Royalty Rate Covers Products Not Colorably Different that Incorporate FaceTime or VPN On Demand Features
ZEPHYR COVE, Nevada.,– March 6, 2014 – VirnetX™ Holding Corporation (NYSE MKT: VHC), an Internet security software and technology company, announced today that in the Company’s pending litigation against Apple Inc. in the United States District Court for the Eastern District of Texas, Tyler Division, the court has issued a public version of the order previously issued under seal on March 3, 2014, awarding the Company an on-going royalty of 0.98% on adjudicated products and products not colorably different from those adjudicated at trial that incorporate any of the FaceTime or VPN on Demand features found to infringe at trial.
“We are very pleased with the court’s order awarding us an on-going royalty of .98%,” said Kendall Larsen, VirnetX CEO and President. “We are equally pleased with the court’s decision to include Apple products that are not colorably different within this rate structure.”
About VirnetX VirnetX Holding Corporation is an Internet security software and technology company with patented technology for secure communications including 4G LTE security. The Company’s software and technology solutions, including its secure domain name registry and GABRIEL Connection Technology™, are designed to facilitate secure communications and to create a secure environment for real-time communication applications such as instant messaging, VoIP, smart phones, eReaders and video conferencing. The Company’s patent portfolio includes over 80 U.S. and international patents with over 100 pending applications. For more information, please visit www.virnetx.com.
Forward Looking Statements Statements in this press release that are not statements of historical or current fact, including statements regarding the strength of Virnetx’s intellectual property, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on expectations, estimates and projections about the markets in which the Company operates, management’s beliefs, and certain assumptions made by management and involve known and unknown risks, uncertainties and other unknown factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements, including but not limited to (1) the outcome of any legal proceedings that have been or may be initiated by the Company or that may be initiated against the Company; (2) the ability to capitalize on the Company’s patent portfolio and generate licensing fees and revenues; (3) the ability of the Company to be successful in entering into licensing relationships with its targeted customers on commercially acceptable terms; (4) potential challenges to the validity of the Company’s patents underlying its licensing opportunities; (5) the ability of the Company to achieve widespread customer adoption of the Company’s GABRIEL Communication Technology™ and its secure domain name registry; (6) the level of adoption of the 3GPP Series 33 security specifications; (7) whether or not the Company’s patents or patent applications may be determined to be or become essential to any standards or specifications in the 3GPP LTE, SAE project or otherwise; (8) the extent to which specifications relating to any of the Company’s patents or patent applications may be adopted as a final standard, if at all; and (9) the possibility that Company may be adversely affected by other economic, business, and/or competitive factors. In addition to statements which explicitly describe such risks and uncertainties, readers are urged to consider statements labeled with the terms “believes,” “belief,” “expects,” “intends,” “anticipates,” or “plans” to be uncertain and forward-looking. The forward-looking statements contained herein are also subject generally to other risks and uncertainties that are described from time to time in the Company’s reports and registration statements filed with the Securities and Exchange Commission, including those under the heading “Risk Factors” in Company’s Quarterly Report on Form 10-K filed with the SEC on March 3, 2014. Many of the factors that will determine the outcome of the subject matter of this press release are beyond the Company’s ability to control or predict. Except as required by law, the Company is under no duty to update any of the forward-looking statements after the date of this press release to conform to actual results.
7,490,151 (“the ’151 Patent), and 7,921,211 (“the ’211 Patent) (collectively, “the patents-insuit”).
See VirnetX, Inc. v. Cisco Systems, Inc. et al., No. 6:10–cv–417, Docket No. 1 (“Apple
I”). The ’135 and ’151 Patents generally describe a method for transparently creating a virtual
private network (“VPN”) between a client computer and a target computer, while the ’504 and
’211 Patents disclose a secure domain name service.
Specifically, VirnetX accused Apple’s VPN On Demand and FaceTime of infringement.
Both features establish secure communications, with Apple’s FaceTime providing a secure
communication link for users when video-chatting. Apple’s VPN On Demand seamlessly
creates a VPN when a user requests access to a secure website or server.
