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|Includes: VirnetX Holding Corporation (VHC)

VIRNETX VS APPLE:VHC: David to Slay Goliath - AGAIN


VHC: David to Slay Goliath - AGAIN

There has been a lot of hype in the press and especially from self pro-claimed gurus alleging that Apple will win its appeal against VirnetX at the Federal Circuit. These gurus have claimed that based on their ipse dixit logic: Apple will get the jury verdict of infringement overturned and, in addition, that Chief Judge Randall Rader will be writing the majority opinion. Moreover, in a further display of hubris, these self-proclaimed gurus have already provided a detailed summary of what they allege Rader will write as the majority opinion.

Our analysis, based on verifiable facts, points, instead, to another judicial victory for VHC in its patent battles with Apple. A little history accordingly is in order to appreciate Cassandra's assessment which runs contrary to the conventional wisdom touted by the press and the ipse dixit gurus.

The four VirnetX patents in play here are the technologies that provide and enable secure communications for critical software embedded in the iphone such as icloud, facetime, and iChat. Securing these Iphone communication features is core to the success of the Apple eco system. Thus, as confirmed during the District Court trial in this matter, Apple has admittedly been unable to design around or technically segregate securing iphone communications from the communication features themselves. Consequently, the jury, as part of its verdict, found that the VirnetX patents are an inseparable, indispensable and intrinsic component of iphone communication features.

Consequently, it should come as no surprise, therefore, that the jury found that in fact patents had been violated by Apple and that damages for past infringement were at least $325 million plus $1 million per day for acts of ongoing infringement. As of the end of June, the damage award will exceed $725 million.

Apple's response was that it would find a work around except it couldn't and acknowledges it is still infringing to this day. Combining the March 2011 jury verdict and subsequent orders of Federal District Court Judge Davis, resulted in a royalty rate of 0.98% of revenues generated from the infringing Apple products (estimated at over $300 million per year).

However, for various inexplicable reasons, investors reacted as though this ruling will not hold up on appeal to a three judge panel before the U.S. Court of Appeals for the Federal Circuit ("CAFC"). The CAFC has exclusive jurisdiction to hear all appeals from all over the country involving patent infringement. As discussed immediately below, Cassandra believes that the CAFC will uphold the entire ruling of the Federal trial court or, at the very least, uphold the finding of infringement and remand the case back to Judge Davis at the trial court with instructions to re-calculate the damages and re-calculate the royalty rate for ongoing infringement.

In order to appreciate Cassandra's contra-status-quo analysis, we must review the numerous confirmed events that have arisen in recent weeks. First, unable to find a work around and having lost every court battle, Apple did what any arrogant global powerhouse would do: they attempted to bully and threaten VirnetX into a settlement. However, VirnetX's management and legal team have shown no desire to settle.

Second, when that didn't work Apple hired at least one corporation and possibly two corporations, RPX and New Bay Capital, to act as proxies for Apple, whereby these two firms filed frivolous inter-partes proceedings before the USPTO in a last ditch effort to invalidate the patents.

New Bay publicly admitted that it would dismiss its inter-partes petition to invalidate VirnetX's patents, if VirnetX paid New Bay 10 percent of the jury award issued at the federal trial court. This statement alone by New Bay shows that it had filed its petition before the USPTO to invalidate these patents in bad faith, i.e. with no sincere or legitimate basis for challenging the validity of VirnetX's patents. When VirnetX refused to succumb to this form of extortion, New Bay withdrew its USPTO inter partes petition in April of this year.

New Bay was formed less than 60 days before filing its frivolous inter-partes petition to the USPTO. We leave it to the reader to figure out who was really behind the bogus petition filed by New Bay.

Similarly, RPX's petition was tossed out by the USPTO earlier this month because RPX was explicitly found by the USPTO to be nothing more than an unnamed proxy for Apple. The Patent Trial and Appeal Board of the USPTO ruled that "A party bound by a judgment may not avoid its preclusive force by re-litigating through a proxy". In short, Apple waived its right to challenge the validity of VirnetX's patents by failing to previously file such proceedings before the USPTO. Instead, Apple rolled the dice in the Federal District Court before Judge Davis and lost. It's only avenue after being clobbered by the jury verdict in Federal District Court was to appeal to the CAFC.

Instead, Apple tried to circumvent the entire federal judicial process by using RPX as its undisclosed proxy. Apple got caught. Another act of bad faith and fraudulent tactics by Defendant Apple who can't get around the fact that it infringed VirnetX's patents and still continues to do so.

Now that those fraudulent proceedings before the USPTO are null and void, it seems that Apple is running out of dirty tricks to pull. As a result, the plethora of so called experts who were practically guaranteeing a reversal by the CAFC of the lower court decision in Apple's favor are equivocating about the outcome.

