Are The Winds Of Settlement Blowing Towards Apple And VirnetX?

| About: VirnetX Holding (VHC)
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Apple (NASDAQ:AAPL) and VirnetX (NYSEMKT:VHC) are currently embroiled in a down home East Texas donnybrook that is scheduled to go to trial in the United States District Court in the Eastern District Of Texas in November of 2012. The fight started when VirnetX, a cutting-edge, secure communications technology company and owner of several essential 4G/LTE battle hardened patents sued Apple, Cisco (NASDAQ:CSCO), Mitel (NASDAQ:MITL), Aastra, Siemens (SI), NEC, and Avaya for building and selling products that infringe on VirnetX's intellectual property portfolio. VirnetX had previously sued Microsoft (MSFT) and won a willful infringement judgment in a 2010 jury trial and settled with MSFT for a hefty $200M after the trial was completed.

In this article, rather than rehash the articles out there about what VirtneX does and the history of the current lawsuit, I am focusing today on why signs could be pointing to a possible Apple and VirnetX settlement. Here are some resources to get you up to speed about VirnetX and the current lawsuit and potential valuation of the company:

1. Justin Moreno's July 2012 96pg "White Paper" - a must read

2. John Ford's articles here and here and here

3. Danial B. Ravitcher's article here

4. Dustin Moore's article here

As of the writing of this article Mitel, NEC, and Aastra have settled with VirnetX for past infringement and future licensing. Apple, Cisco, Siemens and Avaya remain in one joined lawsuit.

Here are four possible signals that point to possible settlement discussions between Apple and VirnetX:

1. iPhone 5 Release -Apple is set to release the iPhone 5 which will be a 4G/LTE device on September 11th in the UK - "Apple's iPhone 5 release is said to be the biggest handset launch in history" . VirnetX asserts the Apple iPhone is one of the products using technology that VirnetX has patented and protected. The licensing structure that VirnetX has set up offers reduced royalty rates as an incentive to settle pre-trial. This could amount to an enormous amount of money given the sales of iPhones, iPads and other Apple products, past and present, that VirnetX claims use its patented technology. The incentive is there for Apple to settle prior to November trial.

2. Deposition of Apple Engineer Not Scheduled - Apple was slapped with a choice of two severe but fair sanctions (which you can read about here and here) by the East Texas District's Honorable Leonard Davis for Apple's attorneys interfering in and eventually halting a damaging witness deposition of one of Apple's own engineers. Apple chose the option that allows VirnetX to depose the same engineer again, at a time and location of VirnetX's choosing with Apple paying all of the related costs. Also, if Apple attorneys have had any conversations with the engineer, after the improperly halted deposition, the Apple attorneys will have to waive any rights of confidentiality regarding those conversations. Apple chose this option on August 13 - one would think VirnetX would have scheduled the new deposition by now - but it has not. Why?

3. No re-filing to the ITC by VirtnetX Yet - In addition to suing Apple in the East Texas Federal District Court VirnetX also filed a complaint with the International Trade Commission against Apple on November 11, 2011 in an attempt to have Apple's alleged infringing products barred from being imported and sold in the United States. On August 20th the ITC administrative law judge assigned to the case dismissed the case due to a "procedural discrepancy". VirnetX announced immediately on August 20th they would be re-filing the amended complaint however VirnetX still has not re-filed the complaint. Why? It should be easy to fix a "procedural discrepancy".

4. Cisco Files Motions For Separate Trial From Apple - On August 28th, 2012 Cisco filed a sealed patent motion for a separate trial from Apple. Is this a delay tactic? Is it possible Apple and VirnetX could settle and Cisco wants to distance itself? Why would Cisco file this motion at such a late date so close to the trial?

It is my belief if Apple were to settle with VirnetX prior to the November trial it could immediately send VirnetX shares to the $75 -$100 per share range. William Blair initiated VHC with an "outperform" and a $65 price target on August 24th, 2012 and that was not including a potentially significant portion of royalties that VirnetX would receive from Apple in a settlement (or favorable verdict).

Investors can never know for sure what kind of negotiations occur behind closed doors - all we can do is keep our ears to the ground, look at the information available and try to connect the dots.

VirnetX closed at $26.01 per share on August 31, 2012. I believe this provides an excellent entry point for VirnetX shares as a play on settlements occurring prior to the November trial and also an excellent longer term investment in VirnetX's foundational and essential cutting-edge secure communications technology.

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 only, not a substitute for your own extensive due diligence, and does not qualify as investment advice.