A jury trial regarding the instant suit commenced on October 31, 2012. At trial, VirnetX
contended that Apple infringed claims 1, 3, 7, 8 of the ’135 Patent; claims 1 and 13 of the ’151 Patent;
claims 1, 2, 5, 16, 21, and 27 of the ’504 Patent; and claims 36, 37, 47 and 51 of the ’211 Patent.
Apple responded that its FaceTime and VPN On Demand features did not infringe the patents-in-suit,
and that the asserted claims were invalid. Following a five-day trial, the jury returned a verdict that the
’135, ’151, ’211, and ’504 Patents were not invalid, and that Apple infringed the asserted claims. To
compensate VirnetX for Apple’s infringement, the jury awarded VirnetX $368,160,000 in damages.
To prevent Apple’s continuing infringement of the patents-in-suit, VirnetX then requested a permanent
injunction, or in the alternative, that the Court set an ongoing royalty rate.
Apple I, Docket No. 621. The Court denied VirnetX’s request for a permanent injunction;
however, the Court gave the parties an opportunity to negotiate a license before setting an
ongoing royalty rate. See Apple I, Docket No. 732 at 42. Unable to reach an agreement with
Apple, VirnetX again requested the Court set an ongoing royalty rate enhancing the implied
royalty rate of .52% found by the jury to 1.52%. Docket No. 10 at 1.1
“Under some circumstances, awarding an ongoing royalty for patent infringement in lieu
of an injunction may be appropriate.” Paice LLC v. Toyota Motor Corp., 504 F.3d 1293, 1314
1 The Court severed the ongoing royalty rate issue into Cause No. 6:13-cv-211 to bring finality to the original case, VirnetX Inc. v. Cisco Sys., Inc. et al., Cause No. 6:10-cv-417.
(Fed. Cir. 2007). When determining the amount of an ongoing royalty, the Court must consider
the change in the legal relationship between the parties to avoid incentivizing defendants “to
fight each patent infringement case to the bitter end because without consideration of the
changed legal status, there is essentially no downside to losing.” Id. at 628. Accordingly,
“[t]here is a fundamental difference . . . between a reasonable royalty for pre-verdict
infringement and damages for post-verdict infringement.” Amado v. Microsoft Corp., 517 F.3d
1353, 1361–62 (Fed. Cir. 2008). Therefore, an ongoing post-verdict royalty may appropriately
be higher than the jury’s pre-verdict reasonable royalty.
Ongoing Royalty Rate
VirnetX argues the implied royalty rate should be trebled because of changed
circumstances in light of the Georgia-Pacific factors and Apple’s now willful infringement.
Docket No. 10 at 2, 9.2 VirnetX contends that because Apple is now an adjudged infringer, the
2 The most common approach to determine a reasonable royalty is using the Georgia-Pacific factors to consider what the accused infringer and patent owner would have contemplated if the parties had negotiated a license to the asserted patent(s) before the infringement took place. The factors include: (1) “[t]he royalties received by the patentee for licensing of the patent-in-suit”; (2) royalties paid for other patents comparable to the asserted patents; (3) “[t]he nature and scope of the license, as exclusive or non-exclusive; or as restricted or non-restricted in terms of territory or with respect to whom the manufactured product may be sold; (4) [t]he licensor’s established policy and marketing program to maintain his patent monopoly by not licensing others to use the invention or by granting licenses under special conditions designed to preserve that monopoly; (5) [t]he commercial relationship between the
licensor and licensee, such as, whether they are competitors in the same territory in the same line of business; or whether they are inventor and promoter; (6) [t]he effect of selling the patented specialty in promoting sales of other products of the licensee; the existing value of the invention to the licensor as a generator of sales of his nonpatented items; and the extent of such derivative or convoyed sales; (7) [t]he duration of the patent and the term of the license; (8) [t]he established profitability of the product made under the patent; its commercial success; and its current popularity; (9) [t]he utility and advantages of the [patented invention] over the old modes or devices, if many, that had been used for working out similar results; (10) [t]he nature of the patented invention; the character of the commercial embodiment of it as owned and produced by the licensor; and the benefits to those who have used the invention”; (11) the extent of the licensee’s