Indeed, it is strange this change in the conventional wisdom, given that just months ago they and an army of short sellers (see 41% short interest as of this writing) gave VirnetX little chance of affirmation. Casandra suspects that these gurus are shill's for Apple. Note they have become very silent because recent events have shown that their logic and claims have been so shamefully wrong at every step in this case. Here are the recent events worth noting:

1. At the oral hearing in VirnetX, Rader and the panel spent most of the time questioning the lawyers on the damages issue. The claims construction issue did not seem to be a concern for Rader and Prost, and Chen. Various commentators have tried stating otherwise, but a review of the transcript from oral argument proves that the question of whether the scope of the patents and thus whether or not infringement took place was of minimal concern. Apple may have aroused the panel's attention as to damages with its MAC upgrade price as a potential smallest saleable unit, but it is too late to promote this as a price point.

2. At oral argument there was no discussion by the panel regarding the jury verdict which found infringement of VirnetX's patents by Apple. It is almost impossible to overturn a jury verdict of infringement unless the reviewing appellate court finds that the trial judge committed some reversible error in his/her evidentiary rulings in terms of what was the jury allowed or not allowed to consider in rendering its decision. Keep in mind this alone would be approximately $725 million.

3. Also some commentators believe that Rader is a known opponent of the Nash Bargaining Solution ("NBS") or method for calculating patent damages and therefore, VirnetX was definitely going to lose this appeal. Rader's opposition to the NBS method is allegedly documented only in some public statements. But what Rader says in a speech at a law school is not binding precedent.

4.Another appellate panel within the federal circuit, cited with approval the trial court decision in VirnetX vs Apple, for its methodology for calculating damages. This is unprecedented, as usually lower court decisions are not cited with approval if the case is up on appeal. This has lead many court watchers, including this one, to say that

the court was likely going to affirm not only the jury verdict of infringement, but also affirm the jury verdict by which patent damages (i.e. the royalty rate) were calculated.

5. Despite the foregoing, certain commentators, who appear to be Apple devotees still kept crowing that VirnetX has lost the appeal and should beg for a settlement from Apple. VirnetX has held firm. Apple has had to worry about the implications of committing multiple frauds:

a. Initially telling the Virnetix Jury a work around was "easy ", and then having to admit that it could not work around the VirnetX patents;

b.Then by being exposed for secretly paying RPX, and possibly New Bay to file inter-partes petitions before the USPTO on its behalf, in a desperate attempt to try to invalidate the patents at issue. The USPTO tossed out these petitions and has ruled that Apple as the undisclosed real party in interest is barred from challenging the validity of VirnetX's patents before the USPTO.

c.Now if New Bay is found upon further investigation as being a front for Apple, that would be two acts of fraud upon the USPTO for which Apple could be severely sanctioned by Judge Davis, as he retains jurisdiction of the enforcement of whatever decision the CAFC hands down. So, who is the patent troll here?

6. Then within the past three weeks:

a. Chief Judge Rader, who is part of the appellate panel reviewing the VirnetX decision, was criticized by colleagues and the press when it was discovered that he had sent an e-mail to an attorney who regularly appears before him, in which he praised the attorney and said that this attorney could show the e-mail endorsement to prospective clients or future employers. This is clearly improper conduct and shows bias on the part of Rader.

b. In response to or reaction to the mounting criticism over Rader's endorsement of this one attorney, Rader on seven days notice, resigned from being Chief Judge of the Federal Circuit, a position he was expected to hold for several more years;

c. Rader also recused himself from two decisions, and those decisions were re-issued by the remaining two judge panels.

d. Apparently, the criticism of Rader for the improper endorsement of the attorney was growing, so Rader has now resigned his judgeship on the Federal Circuit, effective June 30. Again, it was expected that Rader would be on the bench, even in a senior status position for many years to come.

7.Therefore, in light of the foregoing, this court watcher says that it is highly unlikely that Rader will even participate in any more decisions between now and the time he steps down on June 30.

Thus, Cassandra believes that it is likely that VirnetX's jury victory against Apple will be affirmed by the Federal Circuit sometime this summer and that Apple will need to get out it's check book, big time. To the tune of $325 million in ongoing annual payments plus the down payment on theft and bad behavior in the amount of $725 million for past patent violations. In addition, there are indications that Apple will face sanctions for its fraudulent conduct before the PTO.

If you are not outraged now, this single finding of Apple paying off RPX to file improper inter-partes petitions, thus essentially using RPX as a shill, should be read sitting down:

Remember "Apple grossly misrepresented its ability to implement a non-infringing alternative to the jury. The huge disparity between Apple's position at trial and Apple's position post-judgment also warrants increasing the implied royalty rate." (Judge Davis) . So in turn VHC asked for a 1.5, essentially a treble, and Davis, AGAIN, took the middle ground and awarded an increase.

Did Davis have any doubt Apple would appeal? Of course not, he left more powder - to punish Apple, should the need arise. That new justification may have just been provided by Apple paying RPX to serve as Apple's undisclosed proxy (shill) before the USPTO. Apple's conduct before the USPTO is a blatant attempt to circumvent the judicial system and undermine the authority of the federal courts who are the ultimate arbiters of patent disputes. Any large investor in Apple stock should be worried.

Given the size of Goliath Apple it will merely dent their cash flow and war chest. But justice will finally be served and innovation rewarded for tiny David - VHC!

Cassandra eagerly awaits the CAFC decision on this matter.

Disclosure: The author is long VHC.

Additional disclosure: DO YOU OWN HOMEWORK....and never play options with your children's college accounts.