Saturday, December 24, 2011

A huge play for EARLY 2012?

I'v already mentioned VirnetX before in my blog however I felt the need to reiterate my view of it and the large potential in it's price. VirnetX is an internet security software and technology company that boasts an EXTREMELY valuable patent portfolio including technology that will secure mobile devices on 4g networks. This last summer they ended a suit against Microsoft where they claimed Microsoft infringed on their networking patents (patent # 6,502,135 # 6,839,759 and # 7,188,180). Because it is vital for the judge to understand what exactly a patent describes (the wording of some patents can make it quite hard to discern what technology is really patented) before heading to trail, patent infringement cases go to something called a Markman hearing. A Markman hearing (otherwise known as a claim construction hearing) is a pretrial hearing where the judge examines the evidence that suggests the appropriate meanings of key words in the patents being disputed, you can think of it as the patent claims are broken down into "layman's terms" for the judge so he/she can understand exactly what the patent does and whether or not the defendant(s) infringed upon the patent. While this is only a pretrial hearing the decision of a Markman's hearing usually has a large if not definite influence on the outcome of the case as a whole. In February 2009 VirnetX faced Microsoft in the the U.S District Court for the Eastern District of Texas Tyler Division with Leonard Davis as judge of the case and won the Marksman hearing. It was determined that Microsoft had infringed on VirnetX's patents and in May of that year they settled for 200 million dollars. Now VHC faces CISCO SYSTEMS, INC., APPLE INC., AASTRA USA, INC., AASTRA TECHNOLOGIES LTD., NEC CORPORATION, AND NEC CORPORATION OF AMERICA claiming that they infringed on their patents as well. The Marksman hearing will be held in the same court with the same judge on the fifth of next month. While some could say this is a different story, there are several important reasons why I think there's no way VirnetX could lose. 

1) The win over Microsoft provides solid infrastructure that the patents VirnetX has are valid and that its legal team is fully capable of making that visible to the judge. 3 of the 6 patents VHC is claiming infringement on are the ones that won them the Microsoft case which strengthens that argument. Not to mention this case will be held at the same court with the same judge that was used in their case against Microsoft.  

2) Prior to the hearing Cisco had requested that the USPTO reexamine VHC's patent # 7,188,180. However, the USPTO rejected each of Cisco's ten proposed validity challenges to the '180 patent and found that Cisco had not shown that there is a reasonable likelihood that it will prevail with respect to any of the claims of the '180 patent and so rejected the request to reexamine immediately. This reinforces that the USPTO finds VirnetX's 180 patent valid and will aid VHC's argument in court.

3) Here you can find the Joint Claim Construction and Prehearing Statement that explains what terms the plaintif (VirnetX) and the defendants (mentioned above in caps) agree on, don't agree on and the evidence that supports both parties accusations.In the first column of exhibit B you'll see the claim term being related to a patent that VHC is saying the defendants infringed on as well as the patent the term refers to. In the second column is what VHC says the terms mean and in the third is what the defendants feel the terms mean. Without looking at the evidence from part C, it seems almost certain to me VHC has this case won already. For example the claim term virtual private network which relates to the 135, 759 and 180 patents is proposed by VirnetX to mean "a network of computers which privately communicate with each other by encrypting traffic on insecure communication paths between the computers " while the defendants interpret it as "a network of computers which privately and directly communicate with each other by encrypting traffic on insecure communication paths between the computers where the communication is both secure and anonymous". Now the term virtual private network plays a HUGE role in the patent claims of VHC so this is an important term for the judge to side with VHC on and while nothing in life is certain except taxes and death I can't see the judge siding with the defendants on this. Why? Because in their case against Microsoft the same term was challenged but VHC was able to persuade the judge that their construction was correct and resulted in the following direct statement. "In light of intrinsic and extrinsic evidence, the Court construes "“virtual private network"” as “a network of computers which privately communicate with each other by encrypting traffic on insecure communication paths between the computers". Sound familiar? Can't see how the court could rule against its own defintion, but like I said nothing is certain...  