use of the patented invention “and any evidence probative of the value of that use; (12) [t]he portion of the profit or of the selling price that may be customary in the particular business or in comparable businesses to allow for the use of the invention or analogous inventions; (13) [t]he portion of the realizable profit that should be credited to the invention as distinguished from non-patented elements, the manufacturing process, business risks, or significant features or improvements added by the infringer; (14) [t]he opinion testimony of qualified experts; and (15) [t]he amount that a licensor (such as the patentee) and a licensee (such as the infringer) would have agreed upon (at the time the infringement began) if both had been reasonably and voluntarily trying to reach an agreement; that is, the amount which a prudent licensee — who desired, as a Case
bargaining positions of the parties would have dramatically shifted in favor of VirnetX. Docket No. 10 at
5. Apple’s continuing infringement post-trial, and its inability to easily implement the non-infringing
alternatives discussed at trial, also favor increasing the implied royalty rate. Id. at 6–8. Additionally,
VirnetX argues its licenses to the patents-in-suit support enhancing the royalty rate. Id. at 4. VirnetX’s
licenses were negotiated when the validity and infringement of
the patents were disputed, therefore the royalty rates were slightly discounted to account for the
uncertainty. Since validity and infringement are no longer an issue following the Court’s
judgment in this case, VirnetX contends that a higher royalty rate than VirnetX’s prior licenses
would have been negotiated between the parties. Id. at 4-5. VirnetX concedes that the patentsin-
suit have a shorter term now, but argues this only slightly favors decreasing the royalty rate.
Id. at 5.
VirnetX also contends the implied royalty rate should be enhanced in light of the Read
factors because Apple’s post-judgment infringement is willful. Docket No. 10 at 9. VirnetX
argues that six of the nine Read factors support increasing the implied royalty rate. Specifically,
VirnetX argues the rate should be enhanced because Apple is an adjudged infringer and the
patents are valid; Apple cannot maintain a good faith belief that the patents are not invalid or not
infringed; Apple engaged in litigation misconduct; Apple is a large and profitable company; and
Apple has failed to implement a non-infringing alternative. Id. at 9–11.
Apple counters that neither the Read nor Georgia Pacific factors support increasing the
implied royalty rate. Apple argues the only change in circumstances is the jury’s verdict, which
business proposition, to obtain a license to manufacture and sell a particular article embodying the
patented invention — would have been willing to pay as a royalty and yet be able to make a reasonable profit and which amount would have been acceptable by a prudent patentee who was willing to grant a license.” Georgia-PacificCorp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). To determine an ongoing royalty, a modified Georgia-Pacific analysis can be conducted, which focuses on the changed circumstances from the original hypothetical negotiation and the negotiation that would occur post-judgment. See Mondis Tech. Ltd. v. ChimeiInnolux Corp., 822 F. Supp. 2d 639, 647 (E.D. Tex. 2011).
is insufficient itself to modify the implied royalty rate. Docket No. 18 at 7. Apple notes the jury
already considered related licenses, and VirnetX’s latest license with Siemens is no different
from those presented at trial. Id. at 8–9. Apple also argues the verdict does not significantly
change the parties’ respective bargaining positions because the prior hypothetical negotiation
already assumed the patents were valid, infringed, and enforceable. Id. at 9. Apple further
asserts it is not a willful infringer because it continues to have a reasonable and good faith belief
that the patents-in-suit are invalid, as evidenced by its efforts to invalidate the patents-in-suit at
the United States Patent and Trademark Office (“PTO”). Id. at 11-12. Apple argues its efforts at
the PTO also demonstrate that the case in this Court was close. Id. at 12. Accordingly, Apple
urges the Court to reduce the implied royalty rate, because it has successfully implemented a
non-infringing FaceTime feature and it is currently working on a design-around for the VPN On
Demand feature. Id. at 3–5, 13.
Both parties agree the Court should first consider the jury’s implied royalty rate.
