VirnetX Vs. Apple Trial: Verdict #3

Summary

• Results of the September 30, 2016 jury verdict.
• Background information of the case versus Apple.
• Opinions on the jury verdict and the next steps of the case.

VirnetX (NYSE:VHC), on Friday evening, received its jury verdict versus Apple (AAPL) in the amount of $302 million in the '417 action (2009-2012). The jury also decided that FaceTime infringes with the Federal Circuit changed claim construction of a key term in the '504 and '211 patents. Infringement of VPN on Demand was already affirmed by the CAFC. A hearing on willful infringement is scheduled for October 14th, and the post-trial briefing should be underway shortly.

This was the third jury verdict in favor of VirnetX versus Apple in the 6+ year long running battle. The first $368 million verdict was remanded on a claim construction and damage decision at the Federal Circuit in 2014, and the second verdict of $625 million was vacated by H. Judge Schroeder in late July 2016 due to "prejudicial" issues. The cases were split apart again in the July order after '417 and '855 (2013-present) actions, after HJS consolidated the cases in April 2015. The '855 action does not have a trial date set and includes infringement on redesigned versions of VPNoD/FaceTime, along with iMessage. The damages period will be 2013 through the trial date.

Why does VirnetX keep winning at the District Court? That's because the company has the facts on their side, and Apple is a corporate sewer. It wouldn't matter if this case was tried in the Northern District of California, and I believe Apple is lucky it's not being tried in that jurisdiction. The tech patent journalist community would be forced to attend the trial and hear what three jury panels have now heard and decided. Apple can't find two employees who have corroborating stories related to the case. The company's employees/experts also keep testifying under oath implausible stories, explanations, and timelines. Not to mention that Apple put in a non-infringing alternative, routing FaceTime calls through relay servers under a contract with Akamai (AKAM) in 2013. The costs of the alternative started to spiral out of control as more bandwidth was constantly being required. Apple's response to the costs? They broke the security certificates forcing all Apple users to upgrade from iOS 6 to iOS7. Internal emails showed Apple employees joking about the process and laughing at user complaints. Not surprisingly, this was never written about in any mainstream technology publication. All of this information can be found in the trial transcripts over the last 6 years.

Under the Federal Circuit's damages guidance in the VirnetX and Ericsson v. D-Link opinions, VirnetX has tailored the damages model in a very simple model. The company takes its existing licenses signed, breaks them out in a per unit dollar amount, gets an average, and multiplies it by the Apple units shipped. No entire market value rule, and no Nash bargaining. Two juries have now accepted this model. It was also likely used in the recent $22 million Cellular Communications Equipment v. Apple verdict in the middle of September. The Federal Circuit will have to come up with a new reason and new precedent to kick this model out and remand on damages again.

On demand, the anti-patent circus launched their pro-Apple spin on the facts of the case. In a funny headline, VirnetX was called litigious. The company has filed eight actions over a 10-year period; I guess it could have filed eighty lawsuits in that time period. Instead, it has been resolute litigating with Apple and negotiating with other unlicensed parties. Reports from the trial indicate that Samsung (OTCPK:SSNLF), ZTE (OTCPK:ZTCOF), LG (OTC:LGEAF), and IBM Corp. (IBM) have been engaged in discussions with VirnetX, but the discussion details are unknown. VirnetX has yet to sign a license outside of litigation.

Apple has undergone a crusade at the patent office, which conveniently issued final actions six weeks before the statutory twelve-month institution to final decision deadline. Why? Motions to stay have been constantly filed in the District Court action, with one pending before the trial started. Typically, all final decisions are rendered at the PTAB within the final week of the twelve-month deadline. The employees/judges at the PTAB should immediately be investigated, all servers/emails/hard drives need to be imaged, and a formal public investigation by outside authorities should be launched. If there is any communication from Apple or related entity to anyone at the PTAB to accelerate the final decisions, a criminal investigation needs to be launched. I believe the timing was not a coincidence.

In my opinion, the patent reviews have critical claim construction flaws and a high likelihood the Federal Circuit remands all of them back to the Patent Office using their already determined claim constructions from the 2014 opinion. Due to the timing of the District Court '417 case and the patent reviews, it is likely the actions will be heard at the same time. The Federal Circuit required the secure communication links to be BOTH be secure AND anonymous. The Patent Office has ignored the prosecution history, specification, disclaimers, litigation history, Federal Circuit, and Apple's own District Court concessions and is hiding under the BRI standard with a secure OR anonymous stance. The VirnetX v. Apple case is an excellent example of the competing claim construction standards creating a legal mess. Three separate juries have already concluded the patents were not invalid (MSFT 2010, Apple 2012, Cisco 2013).

VirnetX should consider filing lawsuits in other jurisdictions, such as Japan, France, and Germany, whose courts are speedy and not afraid to issue injunctions. The company needs to put Apple on a clock and apply additional pressure to negotiate a worldwide license.

With a $1.20 per device rate now determined, VirnetX and IPValue need to go back into negotiations with prospective licensees and finally sign agreements. I believe fair rates will be between $.40 and $.80 per unit, with volume discounts provided to high-volume device companies. The discount is fair, as it avoids expensive and time-consuming litigation. The often-asked question is why anyone would sign a license with the US legal uncertainty. The answer is VirnetX has a broad international portfolio where equipment is being sold and used. The international venues have not been compromised by big tech companies, and a patent holder is able to get a sales ban on infringing products in a timely manner. Now, the company needs to sign the licenses.

While Apple makes a fantastic product, it ripped off a lot of patent holders, large companies, and small inventors along the way. It has taken a scorched earth policy and typically refuse to negotiate fairly with anyone. Meanwhile Apple, Google (GOOG, GOOGL) and a few other tech companies have destroyed the patent system and innovation engine in the United States. The system is so bad, it has taken Apple forever to collect on its own patents from Samsung. During the debate last week, innovation and cybersecurity were discussed. I don't think either candidate is educated enough on the patent system (or the topic), but that is another story. What most don't know is that cybersecurity patents have been destroyed by the US court system and the Patent Office. Who is going to commit money to this sector when it is so easily ripped off by big tech Non-Paying Entities (NPEs)?

In this case, along with a few other cases that are currently pending, it is time for Apple to do the right thing and compensate the patent owners who have contributed great innovations that helped it grow into the largest company in the world. Sadly, this is very unlikely.

Conclusion

With the '417 trial now over, eyes will now turn to the willfulness aspect of the trial, post-trial briefing, the '855 trial, and the patent reviews. As always, expect the unexpected with this case.

Additional note

I am on vacation and will try to follow up on the comments when I get back on the 14th. I am sure the article will bring out the anti-patent community. Please be considerate in the comment section.

I also thought Perdix's article from September 23rd was extremely well done and communicates the risks associated with the company.

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.