Wozniak Goats Gruff: Apple Gobbled Up by Patent Troll to the Tune of $625M

Apple is no stranger to patent law or lawsuits; however, it can usually give as good as it gets. Not so for Apple’s latest foray into the courts. On February 3, 2015, a jury from the notorious Eastern District of Texas gave a whopping $625.6 million verdict, concluding that Apple had infringed upon four patents when making its iMessage and FaceTime products.

This is the second win for VirnetX against Apple, in 2012 VirnetX won a $368 million verdict claiming that Apple infringed VirnetX’s patents in its FaceTime service and in its VPN service. Although Apple tweaked these products, VirnetX claimed it was not enough this time around – and the jury agreed. VirnetX has a history of suing tech companies for patent infringement, for example, in 2014 VirnetX settled a dispute with Microsoft over its Skype program for $200 million, after successfully suing Microsoft in 2007.

Trip-Trap! VirnetX’s Case Against Apple

This case actually stems, in part, from VirnetX’s 2012 win against Apple. At issue is how much Apple owes VirnetX based on a previous jury’s finding that Apple’s iOS versions 3‑6 infringed its patents. After a weeklong trial, the jury unanimously held that Apple’s VPN function still infringed VirnetX’s U.S. Patent Nos. 6,502,135 and 7,490,151 despite the changes Apple made after the 2012 verdict. Further, the jury found that FaceTime and iMessage infringe VirnetX’s U.S. Patent Nos. 7,418,504 and 7,921,211.

The jury found that Apple owes VirnetX $334.9 million in royalties based on the two infringement findings from the 2012 case, the ‘135 and ‘151 patents. Because these two patents were continually infringed, as the jury found that Apple’s “curative measures” were insufficient, the money owed to VirnetX reaches back to after the 2012 case ended. Then, based on the FaceTime and iMessage infringements, patents ‘504 and ‘211, the jury found that Apple owed VirnetX a further $290.7 million. Moreover, the jury found that Apple willfully infringed the VPN patents (‘135 and ‘151), which means that Apple will be subject to further monetary damages to be determined by the judge. Willful infringement is when an infringer has purposefully infringed a patent, either by intentionally disregarding its existence or recklessly disregarding the patent when making and selling the product. Willful infringement must be shown by clear and convincing evidence, a high burden, and allows for treble damages against the infringer.

Unsurprisingly, Apple has stated it will appeal, emphasizing “All four of VirnetX’s patents have been found invalid by the patent office. Cases like this simply reinforce the desperate need for patent reform.” In fact, VirnetX’s patents ‘135 and ‘151 have been subject to over 20 combined challenges (a dozen of which come from Apple). Finally, in October of 2015, the Patent Trial and Appeals Board performed an inter partes review (IPR) of the claims in each patent, eventually finding a “reasonable likelihood” that the challenged claims were invalid for being either obvious or anticipated. This means that the USPTO reviewed the patents to determine both patent eligibility (under 35 USC 101) and patentability (Sections 102, 103, and 112). If any of VirnetX’s patents are eventually found to be invalid, the judgment may be substantially reduced or completely vacated.

Guarding the Bridge: Patents & Patent Trolls

Green Fields, or Patents

A patent is a government issued grant which gives the owner the right to exclude others from “making, using, offering for sale, or selling the invention throughout the U.S. or importing the invention into the U.S.” for twenty years. In exchange for this right, the patent is published into the public domain and the inventor must describe the invention in detail.