4) Below that you'll see another claim term referring to the 135 patent that reads 
"determining whether the DNS request transmitted in step (1) is requesting access to a secure web site" and for VHC's proposed construction it says "[no construction necessary]" while the defendants say "determining on a DNS proxy server 
whether the DNS request transmitted in step (1) is requesting access to a secure 
web site ". Whoa, is VHC just throwing in the towel here and not giving any explanation to what this might mean? Absolutely not. In their case against Microsoft, they gave the same proposed construction and the court agreed. Now while this is a different court case altogether, it does clearly state in the Joint Claim Construction and Prehearing Statement when describing exhibit C that " VirnetX may also rely upon intrinsic and extrinsic evidence, including the prosecution history and/or  any re-examinations, to rebut  the constructions proposed by Defendants" which means the "prosecution history" they have with Microsoft can be used so any terms already defined from that case that have been accepted by the court already can be used again. That said, most of the proposed constructions of claims have already been accepted by the court leaving little room for the defendants to interpret it differently. 

5) In this case both the plaintiff and the defendants have experts to bring to the stand to aid their case or dispute something the other party said. Because these experts will provide their best interpretation of the disputed terms the evidence they provide is considered extrinsic evidence because it is not furnished by a document but by some external source (in this case, a person). However, the court can only assume some type of bias in these statements for each party and hence has stated " Generally, extrinsic evidence is “less reliable than the patent and its prosecution history in determining how to read claim terms.”"  To put it another way, if the plaintiff cites several textbooks or credible studies that the sky is blue, but the defendant has an expert claiming that in his/her opinion it can be considered green, the judge is going to go with the cited documentation and that the sky is blue.
(If you'd like to see the entire document regarding the claims of terms and outcome of the VirnetX vs Microsoft Case to see for yourself you can find it here. To get a summary of the outcomes of what the court found acceptable for the proposed constructions you can scroll to the bottom of the page to appendix B)

Now you'll also see that for several of the claim terms the defendants proposed constructions read "indefinite" while VHC's proposed constructions to these terms read  "No construction necessary, alternatively a construction that is consistent with the 
ordinary meaning of these terms". Here, the defendants are claiming the terms are too vague while VirnetX is essentially saying the opposite that the terms are obvious. An example of this is the term "allocating resources". Now I have no legal experience of any type so I can't be certain on this but honestly, I can't imagine there are too many ways to interpret the words "allocating resources", I can only assume the judge knows the definition of each word and will have the ability to put the definitions together to get a complete understanding. So while this may add a little fuel to the defendants fire, I don't see how they could present the words in a different manner to the judge and the defendants candle (if I may quote Robert De Niro from one of my favorite movies Limitless) "will have shed a brief but a lovely light".

The Marksman hearing is scheduled for January fifth, about 2 weeks away which gives you ample time to research and form your own educated opinion about possible outcomes. If you still feel VHC will not prevail, share why! I would love to hear someone's perspective from the other side of the fence or if you agree, are you taking a stake in VHC and if so, how much? Below you can find a link to VHC's website where you can find all their press releases and find out more about what they do. Merry Christmas!


  1. Would not be intimidated by the recent shorting activity. The stock has been a short squeeze candidate for a while which just means when it starts moving up, its going to rocket in that direction as the shorts are forced out of their position!

  2. Hi Sparko. Interesting details about the case, thanks for sharing it.

    Do you know when we'll know the outcome of this law suit? For what I understood, on january 5th, it is just the "The Marksman hearing", so a "teaching lesson about the case" for the judge, thus no useful information about the final outcome, right?

  3. @ Plops, glad you could find the information I posted valuable. Your understanding of the markman is correct in that it is essentially for the judge to understand the definitions of the terms being challenged of the patents at hand and will not conclude the case. However, the result of the Marksman will likely dictate the end result of the case as once everything is laid out as clear as can be and assuming the defendants pulled out everything they could to try and get the judge to rule in their favor (a safe assumption I would say) then there really isn't anything more for the defendants to use in their argument. So no its not the final outcome but I would say it definitely provides useful information about the outcome. Patent infringement cases almost always go to a Marksman before a jury trial as the wording of the patents can be confusing to those not in the tech sector the pertaining companies are, but after it's over there is really nothing more to say for either side. However after the Marksman the judge will issue the outcome (for the MSFT case that took 6 months but the time always varies) and then it will go to a jury trial which is currently scheduled for November this year. However, it would seem very unlikely that if (or should I say when) Marksman goes favorably for VHC, it will not take until November as if VHC wins the trial then the ITC has the power to immediately halt production of all products from Apple and any other infringing company. Obviously that is something that provides series threat to Apple so they don't want that to happen which should more then likely result in either hefty settlements from the defendants before the trial as well as royalty agreements for future licensing of VHC IP. Another possibility is acquisition, possibly from a defendant in lui of settling. For example, Apple sure does have alot of 4g products so the idea of them acquiring VHC is definitely lingering around. Either way it is going to result in a huge leap upward in price for VHC and more than likely a juicy dividend for sticking with them throughout them all (as they did with MSFT). I hope that was useful, if you'd like I can try to post results from Markman daily to keep you up to date if your following the stock.

