Will Legal Showdown With VirnetX Cause Apple's CEO To Regret His Words?

| About: VirnetX Holding (VHC)
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Recently Apple (NASDAQ:AAPL) won a long and hard fought jury trial against Samsung (OTC:SSNLF) and was awarded a $1B plus judgement because Samsung was found to be copying Apple's patented hardware and software designs. Shortly after the Samsung verdict, Apple's CEO, Tim Cook, issued the following memo to Apple employees as reported by 9TO5Mac.com:

Today was an important day for Apple and for innovators everywhere.

Many of you have been closely following the trial against Samsung in San Jose for the past few weeks. We chose legal action very reluctantly and only after repeatedly asking Samsung to stop copying our work. For us, this lawsuit has always been about something much more important than patents or money. It's about values. We value originality and innovation and pour our lives into making the best products on earth. And we do this to delight our customers, not for competitors to flagrantly copy.

We owe a debt of gratitude to the jury who invested their time in listening to our story. We were thrilled to finally have the opportunity to tell it. The mountain of evidence presented during the trial showed that Samsung's copying went far deeper than we knew.

The jury has now spoken. We applaud them for finding Samsung's behavior willful and for sending a loud and clear message that stealing isn't right

I am very proud of the work that each of you do.

Today, values have won and I hope the whole world listens.


I believe this Tim Cook memo will come back to haunt him in November of 2012 as VirnetX Holding Corp (NYSEMKT:VHC) and Apple are scheduled to begin a week long jury trial on October 31st, 2012 in Tyler, TX. On this date, the jury will begin to hear evidence and eventually determine if Apple has been using VirnetX's patented secure communication technology illegally. Tyler, TX is home to the United States District Court for East Texas District. The trial will be presided over by the Honorable Judge Leonard Davis - Judge Davis has never had a decision overturned on appeal.

Some quick litigation and settlement history for VirnetX:

  • VirnetX sued and successfully won a $105.75M judgement over Microsoft (NASDAQ:MSFT) in 2010 in the same court with Judge Davis presiding. Fearing triple damages, Microsoft settled and paid VirtnetX $200M after the trial concluded to license the technology.

  • VirnetX sued Apple, Cisco (NASDAQ:CSCO), NEC, and Aastra in 2010.

  • VirnetX sued Siemens (SI), Mitel, and Avaya in 2011.

  • Mitel, NEC, and Aastra settled after the markman ruling for that case was issued on April 25th, 2012.

VirnetX was scheduled to face the four remaining defendants (Apple, Cisco, Siemens, and Avaya) in one trial in November of 2012. However on September 24th, after a hearing at a pre-trial scheduling conference, VirnetX issued this press release stating that Judge Davis agreed to modify the trial by separating Apple from Cisco, Avaya and Siemens "to allow for optimum use of resources for trial preparation while giving parties additional time to try to reach an agreement". This resulted in the VirnetX vs. Apple trial to begin on October 31st, 2012 with the remaining defendants scheduled for March of 2013. VirnetX's CEO and President Kendall Larsen was obviously happy with the above decision stating the following:

We are extremely pleased with the updated trial schedule. We believe this schedule allows us to maximize our resources and will greatly benefit our legal strategy.

A couple of thoughts regarding the press release above and the modified trial schedule:

  • Separating the defendants is definitely in VirnetX's best interest. It allows VirnetX's legal team (McKool Smith) to laser focus on proving Apple's alleged infringement and reduces the amount of "smoke" that would be generated by multiple defendants with multiple products in a complicated technology patent case that could easily confuse a jury. The VirnetX CEO definitely felt this was a positive development based on his quoted statement above.

  • The print from the press release that I put in italics above, leads me to believe the chances for a pre-trial settlement with Apple are now reduced - presumably, if the parties were close to a settlement, the judge probably wouldn't have moved the trial up a week from the original November 5th trial date. However, I believe the chances for a pre-trial settlement with Cisco, Avaya, and Siemens have now increased - mainly because a verdict will have been reached in the Apple trial well before the three defendants' March of 2013 trial date.

Also, on September 14th, VirnetX and Science Applications International Corporation (SAIC) refiled a complaint with the United States International Trade Commission (ITC) against Apple to bar importation and sale of products accused of infringing on VirnetX's U.S. Patent No. 8,051,181 (the 181" patent). Those products include the latest iPhones, iPads, iPods, and Macintosh computers. The previous complaint was dismissed for a procedural standing issue.

The defendants have requested and been granted re-exams by the United States Patent and Trademark Office (USPTO) on the patents in question. This is standard operating procedure by defendants in any patent infringement case. The patent re-exams are on-going and will continue long after the case has been tried and a verdict rendered. In the case of VirnetX, three of the patents in question have survived re-exams from the Microsoft trial and it is further important to note that, to date, no claim in any VirnetX patent, in past or present re-exams, has received a final rejection from the USPTO.

Based on all of the evidence I have seen to date, I have made an investment in VirnetX. If the trial goes as I suspect it will, and VirnetX proves Apple infringed on its technology, I will be interested to see if Apple's CEO issues another memo and how that memo might read.

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.

Disclaimer: 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.