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Apple Rebuffed by Supreme Court in $1 Billion VirnetX Dispute

Susan Decker and Greg Stohr

(Bloomberg) -- The U.S. Supreme Court refused to consider an appeal by Apple Inc. as the iPhone maker seeks to avoid paying as much as $1 billion in patent damages to upstart software developer VirnetX Holding Corp.

VirnetX, a Nevada company with less than $2 million in annual revenue, has waged a decade-long fight to collect royalties from Apple for secure communications technology used in FaceTime and virtual private network programs on devices including the iPhone, iPad and Mac computers.

VirnetX jumped as much as 18% on the news.

The high court denied Apple’s petition arguing that a $439 million judgment from the first of two cases brought by VirnetX was “grossly excessive” and should be thrown out because the U.S. Patent and Trademark Office, in separate proceedings, ruled that the patents at the heart of the dispute are invalid.

A second case, not currently before the high court, resulted in a $503 million verdict over the same patents and newer Apple products. An appeals court has ordered a recalculation of damages in that case, although VirnetX has said it doesn’t expect the number to be significantly smaller.

“It has always been our objective to create our own products with our proprietary technology,” VirnetX Chief Executive Officer Kendall Larsen said in a statement. “Unfortunately, when other companies are using your technology without permission, you must take action to protect that company asset. We have always believed that we were in the right with our court actions against Apple.”

VirnetX said Apple’s Supreme Court appeal is part of that company’s effort to avoid paying to use another of VirnetX’s inventions. Cupertino, California-based Apple’s legal tactics were part of the reason the trial judge increased the jury’s verdict of $302 million, VirnetX’s lawyers said.

“After 10 years of litigation, Apple has no plausible arguments for resisting the judgment,” VirnetX told the court. “It continues the pattern of ‘gamesmanship’ and delay that resulted in the district court enhancing damages below.”

‘Loophole’ in Rule

On the question of damages, Apple said the U.S. Court of Appeals for the Federal Circuit, which handles all patent appeals, has created a “gaping loophole” in the rule that damages should be “limited only to the value of its patented invention” and not to the price of an end product that contains other features.

Apple said that in this case, VirnetX equated the rate paid for a desktop phone with the more complex iPhone.VirnetX said its expert witness estimated the “dollar value” of the invention in any phone supporting secure voice and video calls over the Internet. In that way, the company said it sought to avoid arguments that it was tying the royalty rate to the price of an iPhone or other Apple device.The Federal Circuit affirmed the jury verdict without issuing a formal opinion, and VirnetX argued that meant there was no real issue for the high court to review. The appeals court refused to put its decision on hold while Apple appealed to the Supreme Court.

Apple also contends the case should be thrown out because of the decisions from the patent office. While the Federal Circuit has affirmed some invalidity rulings from a patent office review board, it ordered a second look at others.

‘Massive Damages’

“There is no need or justification to require a defendant to pay massive damages for infringing patent claims that the PTO has decided should never have issued in the first place,” Apple said.

Apple is fighting to find a way to overturn the second case, which ended at trial with a $503 million verdict. The Federal Circuit in November ordered a new trial on damages in that case after finding that newer models of FaceTime didn’t infringe the patents. It said Apple was barred from arguing invalidity because that issue was resolved in one of the earlier court appeals.

VirnetX said that none of its patents have been canceled because the legal dispute on those issues is continuing.

The Patent Trial and Appeal Board, established in a 2011 law as part of a sweeping overhaul of the U.S. patent system, is a favored venue for companies to challenge patents after they’ve been sued. The board has a reputation for siding with companies that challenge patents, and Apple is the most prolific user of the system.

Often, district court judges will put a civil suit on hold until the reviews are completed. When they don’t, as in these cases, it becomes a race for the parties to see which forum will finish first.

The case is Apple Inc. v VirnetX Inc., 19-832.

(Updates with VirnetX comment in sixth paragraph.)

To contact the reporters on this story: Susan Decker in Washington at sdecker1@bloomberg.net;Greg Stohr in Washington at gstohr@bloomberg.net

To contact the editors responsible for this story: Jon Morgan at jmorgan97@bloomberg.net, Laurie Asséo, Elizabeth Wasserman

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