  4. Thank you for your answer, that's very interesting to know a little bit more about the way it works! If you can share the results from Markman or tell me where I can find that kind of informations, I would really appreciate!

  5. @ Plops, no problem and sure I would be happy to convey the results from Markman. The judge of the case, Leonard Davis, worked as a programmer and systems analyst before entering law school and so has experience with technology making him well fitted for such a case. That combined with his ruling from the Microsoft case with VirnetX has no doubt a positive effect for VHC. The defendants were represented by Danny Williams (for Apple), John Desmaris (for Cisco)m Jon B. Hyland represented Aastra and am not sure who represented NEC. VirnetX was represented by the firm McKool Smith and has been lead so far by Doug Cawely. The defendants were trying to convince the judge that the terms being challenged were too narrow while the plaintiffs argued that they were infact wider in scope. It looked like it was going in VHC's favor however as no new evidence was brought up by the defense. Since the same terms were already upheld in VHC's favor from their previous suit, this fared very well for them as the ball really is in the defense's court to try and get the judge to change his mind and without any new significant evidence I don't see that happening. In terms of performance I heard Mr. Desmaris took care of the majority of the talking for the defendants, Williams the next and the other two attorneys did not do very well at all. In fact I read that Aastra's attorney seemed nervous and would have served the defendants better to not have spoken at all. I read that the team representing VirnetX really took care of business though and spoke shortly and concisely and countered the defendant's points effectively.
    Additionally, I have heard the judge has said he should have a preliminary ruling out soon and ordered that the parties set a date for 30-45 days after his ruling for mediation which I like because that means he wants this case settled sooner than later. Hope this helps and as the case progresse's keep checking back and I will update you on the latest status.

  6. Hi Sparko. Everyone is now waiting for the judge to rule in favor of one of the parties, right?

  7. The case is still in court. The recent updates involve the argument over the terms "secure communication link (SCL)" and "virtual private network" (VPN). VirnetX changed the wording of one of their patents from VPN to SCL so that they their patents could reach a broader array of products. This is because while a VPN is a type of secure communication link, it is not the only type so by changing the wording they want their patents to apply to more products which means more royaltys. The defendants are arguing that VirnetX has used the terms equivalently which is trying to prove the opposite, that the term is narrower in scope and applies to less products. The VirnetX lawyers responded that while a VPN is the preferred embodiment of a secure communication link, there are other forms of secure communication links and placing a limitation on the other froms is wrong. No ruling yet however I think VHC has an edge here because they had already changed the wording to the patents to secure communication link for a reason (to apply to more products). I will let you know any more updates when I hear of them.

  8. Here you can find some of the court documents to take a look yourself and see what you make of it.

  9. Were you at the Markman by chance? Some of those comments look awfully familiar.

  10. @ Flyers, no I was not at Markman. My comments are a combination of my studying and analyzing court documents found online as well as any pertinent information I could find online from various boards that I could validate through further research. Would actually like to take the time to say that some of my information has resulted from my reading of your posts on yahoo&IV and would like to say thank you for providing the unbiased information you have provided so far. Quite a refreshing change from posts from those such as Terp and the gentlemen who always ends his posts "bite me". I do encourage you read over my overview of why I believe VHC should prevail as I have spent countless hours analyzing and defining what exactly is going on and I firmly believe I have done it in a very accurate way.

  11. Glad that I could help. Looks like I was right about the NEC lawyer as he was fired not too long after the Markman hearing. Hopefully the rest of my observations are right.

    I agree on most of your comments and everything is laid out pretty cleanly. The VHC situation is pretty complicated.

    I trust their consultants to get the job done and either land settlements or a very large court judgment.