It may be months before the U.S. Court of Appeals for the Federal Circuit resolves a $440 million patent dispute between Apple Inc. and VirnetX Inc. Yet the stock market declared VirnetX the winner of Tuesday’s oral arguments.
Publicly-traded VirnetX Holding Corp.’s stock price spiked 65 percent on Tuesday, with most of the increase occurring during the 2 hours and 15 minutes of hearings. (The stock gave back about half of those gains on Wednesday.)
Apple is appealing a $302 million jury verdict from the Eastern District of Texas that grew to $440 million with enhanced damages, costs, attorneys fees and interest. VirnetX is defending the judgment while challenging a series of PTO actions brought by Apple and other entities that invalidated claims from the four patents at issue, which relate to secure online communications.
VirnetX’s stock price dipped slightly during the first five minutes of Paul Hastings partner Naveen Modi’s presentation, which focused on the timeliness of Apple’s joinder in the PTO proceedings. But once Judge Kimberly Moore told Modi she found the Patent Trial and Appeal Board’s rationale for invalidating one of the patents “incomprehensible,” VirnetX’s stock price began soaring.
The ascent continued as Moore broached the idea of sending the case back to the PTAB while disqualifying Apple from further participation, with Chief Judge Sharon Prost later throwing shade on Apple’s challenge to VirnetX’s damages theory.
“Let’s assume for the sake of argument that we decide to remand this case,” Moore told Wilmer Cutler Pickering Hale and Dorr partner Mark Fleming. “Does that foreclose Apple’s participation on remand?”
Fleming argued Apple is properly joined to the PTAB proceedings. But even if it isn’t, he said there’s no harm to VirnetX, because the board limited Apple to the same invalidation arguments raised by the original PTAB petitioner, a hedge fund called The Mangrove Partners Master Fund Ltd.
Tuesday’s arguments touched on a series of hot-button issues in patent practice, ranging from damages apportionment to the participation of real parties in interest at the PTAB, to whether the courts must to defer to the PTO’s interpretation of the America Invents Act.
The saga dates to 2010, when VirnetX sued Apple in the Eastern District of Texas and won a $368 million jury verdict. The Federal Circuit affirmed the validity of VirnetX’s patents in a 2014 opinion but sent the case back due to claim construction issues and VirnetX’s failure to apportion the damages for the value of the patents.
A retrial resulted in the $440 million judgment. (Another jury has since awarded an additional $503 million based on newer Apple products, though that award remains pending appeal.)
In the meantime, Apple tried to challenge the validity of the patents under the inter partes review procedures established in 2012 by the America Invents Act. But the PTAB ruled Apple’s petitions untimely, because the AIA requires parties who’ve been sued to petition within one year of the lawsuit.
Other entities then began filing petitions, with VirnetX complaining that they are front groups doing Apple’s bidding. The PTAB rejected RPX Corp. petitions when discovery showed that Apple had paid it $500,000 just before they were filed. But the Mangrove Partners’ petitions got the green light, and Apple was allowed to participate under the PTAB’s joinder rules. VirnetX, backed by biotechnology and pharmaceutical trade associations as amici curiae, said the PTAB is misreading the AIA and giving accused infringers an end around the timeliness requirements.
“It’s our belief that Mangrove was working with RPX here,” Modi told Moore on Tuesday, “and as your honor knows, RPX filed petitions working with Apple.”
But Moore and Prost pointed out that the PTAB limited Apple to the same arguments made in Mangrove’s petition. “The problem is I don’t see the prejudice,” Moore said.
Modi argued that Apple had “taken over” the IPR, pointing out that the company’s lawyers were arguing before the Federal Circuit on Tuesday.
That didn’t appear to sway the court. But the judges clearly had issues with the PTAB’s decision on the merits for at least one of the patents. Before Fleming could complete a sentence, Prost cut him off.
“There are problems in the board’s opinion,” she told him. “I mean, just getting through and trying to understand what they did was kind of challenging.”
Fleming argued that was due to VirnetX’s “very broad” patent claims and its confusing arguments. But Moore didn’t sound persuaded. She called the board’s reasoning “sloppy” and “not clear.”
The question then seemed to come down to what role Apple will play if the Federal Circuit vacates and remands the Mangrove IPRs to the PTAB. Fleming seemed to anger Moore when he argued that VirnetX’s interpretation of the AIA joinder rule is unreasonable. “Because it’s quite frankly my interpretation,” she told him. “So it’s surprising that you would stand here and tell me that you personally do not believe that it’s at all reasonable.”
“I obviously don’t mean to suggest your honor that you are being unreasonable, if that is your view of things,” Fleming answered.
Moore later praised Fleming for being creative and asked him if Apple would be willing “not to participate and back out of the petition” if the case is remanded. “The point is you’re probably going to force us to decide the joinder issue because, if we don’t agree with you on the merits, it has to go back,” she told him.
Fleming said he believed Apple could continue participating under the parameters previously set by the board.
Meanwhile, Wilmer partner William Lee argued that VirnetX had made the same error as in the first trial by failing to apportion damages and relying on other VirnetX licenses that aren’t comparable.
Prost told Lee that his arguments might be very good. “If I had been on the jury, maybe I would have bought them,” she said. “But isn’t that a question for the jury? Aren’t our hands tied in what we can do with that?”
“This is all weight,” Moore told him. “It’s not admissibility.”
Lee wound up using about 35 of the 48 minutes allotted for the damages argument. At Moore’s prompting, MoloLamken partner Jeffrey Lamken, who argued damages for VirnetX, submitted after 12 minutes.