Tags: Court | VirnetX | Patent | Apple

Court Scraps VirnetX's $368 Million Patent Award Against Apple

Tuesday, 16 Sep 2014 05:44 PM

Shares of VirnetX Holding Corp. fell 44 percent Tuesday after an appeals court threw out a $368.2 million patent-infringement damage award the company won against Apple Inc. over virtual private networks.

The U.S. Court of Appeals for the Federal Circuit in Washington ordered a review of whether Apple’s FaceTime feature infringed two patents and threw out the damage award, saying it was based on faulty jury instructions. The court did agree that Apple’s VPN on Demand features infringed two other patents.

VirnetX, which gets all its revenue from patent licensing, had been seeking to collect its damage award since a jury in 2012 found Apple’s products infringed the four patents related to secure communications. VirnetX reported $2.2 million in revenue last year and an operating loss of $28.6 million, with much of its expenses for legal bills, its annual report shows.

VirnetX shares fell 44 percent to $8.30 at 4 p.m. New York time.

The dispute is over secure networks, known as virtual private networks, through which a website owner can interact with customers or an employee can work at home and access company files.

FaceTime Calling

The two patents asserted against Apple’s FaceTime video- calling program involve translating domain names to determine if a secure link can be made. The Federal Circuit said the trial judge erred in saying the VirnetX patents didn’t require anonymity, and sent the case back for reconsideration on whether Apple infringed those two patents.

The finding that VPN on Demand infringed two other patents related to ways the domain names can trigger the communications link “was supported by substantial evidence,” the court ruled. The panel also upheld the jury’s finding that all four patents are valid.

“While we are disappointed that the Federal Circuit has vacated portions of the judgment for further proceedings, we are bolstered by the fact that the patents were again found valid and that it was confirmed that Apple’s VPN on Demand functionality infringes,” VirnetX Chief Executive Officer Kendall Larsen said in statement. “We look forward to readdressing the FaceTime infringement and damages issues as soon as possible.”

Kristin Huguet, a spokeswoman for Cupertino, California- based Apple, said the company had no comment.

Excessive Award

The technology is used in a software product called Gabriel that VirnetX has never commercialized. The Zephyr Cove, Nevada- based company said in a court document the lack of Gabriel sales is because, with Apple, “it found itself, yet again, up against an industry giant who already had a foothold in the market using VirnetX’s technology.”

Apple denied infringing the patents, saying it uses a different method to create secure network links. It also argued that VirnetX hadn’t come up with any novel technology.

Even if there was infringement, Apple told the court, the damage award was excessive because neither FaceTime nor VPN on Demand are features that drive sales of the Apple devices. The royalty rate was improperly linked to the total value of the Apple products, Apple said.

All versions of the iPhone, iPad and iPod generated $127.7 billion in sales in fiscal 2013, according to data compiled by Bloomberg.

The court, which handles all patent appeals, has been tightening the rules when it comes to appropriate damages in patent cases, said Matt Cutler, a patent lawyer with Harness Dickey in St. Louis.

“The Federal Circuit is trying to keep a check on those” large awards, he said.

Second Lawsuit

Chief Circuit Judge Sharon Prost, speaking for herself and Circuit Judge Raymond Chen, sided with Apple, saying that, when it comes to multicomponent products, the patent owner “must do more to estimate what portion of the value of that product is attributable to the patented feature.” Former Chief Judge Randall Rader, the third member of the panel that heard arguments in the case, retired in June.

After winning the trial, VirnetX filed a second lawsuit, claiming a newer generation of Apple devices, including the iPad Mini and iPhone 5, infringed the patents; that case is pending.

VirnetX also accused Cisco Systems Inc. and Microsoft Corp. of infringing the patents. VirnetX isn’t appealing a March 2013 jury verdict that cleared Cisco of the infringement claims, said John Earnhardt, a Cisco spokesman. The case over Microsoft’s Skype Internet calling service is pending.

Gulf War

Microsoft, the world’s largest software maker, paid VirnetX $200 million in 2010, a year before it bought Skype. The Skype suit against Microsoft was filed last year.

VirnetX was founded almost a decade ago by former workers at Science Applications International Corp., a government contractor that last year split into two companies. VirnetX has said the technology was developed for the U.S. Central Intelligence Agency, which was seeking new ways of secure communications during the first Gulf War. SAIC gets a percentage of any money VirnetX obtains from the patents.

The appeal is VirnetX Inc. v. Cisco Systems Inc., 13-1489, U.S. Court of Appeals for the Federal Circuit (Washington). The lower court case is VirnetX Inc. v. Cisco Systems Inc., 10cv417, U.S. District Court for the Eastern District of Texas (Tyler).

© Copyright 2017 Bloomberg News. All rights reserved.

 
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Shares of VirnetX Holding Corp. fell 44 percent Tuesday after an appeals court threw out a $368.2 million patent-infringement damage award the company won against Apple Inc. over virtual private networks.
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Tuesday, 16 Sep 2014 05:44 PM
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