 

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Apple Patent Application No. 20110116017 – Not at issue

In theory, there are four main incentives underlying the American patent system, each with its own set of issues and objections:

  1. Invention;
  2. Disclosure;
  3. Commercialization; and
  4. Designing Around.

A patent is granted to encourage invention. The idea is that the original inventor may not endeavor to invent if her inventions could be easily stolen or copied. Thus, the inventor is granted the right to exclude others from using the product of her inventive efforts, allowing her to recoup the costs and risks of inventing in the first place. Some argue that this incentive is too much, causing inefficiency in pre-inventive activities because it leads to duplicative efforts, e.g., multiple companies research the same thing, but only one can get the patent. It also suggests that inventors should not be awarded the total social value of the invention when, really, patents should only reward inventors for the value of early discovery and disclosure. This assumes that the inventor’s true contribution is not the invention itself, which would inevitably be discovered by somebody, but the timing of the invention instead. Classic responses to these objections are that duplicative efforts might be better for consumers and lead to alternative methods to achieve the same goal, and, you can’t assume the inevitability of an invention.

Patents are also granted to encourage enabling disclosures of the invention. Without the guarantees of patent law, inventors would look to trade secret protection to guard the value of their invention. This secrecy would interfere with science, deprive the public of knowledge, and lead to duplicative works. Opponents of patent law often say that secrecy is not a viable alternative because of “reverse engineering,” and some also object that disclosures in patents are often incomplete. Further, some believe that inventors are driven by fame, rather than profit.

Patents also encourage investment, innovation, and commercialization. Patents are a Coasian-type property right. Essentially, this theory assumes that rules of the patent system serve to give fixed and public notice to all parties involved in the technological licensing market through awarding publically announced exclusive ownership. For example, if you invented a new type of chair and did not secure a patent, you would not be able to find a manufacturer willing to accept the risk because (1) the competition could undercut them and (2) the chair might be a failure. The patent system mitigates the risk of copying because of its exclusive nature. Lastly, designing around is the corollary of the incentive to invest, because patents afford an exclusive right they encourage competitors to circumvent the patent by inventing substitutes.

Patent Trolls

Patent owners can get damages or equitable relief against infringers. Equitable relief comes in the form of a preliminary or permanent injunction. Damages, on the other hand, can come from either lost profits or an imposed reasonable royalty, which asks what would the infringer have paid the patent owner if they had negotiated for use.

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Not this kind of troll, unfortunately – Courtesy of Dam Corp.

Patent trolls, AKA non-practicing entities (NPEs), are entities that do not manufacture products or supply services based on the patents they own, thus “non-practicing.” Many NPEs are the arms of research universities looking to license past research to finance their departments, or small entities incapable of mass marketing their innovations. However, a number of NPEs, often referred to as trolls, almost exclusively concern themselves with purchasing patents, often in the hundreds, and then suing others for infringing those patents. Thus, patent trolls only ever pursue royalties, as they have no basis or need for lost profits or equitable relief. VirnetX is commonly referred to as one such troll, holding “over 80 Internet security patents worldwide,” with at least 100 patents pending. One alleged problem with companies like VirnetX is that they reap the rewards of the patent system without putting in any of the work or risk and stifle innovation by preventing others, especially small businesses, from producing their products and services through the threat of expensive litigation. However, there are many who argue that “trolls” are the only way a small, or mid size inventor could ever hope to get value for a patent, as a sole inventor could never afford litigation against the likes of Apple.

Indeed, there are many who lay the blame squarely at the feet of the USPTO and the Federal Circuit for allowing abusable patents to be granted in the first place. Oftentimes, trolls hold patents that are so vague and ambiguous that they could potentially cover hundreds of products from a toaster oven to a smart phone to a jet fighter, even though the patent itself talks little or nothing of any of those things. These people argue for targeted reforms to the standards in the patent law instead of procedures aimed at only trolls.

While Apple does not have to worry about bankruptcy over VirnetX’s onslaught, and is fully capable of launching its own, most businesses cannot afford to fight off patent trolls. Many patent trolls send out their demand letters and threaten litigation based on dubious claims and overbroad patents; however, until litigated, there’s no way to know how valid a troll’s claims are. This is one situation that IPRs were intended to solve. However, IPRs are still quite expensive, and thus, many businesses are stuck between a rock and a hard place. It looks like we might have to wait a while for patent reform to come along and kick this troll off of its bridge, and in the meantime, small businesses would do well to seek out legal help before submitting to any troll’s demands.

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