`
`
`
`No. 19-
`IN THE
`Supreme Court of the United States
`________________
`APPLE INC.,
`
`Petitioner,
`
`
`
`
`
`v.
`VIRNETX INC., LEIDOS, INC.,
`
`
`Respondents.
`________________
`ON PETITION FOR A WRIT OF CERTIORARI TO
`THE UNITED STATES COURT OF APPEALS
`FOR THE FEDERAL CIRCUIT
`________________
`PETITION FOR A WRIT OF CERTIORARI
`________________
`E. Joshua Rosenkranz
`Counsel of Record
`Jennifer Keighley
`ORRICK, HERRINGTON &
`SUTCLIFFE LLP
`51 West 52nd Street
`New York, NY 10019
`(212) 506-5000
`jrosenkranz@orrick.com
`
`
`
`Mark S. Davies
`ORRICK, HERRINGTON &
`SUTCLIFFE LLP
`1152 15th Street, NW
`Washington, DC 20005
`
`William F. Lee
`Mark C. Fleming
`Lauren B. Fletcher
`WILMER CUTLER
`PICKERING HALE AND
`DORR LLP
`60 State Street
`Boston, MA 02109
`Counsel for Petitioner
`
`
`
`i
`
`QUESTIONS PRESENTED
`1. A patented invention often makes but a small
`contribution to a complex end-product’s value. Thus,
`for well over a century, this Court has enforced the
`rule that a patentee must apportion damages for in-
`fringement so that any recovery is limited only to the
`value of its patented invention, not the value created
`by the numerous other features of an end-product in
`which the patented invention is included. The Federal
`Circuit, however, now permits patentees to recover
`damages that extend far beyond the value of the pa-
`tented invention whenever the patentee proves dam-
`ages based on prior licenses, as they commonly do.
`The question presented is whether the Federal
`Circuit’s reliance on prior licenses to ascertain in-
`fringement damages, without satisfying apportion-
`ment rules, conflicts with this Court’s precedent
`requiring apportionment “in every case.” Garretson v.
`Clark, 111 U.S. 120, 121 (1884).
`2. The Patent and Trademark Office (PTO) may
`invalidate patent claims after issuing them. This
`Court has held that when patent claims are invali-
`dated, the invalidation applies in pending litigation.
`The question presented is whether intervening
`PTO invalidations apply in all pending cases, includ-
`ing appeals that remain pending at the rehearing or
`certiorari stage.
`
`
`
`ii
`
`PARTIES TO THE PROCEEDING BELOW
`The parties to the proceedings below were peti-
`tioner Apple Inc., respondents VirnetX Inc. and Lei-
`dos, Inc., and Cisco Systems, Inc.
`
`
`
`iii
`
`CORPORATE DISCLOSURE STATEMENT
`Petitioner Apple Inc. has no parent corporation.
`No publicly held corporation owns 10% or more of Ap-
`ple’s stock.
`
`
`
`
`
`
`
`iv
`
`RELATED PROCEEDINGS
`VirnetX Inc. v. Cisco Systems, Inc., No. 18-1197
`(Fed. Cir.) (judgment issued Jan. 15, 2019)
`VirnetX Inc. v. Cisco Systems, Inc., No. 13-1489
`(Fed. Cir.) (opinion and judgment issued Sept. 16,
`2014)
`VirnetX Inc. v. Apple Inc., No. 6:10-cv-417 (E.D.
