IP Law Daily Apple’s post-trial motions denied, VirnetX awarded a sunset royalty
Thursday, September 6, 2018

Apple’s post-trial motions denied, VirnetX awarded a sunset royalty

By Joseph Arshawsky, J.D.

After eight years of litigation and three trials—the most recent jury verdict awarding over $500 million to VirnetX Inc. ("VirnetX") in damages against Apple Inc. ("Apple") over Apple’s VPN on Demand, Face Time System, and iMessage software applications—Apple’s post-trial motions for judgment as a matter of law and for new trial on noninfringement, damages, and willfulness have been rejected by the federal court in Tyler, Texas. The court also rejected VirnetX’s requests for an injunction, enhanced damages, and attorney fees. The court awarded VirnetX supplemental damages and a sunset royalty at the rate of $1.20 per unit, pre- and post-judgment interest, and costs (VirnetX Inc. v. Apple Inc., August 30, 2018, Schroeder, R.).

Procedural history. On August 11, 2010, VirnetX filed Case No. 6:10-cv-417 ("417 action") alleging that Apple infringed four patents. On November 6, 2012, a jury found that the first versions of Apple’s accused VPN On Demand ("VOD") and FaceTime features infringed the patents. On that same day, VirnetX filed the instant case, accusing of infringement several redesigned products. That case was appealed and the validity of the patents at issue was affirmed on appeal. Following remand, the consolidated case was tried to verdict on February 3, 2016. But on July 29, 2016, the court granted Apple’s motion for a new trial based on improper consolidation of the two causes. Thereafter, the 417 action was tried to a jury in September 2017, and the matter is now pending in the Federal Circuit. The court held a jury trial in this matter from April 2, 2018 through April 11, 2018. The trial was bifurcated into a liability and damages phase and a willfulness phase, which were tried in succession to one jury. After the liability and damages phase, the jury returned a verdict finding that both VOD and FaceTime infringed each asserted patent and awarding $502,567,709 in damages. Apple filed post-trial motions for judgment as a matter of law or for new trial, which the court denied. VirnetX filed post-trial motions for entry of judgment and equitable and statutory relief, which the court granted and denied in part.

Infringement by FaceTime. The first issue raised by Apple involved construction of the patent claim term "indication." The court ultimately construed "an indication that the domain name service system supports establishing a secure communication link" as "an indication other than merely returning of requested DNS records, such as an IP address or key certificate, that the domain name service system supports establishing a secure communications link."

"The Court’s construction requires an indication other than the mere return of an IP address, so return of an IP address is not required, and VirnetX was not required to point to the return of an IP address to establish infringement at trial," said the court.

On the record, the court concluded that VirnetX introduced substantial evidence at trial to support the jury’s verdict that the "indication" term was met by the third version of FaceTime. Although the parties’ experts disagreed, the jury was not required to credit Apple’s expert’s testimony, and the court refused to re-weigh evidence and invade the province of the jury.

Apple’s second argument was based on the secure communication link requirement. Based on Apple’s representation that the secure communication link noninfringement argument in this case and the 417 action are identical, issue preclusion attaches to Apple’s argument in this case, and the court declined to rule on issues already resolved by the 417 judgment. Finally, the court held that "domain name service system" did not incorporate the court’s construction of "domain name service." Apple did not present any new arguments in support of its construction, and the court refused to reconsider its previous rulings. "Apple is entitled to neither JMOL nor a new trial on that basis."

Infringement by VOD. The VOD accused of infringement in the 417 action maintained an "Always" and an "If Needed Mode." The "Always" mode would check to see whether a requested site in a DNS request was on a user-configurable list and, if so, as the name suggests, would always create a VPN without sending a DNS request to a DNS server. The "Always" mode ignored location: It would create a VPN without regard to whether the user was inside or outside a private network. The "If Needed" mode was location-based: It would create a VPN if a user was outside the private network, but not if a user was inside the private network. The parties agree that the "If Needed" mode did not infringe. The jury in the 417 action returned a verdict finding the "Always" mode to infringe. The Federal Circuit affirmed as to literal infringement.

"In its motion, Apple first presents the Court with a series of factual representations about redesigned VOD functionality, suggesting that, under Apple’s description of the redesigned product functionality, it is entitled to JMOL of noninfringement," the court stated. "However, in each instance, there is substantial evidence supporting the verdict, and the Court declines to reweigh the evidence on JMOL and substitute its judgment for that of the jury." Apple’s disagreement with VirnetX’s expert is not a basis for a JMOL, and the jury was entitled to credit VirnetX’s expert’s testimony.

Next, Apple argued that the fact that the optional HTTPS is location-based is fatal to VirnetX’s claim. VirnetX’s expert’s testimony satisfied the court’s claim constructions. "On this record, it is clear that the fact that the HTTPS probe is location-based is not fatal to VirnetX’s claims, and Apple is not entitled to JMOL on this basis," the court opined.

