Apple. The jury found that 16 different claims from 4 different VirnetX patents were infringed by Apple, that Apple had failed to prove any of those 16 claims were invalid, and that VirnetX had suffered $368M in damages from the infringement.

After the jury verdict, the parties filed various post-trial motions. Unquestionably, the most important post-trial motion in my opinion is the one filed by VirnetX for a permanent injunction against Apple. If granted, the injunction would prohibit Apple from continuing to sell any product that infringes any of the 16 claims of VirnetX's four patents. Importantly, the injunction would not be limited to just the specific Apple products accused in the lawsuit and found by the jury to infringe, which include the iPhone, iPhone 3G, iPhone 3GS, iPhone 4, iPod Touch, iPad, and iPad 2, but would also prohibit Apple from selling any other product, current or future, including its newest iOS products like the iPhone 5, that also infringe. Obviously, the issuance of such an injunction could provide VirnetX substantial bargaining leverage to negotiate a very favorable license with Apple.

Briefs for the post-trial motions were filed on November 21 (opening briefs), December 3 (opposing briefs), December 7 (reply briefs), and December 11 (sur-reply briefs). After receiving all the briefs, the Court held a hearing on December 20 to discuss the various post-trial motions. Then, on January 4, the judge ordered Apple to submit by January 15 an additional brief detailing the anticipated cost and time required to comply with an injunction, to which VirnetX had until January 18 to respond.

Those two additional briefs regarding the permanent injunction have now been filed. Unfortunately, neither they nor any of the other post-trial motion briefs are publicly available, as they have all been sealed by the court. I have a very serious public interest concern with the lack of transparency, but what's done is done. So, we, the public, are left to simply do our best to analyze the situation without the benefit of seeing the briefs. This obviously makes me less comfortable drawing conclusions on the parties' respective motions, and is a legitimate reason why the opinions I express herein may ultimately be proven incorrect. So please remember when reading this article that I have not had the benefit of reading the parties' briefs. I also did not attend the trial nor have I read any transcripts from the trial's proceedings.

Now that the briefing is completed, the ball is in the judge's court (no pun intended) to decide whether to grant VirnetX a permanent injunction against Apple's continued infringement. However, I note that in his January 4 Order, the judge also ordered Apple to provide VirnetX up-to-date sales figures for the accused products and for the newly released iOS products, including the iPhone 5, by January 15. In light of the new sales data it was to receive from Apple, VirnetX was ordered to submit an amended motion for post-verdict damages by January 22, to which Apple is to respond by January 25. Thus, while the motion for a permanent injunction has been fully briefed, I do not think the judge will issue an opinion on it until the briefs for the post-verdict damages are submitted this week, as he likely will want to address all the post-trial motions at the same time.

In short, as of this Friday, January 25, all of the post-trial motions will have been fully briefed and I expect the judge to move forward with ruling on them, including VirnetX's motion for a permanent injunction, within a short amount of time. This is why I recently initiated a position in VirnetX, as I did not want to lose the opportunity to do so before the judge makes his decisions on the post-trial motions.

I have decided to take a long position in VirnetX because I believe the outcome of the post-trial motions will be extremely favorable for it. First, while I have not been able to review the briefs relating to the motion for a permanent injunction, the Judge's January 4 Order directing Apple to tell him how much time and money it would take for them to comply with an injunction signals to me that he is seriously considering granting VirnetX's motion. If he wasn't seriously considering it, he wouldn't care how difficult it might be for Apple to comply with any such injunction. His concern about the time they would need to comply signals to me that he is determining how long to give them to come into compliance with an injunction once he grants it. For example, he may delay the start of the injunction for 60 or 90 days to give Apple time to come into compliance with it so that they are not immediately in contempt of court for violating the injunction upon issuance.

Notably, Judge Davis has granted permanent injunctions in patent cases in the past, including in 2009 granting a permanent injunction against Microsoft, a decision affirmed by the Court of Appeals. Interestingly, in that case, the patent holder was represented by many of the same attorneys now representing VirnetX, so I assume they are very familiar with Judge Davis and his perspective on permanent injunctions. Also of note, regarding how quickly Judge Davis may rule on VirnetX's motion for a permanent injunction, in that case from 2009 he issued his decision granting the motion for a permanent injunction just about one month after it was fully submitted. This is why I expect he may move quickly to decide the VirnetX motion for a permanent injunction, which was fully submitted as of this past Friday, January 18.

To be clear, I am not 100% absolutely sure that Judge Davis will grant VirnetX an injunction against Apple. I am, though, highly confident that he will do so. Even if he doesn't grant VirnetX a permanent injunction against Apple, VirnetX is still entitled to ask him to impose an ongoing royalty payment that Apple must pay VirnetX for continuing to infringe the four patents. Judge Davis has done this in the past, awarding an ongoing royalty that was roughly 70% more than what the jury had awarded for past damages.

It is also possible that if Judge Davis does grant VirnetX an injunction, Apple could ask the Court of Appeals to stay and/or reverse it. I cannot at this time give a confident analysis of how likely or not it would be for the Court of Appeals to grant any such requests by Apple. There are just too many factors, including how the injunction is worded, how Judge Davis explains his reasoning, and what decisions, if any, regarding injunctions are issued by the Court of Appeals in the intervening time period. If a permanent injunction is granted by Judge Davis and if Apple asks the Court of Appeals to stay and/or reverse it, I hope to have time to evaluate the likelihood of Apple's requests being granted at that time. For now, it's simply too premature for me to have an opinion.