`Tex.) (final judgment issued Sept. 29, 2017)
`
`
`
`v
`
`TABLE OF CONENTS
`
`Page
`QUESTIONS PRESENTED ...................................... i
`PARTIES TO THE PROCEEDING BELOW ........... ii
`CORPORATE DISCLOSURE STATEMENT ......... iii
`RELATED PROCEEDINGS .................................... iv
`TABLE OF AUTHORITIES ................................... vii
`INTRODUCTION ..................................................... 1
`OPINIONS AND ORDERS BELOW ........................ 4
`JURISDICTION ........................................................ 4
`STATUTORY PROVISIONS INVOLVED ............... 5
`STATEMENT OF THE CASE .................................. 6
`Apple’s Feature-Rich Mobile Devices
`Revolutionize The Industry ............................... 6
`VirnetX Sues Apple For Patent
`Infringement But The PTO Invalidates All
`Asserted Claims .................................................. 8
`Meanwhile, VirnetX Proceeds To Trial
`And Wins A $439 Million Judgment ............... 10
`The Federal Circuit Affirms The Massive
`Damages Judgment And Denies
`Rehearing, Despite Affirming PTO
`Invalidations ..................................................... 15
`REASONS FOR GRANTING THE WRIT.............. 18
`
`
`
`vi
`
`I. Certiorari Should Be Granted To Correct
`The Federal Circuit’s Rejection Of This
`Court’s Century-Old Rule Requiring
`Apportionment Of Damages. ........................... 18
`A. The Federal Circuit has incorrectly
`rejected the requirement to apportion in
`“prior license” cases. ......................................... 19
`B. This case is a compelling vehicle to
`consider the Federal Circuit’s departure
`from basic apportionment principles. .............. 27
`C. The Federal Circuit’s failure to
`require apportionment will stifle
`innovation. ........................................................ 31
`II. Certiorari Should Also Be Granted To
`Confirm That An Infringement Judgment
`Pending On Appeal Cannot Be Upheld
`Once The PTO Has Invalidated The
`Patents. ............................................................. 34
`CONCLUSION ........................................................ 40
`APPENDIX A: Court of Appeals Judgment
`(Jan. 15, 2019) .................................................. 1a
`APPENDIX B: District Court Opinion
`(Oct. 13, 2017) ................................................... 3a
`APPENDIX C: Court of Appeals Opinion
`(Sept. 16, 2014) ............................................... 77a
`APPENDIX D: Court of Appeals Order
`(Oct. 1, 2019) ................................................. 126a
`APPENDIX E: Court of Appeals Order
`Denying Rehearing (Aug. 1, 2019) ............... 129a
`APPENDIX F: 35 U.S.C. § 316 (2006) ................ 130a
`
`
`
`
`
`vii
`
`TABLE OF AUTHORITIES
`
` Page(s)
`
`Cases
`Allen v. Culp,
`166 U.S. 501 (1897) .............................................. 35
`Apple Inc. v. Pepper,
`139 S. Ct. 1514 (2019) ............................................ 6
`Blake v. Robertson,
`94 U.S. 728 (1877) ................................................ 21
`Brulotte v. Thys Co.,
`379 U.S. 29 (1964) ................................................ 38
`Carafas v. LaVallee,
`391 U.S. 234 (1968) .............................................. 37
`
`City of Chicago v. U.S. Dep’t of
`Treasury, Bureau of Alcohol,
`Tobacco & Firearms,
`423 F.3d 777 (7th Cir. 2005) ................................ 37
`
`Commonwealth Sci. & Indus. Research
`Organisation v. Cisco Sys., Inc.,
`809 F.3d 1295 (Fed. Cir. 2015) ...................... 23, 29
`Cty. of Sacramento v. Lewis,
`523 U.S. 833 (1998) .............................................. 38
`Cuozzo Speed Techs., LLC v. Lee,
`136 S. Ct. 2131 (2016) .......................................... 38
`
`
`
`viii
`
`Elbit Sys. Land & C4I Ltd. v. Hughes
`Network Sys., LLC,
`927 F.3d 1292 (Fed. Cir. 2019) .......... 19, 24, 25, 26
`Ericsson, Inc. v. D-Link Systems, Inc.,
`773 F.3d 1201 (Fed. Cir. 2014) ............................ 22
`Fresenius USA, Inc. v. Baxter Int’l, Inc.,
`721 F.3d 1330 (Fed. Cir. 2013) ...................... 17, 36
`Garretson v. Clark,
`111 U.S. 120 (1884) ..................... i, 1, 11, 20, 21, 27
`
`Impression Prods., Inc. v. Lexmark
`Int’l, Inc.,
`137 S. Ct. 1523 (2017) .......................................... 31
`Intel Corp. v. Future Link Sys., LLC,
`No. CV 14-377-LPS, 2017 WL
`2482881 (D. Del. June 1, 2017) ........................... 34
`
`Intellectual Ventures II LLC v. Sprint
`Spectrum, L.P.,
`No. 2:17-CV-0661-JRG-RSP, 2019
`WL 1877309 (E.D. Tex. Apr. 26,
`2019) ..................................................................... 34
`Joshua v. United States,
`17 F.3d 378 (Fed. Cir. 1994) ................................ 30
`Landgraf v. USI Film Prods.,
`511 U.S. 244 (1994) .............................................. 35
`Lear, Inc. v. Adkins,
`395 U.S. 653 (1969) .......................................... 3, 38
`
`
`
`ix
`
`In re Maxim Integrated Prods., Inc.,
`No. 12-244, 2015 WL 5311264 (W.D.
