Appeals court tosses $368M patent judgment against Apple

Judges question 'tainted' jury instructions and too-broad damages calculations in patent infringement case

A federal appellate court today threw out a 2012 judgment against Apple that required it to pay $368 million to VirnetX for patent infringement by the Cupertino Calif. company's FaceTime video calling service and its implementation of VPN (virtual private networks).

In an order filed today by the U.S. Court of Appeals for the Federal Circuit, Chief Judge Sharon Prost and Circuit Judge Raymond Chen vacated the damages and returned the case to the Texas court where it was first tried.

The technical descriptions in the order notwithstanding, the appeals court rejected the damages awarded by the jury because of that it called "tainted" instructions to the panel.

"We conclude that the district court's jury instruction regarding the entire market value rule was legally erroneous," Prost said in the order, writing for herself and Chen. "It is clear that the jury's verdict was tainted by the erroneous jury instruction."

During the trial, an expert witness hired by VirnetX had spelled out three possible damages scenarios, and argued that the FaceTime feature drove sales of Apple's iPhone, iPad, iPod Touch and Macs. VirnetX was thus due a fraction of the proceeds from those sales, the expert witness said.

"Apple argues that the testimony of VirnetX's expert on the proper royalty base should have been excluded because it relied on the entire market value of Apple's products without demonstrating that the patented features drove the demand for those products," the order stated. "For similar reasons to those stated above, we agree."

The damages expert, Roy Weinstein, used $29 as the royalty base for each FaceTime-equipped Mac -- the then price of an OS X upgrade -- and the incremental value of the messaging service for each iOS device at $15.

"VirnetX cannot simply hide behind Apple's sales model to avoid the task of apportionment," Prost said. "The patentee must do more to estimate what portion of the value of that product is attributable to the patented technology."

The decision by the Court of Appeals was technically a partial win by each side, but by voiding the damages and remanding the case to the trial court, it effectively puts VirnetX back at square one.

VirnetX filed its lawsuit against Apple in August 2010, naming then-current hardware, including the iPhone 4 and the first-generation iPad. A five-day trial started Oct. 31, 2012, and the verdict was handed down early the next month. VirnetX later filed a second lawsuit that targeted newer Apple products, ranging from 2012's iPad Mini and iPhone 5 to all Macs equipped with OS X Mountain Lion, which was also released that year.

Prior to its victory against Apple two years ago, VirnetX was best known for reaching a $200 million settlement with Microsoft in May 2010, after it had accused Windows of infringing on its virtual private networking (VPN) patents. As part of that settlement, Microsoft said it would license the VirnetX technologies.

VirnetX declined to comment today.

The Nevada company's stock plummeted after the court order was released, losing near half its value.

Copyright © 2014 IDG Communications, Inc.

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