Ongoing Royalty against Apple: Higher than Back Damages and Willfulness a Given

By Dennis Crouch

VirnetX and SAIC v. Apple (E.D. Tex 2014)

The VirnetX/SAIC/Leidos patents cover methods of creating virtual private networks (VPNs) and secure domain name services. Here, SAIC is the multi-billion-dollar government contractor and the patents were apparently developed as part of SAIC’s work for the CIA and NSA. SAIC spun-off several of its IP assets to VirnetX who is an independent publicly traded patent enforcer. Apparently, VirnetX’s market cap is around $1B based almost on its 80 patents and several court wins. However, the company only has 15 employees. SAIC/Leidos retain a revenue stream from patent profits as well.

A jury found that Apple infringed the VirnetX patents with its FaceTime and VPN On Demand applications. The jury awarded $368 million in past damages. However, District Court Judge Davis denied VirnetX’s motion for injunctive relief to stop ongoing infringement. Those decisions are on appeal to the Federal Circuit.

Meanwhile, Judge Davis severed the case so that he could separately consider the issue of ongoing damages. Now, Judge Davis has awarded an ongoing royalty of 0.98% for devices configured to run either FaceTime or VPN ON Demand. Breaking-down that award: 0.65% in damages and 0.33% in enhanced damages for the willfulness of the ongoing infringement.

The ongoing damage award rate is substantially higher than that awarded for back-damages. The explanation is several fold: the patents have now been adjudged valid; Apple’s ongoing infringement is now willful; and some changed circumstances. Regarding the changed circumstances – since the verdict, VirnetX licensed its patents to Siemens at a substantially higher rate than its pre-verdict licenses.

One issue that appeared to stick to Judge Davis involved Apple’s changed theories during the case. In particular, at trial, Apple had argued that the invention was rather minimal and that it would have only cost Apple $3.6 million to make a “very simple change” to its servers so that they would operate in a way that VirnetX admits would be non-infringing. Later, when VirnetX sought injunctive relief, Apple “dramatically reversed course” and argued that implementation of a design around would be incredibly expensive and disruptive. (The actual numbers of estimated costs are redacted from the filings.) Apple appeared to lose significant credibility with those arguments. Judge Davis wrote:

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.

Regarding enhanced damages for willfulness, Judge Davis suggests that post-verdict infringement should generally be considered willful and subject to enhanced damages.

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In my mind there is a minor, but million dollar issue with the decision. Judge Davis awarded a 0.65% ongoing royalty and then enhanced the damage award by an additional 50% of that. In my calculation, that would take the award to 0.975%. However, Judge Davis rounded up to 0.98%. The Judge wrote: “Considering four factors favor enhancing the implied royalty rate, the ongoing royalty rate [of 0.65%] is increased 50% to 0.98%.” Those five thousandths of a percent appear small, but will likely add to at least a million dollar difference.

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Further reading:

7 thoughts on “Ongoing Royalty against Apple: Higher than Back Damages and Willfulness a Given

  1. Great informative article.
    .98% of all Apple products sold in the USA equal over $300 million annually!
    Time to buy more VHC at bargain prices.

  2. Dennis thanks for reporting this case. Lessons learned:

    1. Ongoing infringement is willful and a higher royalty rate is justified; and
    2. Misrepresentations to a jury about costs to design around justify an increase to the base RR found by the jury.

    I don’t recall any cases quite like this before. Important case.

  3. I see your point about the rounding up, but on the other hand, enhancing damages by 50% is fairly arbitrary to begin with, so enhancing by slightly more than that seems no less arbitrary.

      1. Three decimal places are a lot for some people to handle.

        Also, a million dollars might seem like a lot to regular people, but it’s completely insignificant if you’re already paying hundreds of millions in damages. Or, in general, if you’re Apple.

  4. “on its 80 patents and several court wins. However, the company only has 15 employees. ”

    I thought AI told us that every patent creates at least one job :(

    Looks to me like those 80 patents are only creating .1875 jobs per patent.

    “Here, SAIC is the multi-billion-dollar government contractor and the patents were apparently developed as part of SAIC’s work for the CIA and NSA.”

    Pretty nice work if you can get it. Play off of fears of people with bombs strapped to themselves babbling about Allah, develop a system on the government’s dime, keep private patent rights to the same.

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