`Pa. Sept. 11, 2015) ............................................... 34
`
`Mentor Graphics Corp. v. EVE-USA,
`Inc.,
`851 F.3d 1275 (Fed. Cir. 2017) ............................ 33
`
`Mentor Graphics Corp. v. EVE-USA,
`Inc.,
`870 F.3d 1298 (Fed. Cir. 2017) ............................ 33
`Moffitt v. Garr,
`66 U.S. (1 Black) 273 (1862) ............................ 3, 35
`Nestle USA, Inc. v. Steuben Foods, Inc.,
`884 F.3d 1350 (Fed. Cir. 2018) ............................ 36
`NFC Tech. LLC v. HTC Am., Inc.,
`No. 2:13-cv-1058-WCB, 2015 WL
`1069111 (E.D. Tex. Mar. 11, 2015) ..................... 10
`Ohio Willow Wood Co. v. Alps S., LLC,
`735 F.3d 1333 (Fed. Cir. 2013) ............................ 37
`
`Oil States Energy Servs., LLC v.
`Greene’s Energy Grp., LLC,
`138 S. Ct. 1365 (2018) .......................................... 29
`
`Papst Licensing GMBH & Co. KG v.
`Samsung Elecs. Am., Inc.,
`924 F.3d 1243 (Fed. Cir. 2019) ............................ 36
`Plaut v. Spendthrift Farm, Inc.,
`514 U.S. 211 (1995) .............................................. 35
`
`
`
`x
`
`Realtime Data LLC v. NetApp, Inc.,
`No. 6:16-CV-00961-RWS, 2017 WL
`5756863 (E.D. Tex. Nov. 28, 2017) ...................... 34
`Reedy v. Scott,
`90 U.S. 352 (1875) ................................................ 35
`Samsung Elecs. Co. v. Apple Inc.,
`137 S. Ct. 429 (2016) .............................................. 6
`Seymour v. McCormick,
`57 U.S. (16 How.) 480 (1854) ............................... 20
`
`Sprint Commc’ns Co. v. Time Warner
`Cable, Inc.,
`760 F. App’x 977 (Fed. Cir. 2019) ............ 24, 26, 29
`Stutson v. United States,
`516 U.S. 163 (1996) .............................................. 37
`United States v. Byers,
`740 F.2d 1104 (D.C. Cir. 1984) ............................ 37
`United States v. Davidson,
`551 F.3d 807 (8th Cir. 2008) ................................ 37
`United States v. Schooner Peggy,
`5 U.S. (1 Cranch) 103 (1801) ........................... 3, 35
`Vectura Ltd. v. GlaxoSmithKline LLC,
`397 F. Supp. 3d 579 (D. Del. 2019) ..................... 34
`VirnetX Inc. v. Apple Inc.,
`931 F.3d 1363 (Fed. Cir. 2019) ................ 10, 16, 36
`
`
`
`xi
`
`VirnetX Inc. v. Cisco Sys., Inc.,
`776 F. App’x 698 (Fed. Cir. 2019) ............ 10, 16, 36
`
`Westinghouse Elec. & Mfg. Co. v.
`Wagner Elec. & Mfg. Co.,
`225 U.S. 604 (1912) .............................................. 21
`XY, LLC v. Trans Ova Genetics,
`890 F.3d 1282 (Fed. Cir. 2018) ............................ 36
`Constitutional Provisions
`U.S. Const. art. I, § 8, cl. 8 ........................................ 18
`Statutes & Rules
`28 U.S.C. § 1254(1) ...................................................... 4
`35 U.S.C. § 284 ...................................................... 5, 19
`35 U.S.C. § 316(a) (2006) .......................................... 10
`35 U.S.C. § 316(b) (2006) .......................................... 35
`35 U.S.C. § 318(c) ...................................................... 35
`Fed. Cir. R. 36 ............................................... 16, 29, 30
`Other Authorities
`Eric E. Bensen & Danielle M. White,
`Using Apportionment to Rein in the
`Georgia-Pacific Factors, 9 Colum.
`Sci. & Tech. L. Rev. 1 (2008) ............................... 20
`
`
`
`xii
`
`Black Swamp IP, LLC v. VirnetX Inc.,
`IPR2016-00693, -00957, Paper No.
