VirnetX Begins Cornering Apple In Patent Fight

| About: VirnetX Holding (VHC)
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Pursuing litigation, and in particular patent litigation, can be a treacherous path for companies. The journey is fraught with complex issues, unpredictable juries, and shrewd lawyers. For VirnetX (NYSEMKT:VHC), it has included ongoing licensing and assertion of its secure communication intellectual property to the most dominant technology companies in the world.

After two years of wrangling, VirnetX and Apple (NASDAQ:AAPL) met for a jury trial in November 2012. The big news headline emerging from the courtroom was that VirnetX secured a jury verdict that Apple was infringing its patents and owed the company $368.2 million. Indeed that was one of the most critical wins for the company in the long legal battle, both validating its patents and proving its IP is embedded into the world's most pervasive technologies.

However, one ruling that occurred during the trial and went largely unnoticed by the investment world could prove key going forward. It was overlooked as it occurred during the trial itself without a formal order filed. Furthermore, investors were focused on the details of the case and jury's eventual verdict. Even though I attended the trial, at the time I made little more than a small note of it. However, it may prove to be an important development for VirnetX.

This ruling was highlighted in a recent petition by VirnetX counsel to the United States Patent Office under control number 95/001,697. In this petition, the company notified the Office of an action taken by the court with respect to patents under reexamination. During the November district court trial, Judge Davis granted a judgment as a matter of law that at least certain claims of the '135, '151, '211, & '504 VirnetX patents are valid over all pieces of prior art asserted in the case (with the exception of the Kiuchi reference). Apple did not oppose this motion. Thus, any prior art reference Apple asserted at any point, by law, does not anticipate or invalidate the patent claims asserted in the case. The judge will further rule in his final judgment whether validity over all of these references will apply all of the remaining claims or just those asserted at trial.

In the recent filing to the USPTO, VirnetX counsel argues "…since Apple did not oppose th[at] judgment, it cannot appeal [it]…" and further "…Apple has waived these validity arguments and has no standing to appeal them." Thus they contend, the ruling that all prior art does not anticipate the claims is effectively a final judgment and will soon trigger the estoppel provision of 35 U.S.C 317(b). Estoppel in regards to the examinations has attached or will soon attach against Apple. Estoppel is a legal term which bars someone from asserting anything that has already established as truth by law. This section of the law is forming the crux of VirnetX's validity defense and a potential legal endgame for Apple.

So, in other words, Apple cannot twice argue VirnetX patents' are invalid. Since it has lost in court in regards to these, VirnetX argues that upon a final ruling, it will soon be prevented from contending invalidity with the same references with the Patent Office (at least on the asserted claims in the case).

The Kiuchi reference was separately asserted in court. A jury specifically determined that this prior art did not anticipate or invalidate the claims of VirnetX's patents. Judge Davis will in all likelihood also include this in his final ruling.

To be clear, VirnetX is not currently asking the Office to close the reexamination. Rather, it is requesting suspension of the proceedings due to the fact that "good causes exists" to do so because efforts to prosecute the patents further "…are or will soon be moot as a result of litigation…". Moreover, Apple should not be allowed to again challenge the validity of the patents over the same issues a second time.

Cisco Systems (NASDAQ:CSCO) is set for a jury trial in March 2013. VirnetX further requested its examinations regarding these patents be held up in light of the fact the same patents are at hand. At the very least, it pleas, the Office should unmerge the conjoined Apple/Cisco reexamination proceedings due to the varying degrees of estoppel.

Asserting invalidity has long been a strong defense of Apple since the beginning of the litigation, but it may be showing signs of crumbling. On the flip side, securing the validity of its patents is critical for a pure intellectual property licensing company like VirnetX. This litigation includes some of the key patents of the VirnetX portfolio. It really is make or break. The company must successfully protect and defend the validity of these patents if it intends to successfully license them across a large swath of the technology industry.

It is difficult to tell whether or not the Office will grant this petition to suspend reexamination, although they have done so in at least somewhat similar circumstances in the past. But what this event demonstrates is that Apple may be running out of options to challenge the validity of VirnetX's patents. Although Apple will appeal the district judge's ruling and may indeed be allowed to continue the reexamination, it is clear a leg of Apple's defense stool may be beginning to wobble.

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.