Apple then argued that the redesigned VOD does not intercept DNS requests before they are sent to a DNS server. But the court has not construed the asserted claims to require a "DNS proxy that intercepts DNS requests before they are sent to a DNS server." Apple did not attempt to seek a ruling from the court that the claims have this temporal limitation, and its contention that the claims are so limited is therefore waived. "Post-trial motions are not a vehicle to seek new constructions and retroactively apply them to the evidence introduced at trial," the court explained.

Apple also argued that redesigned VOD "operates in the same way" as the old "If Needed" mode by first "attempting to connect insecurely and only creates a VPN if needed." VirnetX presented evidence that, while the "If Needed" functionality would attempt to make an unsecure connection to a domain name if it could, the redesigned VOD does not first attempt to connect insecurely. Accordingly, Apple was denied JMOL on this basis.

Finally, Apple argued that VirnetX based its infringement theory on a specific and optional operating scenario for redesigned VOD but offered no evidence that anyone configured or used VOD in the infringing manner. An accused device may be found to infringe if it is reasonably capable of satisfying the claim limitations, even if it is also capable of noninfringing modes of operation. The court found there was at least circumstantial evidence that some of Apple’s customers directly infringe the method claim with the new version of VOD. As to the apparatus claims, Apple directly infringes when it makes, uses, offers to sell, sells, and imports devices containing VOD because VOD is capable of operating in an infringing mode. Accordingly, Apple is not entitled to JMOL of noninfringement.

Infringement by iMessage. Apple seeks JMOL on its iMessage non-infringement counterclaims because VirnetX’s claim of infringement has not been dismissed. "Parties routinely drop asserted claims and defenses in their cases as litigation progresses, and the Court declines to penalize or discourage the parties’ efforts in narrowing the case for trial," said the court. "Accordingly, Apple is not entitled to JMOL of noninfringement for iMessage."

Indirect infringement. The court was persuaded that the jury had a sufficient evidentiary basis from which to conclude that Apple both knowingly induced infringement and possessed specific intent to encourage its customers’ infringement. The jury’s verdict is supported by substantial evidence and is not against the great weight of the evidence. Accordingly, Apple is not entitled to JMOL or a new trial on indirect infringement.

Damages. Apple’s criticisms of VirnetX’s expert’s opinion were Daubert attacks, and the already held that Apple’s concerns are related to the weight of this testimony, not its admissibility. The court identified no error in the jury relying on VoIP licenses discussed by VirnetX’s expert in determining the appropriate royalty rate in this case. The court was not persuaded that VirnetX’s damages expert’s opinion was unreliable, and the jury was entitled to credit his opinion. The court declined to substitute its judgment for that of the jury. VirnetX’s expert’s reliance on actual licenses entered into for the patented technology does not violate the entire market value rule. The jury was never tasked with applying a royalty rate percentage to the entire value of any Apple product. The court found no basis to reconsider its prior ruling with regard to Apple’s requested Skype offset. The jury was free to disbelieve Apple’s expert and credit VirnetX’s expert, which provided substantial evidence for the verdict.

Willfulness. The court has exercised its discretion, below, to decline enhancing damages in this matter. Accordingly, Apple’s willfulness JMOL and new trial motions are now moot.

The court considered Apple’s remaining arguments in its motion for judgment as a matter of law and a new trial of noninfringement, the court concluded that Apple’s motion should be denied.

Enhanced damages and attorney fees. VirnetX argued that a 100 percent enhancement of the jury’s verdict is warranted and the court disagreed, finding enhancement inappropriate under the totality of the circumstances. Having considered each Read factor, the court concluded that enhancement is inappropriate. In favor of enhancement are the facts that Apple is a large, successful company, that Apple "copied" VirnetX’s ideas in a redesign and that an Apple engineer and corporate witness misled VirnetX in depositions about key infringement facts. The stated that it should not be interpreted as condoning such conduct. At the same time, however, this case was close, the misconduct brief and the remediation effort significant. In declining to award enhanced damages, the court also considered the size of the jury verdict. For the same reasons, the court declined to award attorney fees.

Supplemental damages. The court granted VirnetX’s motion for supplemental damages at the jury’s implied royalty rate to account for units not included in the jury verdict.

Injunction. The court found that VirnetX was not in direct competition with Apple, even with the release of VirnetX’s Gabriel product. The court therefore denied VirnetX’s request for injunctive relief on grounds of lack of irreparable harm.

Sunset royalty. However, the court did award a sunset royalty for future sales at the jury’s implied rate of $1.20 per unit. The court rejected VirnetX’s argument to increase that amount post-verdict.

Finally, the court awarded VirnetX pre- and post-judgment interest and costs.

This case is No. 6:12-cv-00855-RWS.

Attorneys: Bradley Wayne Caldwell (Caldwell Cassady & Curry, PC) and Charles Ainsworth (Parker Bunt & Ainsworth) for VirnetX Inc. Donald Urrabazo (Urrabazo Law, PC) for Leidos, Inc. f/k/a Science Applications International Corp. Aaron D. Resetarits (Kirkland & Ellis, LLP) and Ameet A. Modi (Desmarais LLP) for Apple Inc.

Companies: VirnetX Inc.; Leidos, Inc. f/k/a Science Applications International Corp.; Apple Inc.

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