`14 (P.T.A.B. June 12, 2017) ................................... 9
`Bernard Chao, Implementing
`Apportionment, 2019 Patently-O
`Pat. L.J. 20 (2019) ................................................ 32
`Decision on Appeal, Cisco Systems, Inc.
`v. VirnetX Inc., 2018 WL 798782,
`Reexamination No. 95/001,679
`(P.T.A.B. Feb. 6, 2018) ........................................... 9
`Application for Extension of Time to
`File a Petition for Writ of Certiorari,
`Elbit Sys. Land & C4I Ltd. No.
`19A564 (U.S. Nov. 14, 2019) ............................... 19
`Joint Motion for Entry of Stipulated
`Dismissal, Elbit Systems Land &
`C41 Ltd. v. Hughes Network Sys.,
`No. 15-00037 (E.D. Tex. Dec. 18,
`2019), Doc. 591 ..................................................... 19
`
`EVE-USA, Inc. v. Mentor Graphics
`Corp., No. 17-804 (U.S. Apr. 23,
`2018) ............................................................... 19, 33
`David Franklyn & Adam Kuhn, The
`Problem of Mop Heads in the Era of
`Apps: Toward More Rigorous
`Standards of Value Apportionment
`in Contemporary Patent Law, 98 J.
`Pat. & Trademark Off. Soc’y 182
`(2016) .................................................................... 32
`
`
`
`xiii
`
`Amy L. Landers, Let the Games Begin:
`Incentives to Innovation in the New
`Economy of Intellectual Property
`Law, 46 Santa Clara L. Rev. 307
`(2006) .................................................................... 32
`Mark A. Lemley & Carl Shapiro, Patent
`Holdup and Royalty Stacking, 85
`Tex. L. Rev. 1991 (2007) ...................................... 32
`Brian J. Love et al., Determinants of
`Patent Quality: Evidence from Inter
`Partes Review Proceedings, 90 U.
`Colo. L. Rev. 67 (2019) ......................................... 38
`Brian J. Love, Patentee
`Overcompensation and the Entire
`Market Value Rule, 60 Stan. L. Rev.
`263 (2007) ............................................................. 33
`4 Matthews, Annotated Patent Digest
`§ 30:84, Westlaw (database updated
`Dec. 2019) ....................................................... 21, 33
`PricewaterhouseCoopers, 2018 Patent
`Litigation Study, May 2018,
`https://tinyurl.com/y5gd8blr ................................ 21
`Petition for Writ of Certiorari, Time
`Warner Cable, Inc. v. Sprint
`Commc’ns Co., No. 19-211 (Aug. 15,
`2019) ......................................................... 18, 26, 32
`
`
`
`xiv
`
`Brief Amicus Curiae Intel Corp., Time
`Warner Cable, Inc. v. Sprint
`Commc’ns Co., No. 19-211 (Sept. 18,
`2019) ..................................................................... 32
`
`
`
`
`
`INTRODUCTION
`Defying this Court’s commands, the Federal Cir-
`cuit committed two fundamental legal errors to sus-
`tain a whopping $439 million judgment. It applied a
`rule that is fueling grossly excessive damages awards.
`And it sustained the inflated award even though the
`PTO has invalidated the underlying patent claims.
`I. The first error was to flout more than a century
`of doctrine
`from this Court requiring “appor-
`tion[ment]” of patent damages “in every case.” Garret-
`son v. Clark, 111 U.S. 120, 121 (1884). The rule is
`simple: A patentee cannot exploit the success of a
`multicomponent end-product—whether an improved
`mop, as in Garretson, or revolutionary Apple products
`like iPhones, here—to generate a huge damages sum
`far exceeding the limited contribution its patented in-
`vention makes to the end-product. Instead, the pa-
`tentee must “give evidence tending to separate or
`apportion … the patentee’s damages between the pa-
`tented feature and the unpatented features.” Id.
`In a series of cases over the past five years, the
`Federal Circuit has adopted a gaping loophole that al-
`lows patentees to recover inflated damages far beyond
`the value of the patented invention. Patentees may
`now skip apportionment entirely when they prove
`damages using one of the most common damages
`methodologies—pointing to prior
`licenses. This
`method entails introducing a license (or several li-
`censes) for the same or a different patent in a different
`end-product and uncritically assuming that the pa-
`tentee and accused infringer in this case would have
`
`
`
`2
`
`negotiated the same rate. Here, for example, the pa-
`tentee introduced a handful of licenses with third par-
`ties
`for
`infringement claims asserted against
`conventional desktop phones, and assumed that the
`per-unit average rate across these agreements re-
`flects the value of the technology in Apple’s much
`more complex devices.