Having said that, the case involving the injunction Judge Davis granted against Microsoft is enlightening. There, Judge Davis granted the injunction on August 11, 2009, with a 60 day grace period to comply, making its effective date October 10. Microsoft immediately asked the Court of Appeals to expedite hearing their appeal and also stay the injunction in the interim. The Court of Appeals granted both of Microsoft's requests, ordering expedited briefing on August 19 and staying the injunction on September 3. The Court of Appeals then heard oral argument on September 23 and issued its decision upholding the injunction on December 22.

The Court of Appeals did slightly change the injunction, in that Judge Davis had originally given Microsoft 60 days from the date of his order to comply, while the Court of Appeals felt they should have been given 5 months. But that change didn't really mean much, as the stay they granted meant the injunction wasn't in effect until they ruled anyways, which was more than 4 months after Judge Davis' granting of the injunction. The Court of Appeals set the effective date for the injunction as January 11, 2010, merely 20 days after they confirmed Judge Davis' granting of the injunction.

Thus, if the Microsoft case is representative of what one can expect may happen with VirnetX and Apple, it would be reasonable to believe that the Court of Appeals, even if it grants a stay of any injunction, would move quickly to hear any issues Apple may have with it and reinstate the injunction within a few months if it affirms Judge Davis' decision to do so. It also shows that Judge Davis has made the correct decision to grant an injunction in the past. Thus, one cannot reasonably argue he doesn't know what he's doing and would surely be reversed on appeal on the issue of permanent injunctions. Quite to the contrary.

Therefore, in the scenario I expect, Apple will be forced to consider negotiating a license with VirnetX while its products are under the threat of a permanent injunction. Even if that's not the case, either because Judge Davis denies VirnetX's request or the Court of Appeals reverses Judge Davis' issuance of an injunction, Apple will still likely have to pay VirnetX an ongoing royalty that Judge Davis thinks is sufficient, which may very well be much higher than what the jury awarded VirnetX for Apple's past infringement.

I also note that the four VirnetX patents found to be infringed by Apple in this case do not all expire until January 2022, although they are also currently being reexamined at the Patent Office and may therefore be canceled or modified prior to their expiration. However, VirnetX only needs one valid and infringed claim to sustain an injunction, and therefore any attempt to prevent the implementation of an injunction by invalidating VirnetX's patent claims at the Patent Office would have to be 100% successful and also done sooner than the date upon which the injunction is to go into effect. I don't believe any of the reexaminations are close to being final, as they have not yet even entered the appeals process, which could take two or more years, much less are all of them on the verge of concluding in Apple's favor, as would be required for the injunction threat to be eliminated.

Additionally, while VirnetX has other patent infringement actions pending against Apple, they have no impact on whether Judge Davis will grant VirnetX's currently pending motion for a permanent injunction. Also, quite importantly, I am not a financial analyst, so I cannot opine on how any of the various scenarios discussed herein, or any other issues, may affect VirnetX's value as a company. I am not making any recommendation as to whether to buy or sell VirnetX. I am required to disclose my position, if any, in the discussed companies and have done as I am required. The fact that I am long VHC as of the submission of this article to the Seeking Alpha editors does not mean you should infer I am recommending you buy VHC. What's right for me may not be right for you, and circumstances may have changed between the time I wrote this and the time you are reading this.

Lastly, to be completely candid, I have personally argued, and still believe, that as a matter of public policy, no injunction should ever be granted in patent infringement cases. However, I have not let my personal opinions about public policy impact my opinion about what I expect to happen in this case. What I've said here is what I think will happen given the facts of the case and the judge who is responsible for making the decision. I have not said here what I think should happen as a matter of what is best for society.

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 content was originally issued as a Ravicher Report on January 22, 2013. It is now being made available for free to the public for the first time here. While I am long VHC as of the submission of this article for publication to the Seeking Alpha editors, VHC is, in my opinion, highly volatile, as is the litigation process in which it is involved, and therefore I may change my position in VHC at any moment for any reason or no reason at all. If asked to state the price at which I would change my position in VHC, at the precise moment that I am submitting this article to the Seeking Alpha editors, I would be willing to close my long position in VHC if it reached $42-45. In stating these prices, I am not providing any investment advice or making any buy or sell recommendation. I am merely saying what prices I would at this moment be willing to close my long position. My opinion on this may very well change, rapidly, as developments in my life and/or VHC occur. Also, when asked, I have given my opinions about VHC to private parties, some of whom had positions in VHC at the time I gave my opinions to them. Sometimes I gave my opinions in exchange for a fee and I may very well continue to do so. I do not, however, tell people what they want to hear. I tell them my honest opinion, and on more than one occasion my bluntness and commitment to my opinions led to a very awkward conversation. Lastly, I recently reached out to representatives of VHC to request copies of various documents filed with the court, including the briefs of the parties regarding the motion for a permanent injunction that were filed with the court under seal. Nothing was provided to me and I did not discuss my opinions or anything else with them.

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