08/15/13 Hr’g Tr. at 7:11–17. VirnetX requests the Court to treble the jury’s implied royalty rate
based on changed circumstances between the original hypothetical negotiation in 2009 and the
hypothetical negotiation that would occur post-judgment in 2013. Because the Court is using the
implied royalty rate as a starting point for determining the ongoing royalty rate, “the Court
focuses on any new evidence that was not before the jury.” Mondis Tech., Ltd. v. Chimei Innolux
Corp., 822 F. Supp. 2d 639, 647 (E.D. Tex. 2011).
VirnetX’s primary argument for increasing the rate involves its licenses for the patentsin-
suit with other companies. While VirnetX concedes its license with Siemens was the only
license not considered by the jury, VirnetX argues that all of its licenses would have been
weighed differently at a negotiation post-judgment. Docket No. 10 at 4–6. Additionally,
Case 6:13-cv-00211-LED Document 53 Filed 03/06/14 Page 5 of 10 PageID #: 2988
VirnetX alleges these licenses, including its new license with Siemens, demonstrates its
continued success in licensing its patents and companies’ willingness to license its patented
technology. Id. While the jury has considered most of these licenses, VirnetX’s licensing efforts
up to 2009 were not nearly as successful as its efforts up to 2013. See Mondis, 822 F. Supp. 2d
at 648 (finding an improvement in licensing success warranted “an increase [in the royalty rate]
from the jury’s determination”). Accordingly, VirnetX’s increased commercial success supports
increasing the implied royalty rate.
The only other major circumstance that has changed—aside from willfulness which the
Court will address next—is Apple’s non-infringing alternatives. Apple argues the royalty rate
should be decreased to account for Apple’s FaceTime design around. Docket No. 18 at 3.
However, the cost of implementing a non-infringing alternative instead of licensing the patentsin-
suit was presented to the jury. At trial, Apple’s corporate representative, Mr. Gates, stated
that it would cost Apple only $3.6 million to route all its FaceTime calls via relay servers, which
VirnetX admits is non-infringing. Apple I, 11/2/12 a.m. Tr. 68:3–17. Mr. Gates further stated
that it would be “a very simple change to make to route all the traffic through the relay,” noting it
would only take about two weeks to implement the changes. Id. at 71:20–21; Id. at 109:19–
110:16. Thus, while the jury already considered some of this evidence, it did not hear the whole
When VirnetX sought a permanent injunction post-trial, Apple dramatically reversed
course, estimating it would cost at least
Apple I, Docket No. 653, Ex. 2 at 2; id. Ex. 3 at 3; see Apple I, Docket No. 732 at 41. Apple also
argued it required
Apple I, Docket No. 653 at 3, 5. Apple’s
miscalculations were even more apparent at the August 2013 ongoing royalty hearing, when
Apple stated it paid to route FaceTime calls though relay servers for just
and it had yet to implement a non-infringing VPN On Demand feature. 08/15/13 Hr’g Tr. at
48:25–49:4; id. at 49:12–22 (“And again, Apple is working toward its VPN On Demand designaround
this fall.”). While Apple has taken steps to mitigate its infringement, 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.
In light of the changed circumstances, the reasonable royalty rate should be increased by
25% to 0.65%. However, Apple’s ongoing willful infringement must also be considered. See
Internet Machines LLC v. Alienware Corp., No. 6:10-cv-23, 2013 U.S. Dist. LEXIS 115723, at
*64–67 (E.D. Tex. June 19, 2013); Soverain v. J.C. Penney, 899 F. Supp. 2d 574, 589 (E.D. Tex.
2012). As an initial matter, Apple argues VirnetX impermissibly presumed Apple was a willful
infringer. Docket No. 18 at 5. However, “[f]ollowing a jury verdict and entry of judgment of
infringement and no invalidity, a defendant’s continued infringement will be willful absent very
unusual circumstances.” Affinity Labs. Of Tex., LLC v. BMW N. Am., LLC, 783 F. Supp. 2d 891,
899 (E.D. Tex. 2011). As there are no such circumstances present, the Court must determine
how much the implied royalty rate should be enhanced to account for Apple’s ongoing willful