`The Federal Circuit now regularly permits pa-
`tentees to prove damages through this simplistic ap-
`proach even though it includes zero apportionment.
`In this and multiple other cases, there was no reason
`to think the rate applied to one end-product would re-
`flect the same value of the patented invention in an-
`other. In each, the patentee introduced no evidence to
`prove the equivalence. And the Federal Circuit has
`now made clear that it requires no such evidence
`whenever the patentee invokes prior licenses to prove
`damages.
`Under the Federal Circuit’s settled approach, ap-
`portionment is effectively a dead letter. Patentees are
`increasingly resorting to this method of proving dam-
`ages, carefully selecting prior licenses that lead juries
`to award massive sums entirely untethered from the
`value the patented feature contributes to the end-
`product. Only this Court can end this innovation-
`busting deviation from settled law.
` II. There is another foundational problem with
`this massive verdict that also demands this Court’s
`attention. The Federal Circuit has sustained the judg-
`ment even though it is based on patent claims that
`the PTO has invalidated.
`
`
`
`3
`
`In cases stretching back as early as 1861, this
`Court has held that when patent claims are invali-
`dated, their invalidation applies in “pending suits.”
`Moffitt v. Garr, 66 U.S. (1 Black) 273, 282-83 (1862).
`That is a straightforward application of the broader,
`and even more time-honored, principle that interven-
`ing legal developments apply in pending cases. See
`United States v. Schooner Peggy, 5 U.S. (1 Cranch)
`103, 110 (1801) (Marshall, C.J.).
`Here, however, the Federal Circuit denied effect
`to intervening PTO invalidations, leaving Apple on
`the hook for hundreds of millions of dollars based on
`invalid claims. In doing so, the court departed from
`yet another established principle: For purposes of the
`rule recognized in Moffit, Schooner Peggy, and legions
`of similar cases, a case remains pending until this
`Court has denied certiorari. At the relevant time here,
`however, the appellate mandate had not yet issued.
`Nor had a petition for certiorari even been filed, much
`less denied by this Court. (Indeed, this is that very
`petition.)
`It is important for this Court to correct the Fed-
`eral Circuit’s fundamental mistake of law. This Court
`has repeatedly declared that it is anathema to force
`an innovator to “pay tribute to would-be monopolists
`without need or justification” when their patents are
`invalid. Lear, Inc. v. Adkins, 395 U.S. 653, 670 (1969).
`There is no need or justification to require a defend-
`ant to pay massive damages for infringing patent
`claims that the PTO has decided should never have
`issued in the first place.
`
`
`
`4
`
`Without this Court’s intervention, the Federal
`Circuit will continue allowing patentees to recover
`awards having nothing to do with the value of the as-
`serted technology, even where the underlying patent
`claims are no longer valid. This Court should grant
`certiorari to reinstate the guard rails that have
`curbed excessive patent damages awards for well over
`a century.
`OPINIONS AND ORDERS BELOW
`The Federal Circuit’s first decision in this case is
`reported at 767 F.3d 1308 (VirnetX I) and reproduced
`at App. 77a-125a.
`The Federal Circuit’s second decision, which peti-
`tioner challenges here, is reported at 748 F. App’x 332
`(VirnetX II) and reproduced at App. 1a-2a. The order
`denying rehearing and rehearing en banc is unre-
`ported and reproduced at App. 128a-129a.
`The district court’s decision denying Apple’s post-
`trial motion on damages is reported at 324 F. Supp.
`3d 836 and reproduced at App. 3a-76a.
`JURISDICTION
`The Federal Circuit entered judgment on January
`15, 2019. On August 1, 2019, that court denied Apple’s
`timely petition for rehearing and rehearing en banc.
`App. 128a-129a. On October 18, 2019, the Chief Jus-
`tice extended the time in which to file a petition for a
`writ of certiorari to and including December 29, 2019.
`This Court has jurisdiction under 28 U.S.C. § 1254(1).
`
`
`
`5
`
`STATUTORY PROVISIONS INVOLVED
`Section 284 of the Patent Act, 35 U.S.C. § 284,
`provides in relevant part:
`Upon finding for the claimant the court shall
`award the claimant damages adequate to
`compensate for the infringement, but in no
`event less than a reasonable royalty for the
`use made of the invention by the infringer, to-
`gether with interest and costs as fixed by the
`court.
