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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- Mark A. Lemley, The Ongoing Confusion over Ongoing Royalties, 76 Mo. L. Rev. 695 (2011)