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Will Apple Be Forced To Sell Products Without FaceTime, IMessage, And VPN On Demand?

|About: Apple Inc. (AAPL), Includes: VHC


After a second losing trip to Federal Court, Apple again found to infringe VirnetX's patents.

FaceTime, iMessage, and VPN on Demand targeted in a narrowly worded Injunction Request.

Apple's enterprise customers complained long and loud the last time Apple tried to tamper with VPN on Demand.

Apple's victory vs. Samsung at the CAFC for a permanent injunction may come back to haunt them.

Apple's only known non-infringing alternative for FaceTime cost the company millions of dollars per month when implemented three years ago and had skyrocketing future usage projections.

On Feb. 3rd, 2016, a Tyler, Texas jury found Apple (NASDAQ:AAPL) to infringe two patents from VirnetX's (NYSEMKT:VHC) patent portfolio, Case 6:12-cv-00855-RWS. In 2014, two other patents on appeal to the CAFC were confirmed to be infringed with damages and willfulness to be determined by this jury. Damages awarded by the jury were $1.41 per unit on a non-stacking basis (no matter how many patents were infringed the damage number did not increase). This number falls at roughly the midpoint of VirnetX's suggested damages range and far more than Apple's proposed $0.10 per unit number. The jury also found willfulness where asserted.

In a proposed order filed March 4th, VirnetX asked the court to confirm the jury verdict, to award enhanced damages where willfulness was found, for pre-and post-judgment interest, for costs and attorney's fees, and for a permanent injunction on the future sales of all Apple products found to be infringing or not more than colorably different from the infringing products. These products called Later Released Products (NYSE:LRP) include, at least, the iPhone 6S, iPhone 6S Plus, iPad Air 2, iPad Mini 3, iPad Mini 4, iPad Pro, and iPod Touch 6th Gen.

In a motion accompanying the proposed order, VirnetX shows that iMessage and FaceTime as currently offered and advertised must use VirnetX's technology, "2/2/2016 Trial Tr. (Jones) at 84:21-23 ("Q. And has Apple shown that they could do without the VirnetX inventions? A. No, they haven't. My analysis shows that they could not."); 2/2/2016 Trial Tr. (Apple) at 85:6-7 ("We did not rely on non-infringing alternatives in our case.")".

In a knowledge base article posted April 2013 and discussed here, Apple explains that the original, infringing, method of "Always on" will be replaced by a new "If needed". This "If needed" method was also found to infringe. Currently, Apple has presented no functional method for VPN on Demand that does not infringe VirnetX's patents.

All of this simply does not bode well for the future of these features in their current form in new products. Ironically the most recent CAFC case law dealing with permanent injunctions is the Apple vs. Samsung opinion of Sept. 15, 2015. This article is not an attempt to parse that decision, but suffice it to say that given this ruling and the similarity of the cases, should Judge Schroeder decide an injunction is in order, a CAFC appeal where the panel is looking for an abuse of discretion will be hard pressed to overturn the judge's order; if Halo/Stryker issues favorably from SCOTUS before there is a ruling on injunction, a permanent injunction seems even more likely.

The question then becomes can Apple compete without the current (secure and simple) versions of FaceTime, iMessage, and VPN on Demand. Apple's usual September release of a new iPhone model could very well coincide with the requested injunction and would also come at the beginning of the two year cycle out of the iPhone6 and 6p. The first editions of the larger model iPhones accelerated upgrades and cannibalized the normal two year trade in cycle. According to this article, 81 Million U.S. Smartphone Users Now Own iPhone6 or Higher: CIRP there were 110 million iPhone users in the U.S. at the end of 2015 and, yes, close to 75% of those users own iPhone6 or higher.

With the back end of this sales curve now approaching, can Apple afford the added pressure of removing or downgrading such popular features as FaceTime, iMessage, and VPN on Demand? VPNs will have to be initiated on a connection by connection basis, a well known recipe for having employees ignore policy and use their phones without VPNs. FaceTime can offer a user the option of unsecured communications or Apple could simply route all calls through relay servers. One is simply undesirable, the other economically untenable. iMessage, with no feasible work around becomes a thing of the past.

With some analysts already calling for the first decline ever in iPhone sales, will Apple make the decision to lessen some of its most popular features? Judging by its intransigence in this lawsuit to date, the answer just might be, "Yes".

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.