`
`
`
`
`
`
`
`6
`
`STATEMENT OF THE CASE1
`
`Apple’s Feature-Rich Mobile Devices Revolution-
`ize The Industry
`Apple revolutionized the mobile device industry
`when it released the first iPhone in 2007. See CA.I
`1808. While it has “Phone” in its name, this
`touchscreen device has many thousands of features
`and is more accurately described as a handheld com-
`puter. CA.I 1808-10. This Court has twice commented
`on the iPhone’s “broad range” of features that come
`preloaded, Samsung Electronics Co. v. Apple Inc., 137
`S. Ct. 429, 433 (2016), and that can be added by in-
`stalling applications (aka apps), Apple Inc. v. Pepper,
`139 S. Ct. 1514, 1518 (2019).
`Besides the iPhone, Apple produces several other
`feature-rich mobile devices, including iPad tablets
`and iPod touches, all capable of “pretty much any-
`thing you can imagine.” CA.I 1807. Apple also contin-
`ues to make more traditional Macintosh desktop and
`laptop computers (Macs). CA.I 1805-06.
`
`
`1 “CA.I” refers to the Court of Appeals appendix in VirnetX
`I (the first appellate ruling in this case). “CA.II” refers to the
`Court of Appeals appendix in VirnetX II (the second appellate
`ruling in this case and the one at issue in this petition). “Dkt.”
`refers to the Court of Appeals docket in VirnetX II, No. 18-1197
`(Fed. Cir.).
`
`
`
`7
`
`
`
`CA.II 10,096.
`This case concerns only aspects of two of the thou-
`sands of features that come preinstalled on the Apple
`products described above (which we will call “Apple
`devices”). In particular, this case involves two inter-
`net-security measures. When people use the internet,
`their devices communicate data to other internet-con-
`nected computers or devices. For example, when users
`visit www.amazon.com, they are actually sending
`data back and forth between their devices and the
`website “server”—the computer that stores and deliv-
`ers Amazon’s website content. CA.II 2250. Without
`encryption of the transmitted data, eavesdroppers
`could see that data. CA.II 2263-66.
`
`
`
`8
`
`There are many ways to protect this information.
`The two at issue here are (1) encryption used by an
`Apple application called “FaceTime” and (2) an Apple
`security feature called “VPN On Demand.” The first,
`found in FaceTime, enables users to privately vide-
`oconference each other on Apple devices. FaceTime
`communications are transmitted over the internet. To
`protect these communications from eavesdropping,
`FaceTime encrypts what a caller sees and hears, but
`the identities of the callers are not hidden from view.
`CA.II 1533-34; see App. 81a-82a.
`The second Apple feature at issue here, VPN On
`Demand, provides a method of securing data trans-
`mitted while browsing the web. A “virtual private net-
`work,” or VPN, encrypts web traffic even while
`browsing on a public network, e.g., while using a ho-
`tel’s Wi-Fi. Organizations often use VPNs so employ-
`ees can securely access their office’s private server
`from a remote location. CA.I 1322-23. Apple’s VPN On
`Demand feature makes establishing a VPN easy and
`customizable for individual users, allowing them to
`specify a list of domain names (e.g., www.ama-
`zon.com) for which they want to automatically estab-
`lish a VPN and protect their web browsing from
`snooping. See App. 82a-84a.
`
`VirnetX Sues Apple For Patent Infringement But
`The PTO Invalidates All Asserted Claims
`VirnetX owns several patents for secure commu-
`nication technology. Rather than selling products, it
`seeks to sell licenses for its patents. Most of VirnetX’s
`licensing efforts have failed with respect to large com-
`panies like Google, Samsung, and Verizon. CA.I 1258-
`
`
`
`9
`
`60. Instead, VirnetX has typically licensed its technol-
`ogy to smaller companies in settlement agreements
`meant to avoid expensive litigation. See CA.II 1857-
`60.
`In 2010, VirnetX sued Apple, alleging that
`FaceTime and VPN On Demand infringed four pa-
`tents: U.S. Patent Nos. 7,418,504, 7,921,211,
`6,502,135, and 7,490,151. The four are similar, each
`“claim[ing] technology for providing security over net-
`works such as the Internet.” App. 80a. VirnetX ac-
`cused FaceTime of infringing the ’504 and ’211
`patents, which disclose a system that supports estab-
`lishing secure communication links between devices
`on the internet. Id. And it accused VPN On Demand
`of infringing the ’135 and ’151 patents, which disclose
`a system for identifying secure websites and creating
`a corresponding VPN. App. 82a.
`Apple responded by petitioning the PTO to inval-
`idate these four patents. Through these various pro-
`ceedings
`(and others
`initiated by additional
`interested parties), the PTO has invalidated every pa-
`tent claim VirnetX has asserted against Apple, find-
`ing all either anticipated or obvious. See, e.g., Decision
`Granting Renewed Petition to Sever Merger and Re-
`newed Petition to Terminate Reexamination Proceed-
`ing, Reexamination Nos. 95/001,697 & 95/00,1714
`(Oct. 16, 2019) (continuing prosecution of claims of
`’151 patent); Decision on Appeal, Cisco Systems, Inc.
`v. VirnetX Inc., 2018 WL 798782, Reexamination No.
`95/001,679 (P.T.A.B. Feb. 6, 2018), appeal pending,
`No. 19-1671 (Fed. Cir. docketed Mar. 19, 2019) (inval-
`idating claims of ’135 patent); Black Swamp IP, LLC
`v. VirnetX Inc., IPR2016-00693, -00957, Paper No. 14
`
`
`
`10
`
`(P.T.A.B. June 12, 2017), appeal pending, Nos. 17-
`2593, -2594 (Fed. Cir. docketed Sept. 25, 2017) (inval-
`idating claims of ’504 and ’211 patents). Indeed,
`across nearly 35 proceedings, 14 examiners and adju-
`dicators at the PTO have held the patents in suit, or
`closely related patents in the same families, invalid.
`For the two patents underlying the FaceTime al-
`legations (the ’504 and ’211 patents), the Federal Cir-
`cuit recently affirmed the PTO’s rulings with respect
`to all claims (or claims indistinguishable therefrom,
`as explained below, infra at 36-37). See VirnetX Inc.
`v. Cisco Sys., Inc., 776 F. App’x 698, 700 (Fed. Cir.
`2019) (relevant claims of the ’504 patent) (VirnetX
`Reexamination Appeal I); VirnetX Inc. v. Apple Inc.,
`931 F.3d 1363, 1368-69 (Fed. Cir. 2019) (relevant
`claims of the ’211 patent) (VirnetX Reexamination Ap-
`peal II).
`That means the PTO will issue final certificates
`officially cancelling the patent claims affirmed as un-
`patentable by the Federal Circuit. See 35 U.S.C.
`§ 316(a) (2006).
`
`Meanwhile, VirnetX Proceeds To Trial And Wins
`A $439 Million Judgment
`While the PTO was reexamining the validity of
`the patents, VirnetX went to trial against Apple in
`federal district court. This was unusual: District
`courts are “nearly uniform” in staying infringement
`litigation pending final adjudication of cancellation
`proceedings at the PTO. NFC Tech. LLC v. HTC Am.,
`
`
`
`11
`
`Inc., No. 2:13-cv-1058-WCB, 2015 WL 1069111, at *6
`(E.D. Tex. Mar. 11, 2015).
`In November 2012, a jury found that FaceTime
`and VPN On Demand infringed the asserted patent
`claims, and that Apple had not proved by clear and
`convincing evidence that the asserted claims were in-
`valid. It awarded VirnetX about $368 million in dam-
`ages. App. 84a. The Federal Circuit affirmed the
`validity determinations, as well as the infringement
`verdict with respect to VPN On Demand, but it re-
`versed the finding that FaceTime infringed. App. 79a-
`80a. The court also rejected VirnetX’s damages meth-
`odology. App. 107a.
`On retrial in 2016, the jury reinstated the in-
`fringement finding against FaceTime. App. 8a. The
`jury also redetermined damages for both FaceTime
`and VPN On Demand, this time awarding over $302
`million. Id. With prejudgment interest, enhanced
`damages, costs and attorney’s fees, the total judgment
`was over $439 million. Id. at 66a-67a; CA.II 71.
`As relevant here, the big difference between the
`two trials was VirnetX’s approach to damages. The
`first time around, VirnetX had started with the
`pricetag of each Apple product (the “royalty base”)
`and then attempted to gauge the portion of that value
`that the patented technology contributed. In other
`words, VirnetX made some attempt to comply with
`the long-established requirement that a patentee
`must “give evidence tending to separate or apportion
`the defendant’s profits and the patentee’s damages
`between the patented feature and the unpatented fea-
`tures.” App. 108a (quoting Garretson, 111 U.S. at
`
`
`
`12
`
`121). The Federal Circuit, however, reversed because
`VirnetX’s approach to this longstanding apportion-
`ment requirement was flawed. App.111a-116a.
`At the second trial, VirnetX did not even try to fix
`the errors the Federal Circuit had identified. Rather,
`VirnetX avoided apportionment entirely by abandon-
`ing any attempt to calculate damages based on the
`patents’ contribution to a royalty base. Instead, Vir-
`netX introduced licenses that it had previously nego-
`tiated with other companies for completely different
`devices. Specifically, VirnetX introduced six prior li-
`censes resulting from settlement agreements with
`other companies it had sued for infringement. CA.II
`1857. Those companies had agreed to pay VirnetX a
`percentage of their total sales (or a lump sum derived
`from that sales-based figure). CA.II 1778-80, 1843. At
`trial, VirnetX then repackaged these payments into
`per-unit rates by dividing total payments by total
`product units sold:
`
`License
`Microsoft
`Avaya
`Siemens
`Mitel
`Aastra
`NEC
`
`Per-Unit Rate
`$0.19
`$0.34
`$1.21
`$1.43
`$1.80
`$2.26
`
`
`
`
`
`13
`
`See CA.II 1783, 1855, 1869. The royalties varied by
`more than an order of magnitude. Yet, VirnetX just
`averaged these per-unit rates (i.e., added them to-
`gether and divided by six) to yield an “average rate”
`of $1.20. It then urged the jury to conclude that Apple
`would agree that VirnetX’s patents were worth $1.20
`in any device found to infringe. CA.II 1811-12.
`VirnetX’s expert acknowledged his back-of-the-
`envelope math did not weight the Microsoft agree-
`ment more than the others, even though that agree-
`ment “involved far more units and far more money”
`than any of the others. CA.II 1786. The $200 million
`Microsoft agreement, covering over a billion units in
`the United States and another billion units abroad,
`was given the same weight as a $22,000 agreement
`with Aastra for 12,000 units, a $47,000 agreement
`with NEC for 21,000 units, and a $55,000 agreement
`with Siemens for 46,000 units. CA.II. 1847, 1853-56.
`He also recognized that “the Apple devices in this case
`[were] far, far more complex” than the products li-
`censed in all of the agreements except for Microsoft’s,
`which bore the lowest per-unit rate. CA.II 1866. Those
`non-Microsoft licensed products were more conven-
`tional office desktop phones of the sort popular in
`many professional settings:
`
`
`
`14
`
`Comparison of Avaya and Apple Products
`
`Avaya IP Desk
`Phone, IP Conference
`Phone, IP PBX, and
`Communication Manager
`
`Apple Mac
`Computers, iPods,
`iPhones and iPads
`
`
`CA.II 10,096; see also CA.II 1867. VirnetX nonethe-
`less insisted that its expert’s unweighted average rep-
`resented “fair payment by Apple to VirnetX” for each
`infringing product sold. CA.II 1765; see also CA.II
`1785-86.
`In various motions, Apple had objected that this
`approach violated basic patent-law damages princi-
`ples because the rates were unapportioned: There was
`no evidence these rates reflected only the value that
`VirnetX’s patents contributed to Apple’s products. See
`CA.II 32, 37, 80.
`When pressed on these flaws, VirnetX’s expert as-
`serted that these rates must “have been apportioned
`to reflect the incremental contribution of VirnetX’s
`technology to those products,” because VirnetX had a
`policy of doing so. CA.II 1862. But he was “not certain”
`how VirnetX performed any apportionment. CA.II
`
`
`
`15
`
`1863. And he conceded that “the value of a license en-
`tered into in the settlement of litigation” could “repre-
`sent the value to the Defendant of making a lawsuit
`go away,” CA.II 1858, rather than the value of the pa-
`tented feature.
`The jury nevertheless accepted VirnetX’s invita-
`tion to multiply the average $1.20 rate by the number
`of accused Apple products (250 million) to arrive at a
`total royalty of over $302 million. CA.II 1819. The
`damages award was imposed in one undifferentiated
`amount, resting in part on products found to infringe
`both the FaceTime and VPN patents, and in part on
`products for which only FaceTime infringed. See
`CA.II 9; CA.II 1818-21.
`In a motion for a new trial, Apple asked the dis-
`trict court to set aside the damages judgment for fail-
`ure to prove apportionment. App. 18a-19a. But the
`cour
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