Huge penalty could shift the balance of power among smartphone makers.
iPhones, iPads, and Macs infringe VPN patents held by VirnetX, jury rules.In 2012, Apple won the year's biggest patent verdict—more than $1 billion against Samsung.
The company also lost one of that year's biggest cases when an East Texas jury ordered it to pay $368 million to a company named VirnetX for infringing patents related to FaceTime and VPN On Demand functions used in iPhones, iPads, and Macs. VirnetX is a company some call a "patent troll" because its only business is now patent enforcement. Then, in March, US District Judge Leonard Davis ordered (PDF) an ongoing royalty to be paid to VirnetX. The number was downright stunning: 0.98 percent of revenue from iPhones and iPads sold in the US.
To no one's surprise, Apple is fighting tooth and nail to avoid this outcome. A decision (PDF) published yesterday shows that one creative strategy that Apple tried to use went too far.
The decision puts VirnetX back in the driver's seat, in a stronger position to collect a patent tax of nearly 1 percent on the most popular product produced by the world's richest tech company. One estimate suggests that VirnetX could soon be collecting around $340 million from Apple annually unless VirnetX's patents are vanquished on appeal.
The 0.98 percent royalty was applied to not just the early iPhones and iPads considered during the 2012 trial, but also to newer products like the iPhone 5, fifth-generation iPod touch, fourth-Generation iPad, and iPad mini. Apple spent tens of millions redesigning how FaceTime works to try to avoid the VirnetX patents, but in the end it was for naught. Davis found that the newer iOS products were "not colorably different from those adjudicated at trial."
VirnetX is getting close to a big win at a politically sensitive time, with the tech community and a broad range of companies still stinging from having lost the fight to push through an anti-patent-troll bill in Congress.
The stakes are high enough that Apple can be counted on to keep fighting to the bitter end. VirnetX won't be able to cash in until it crosses the final hurdle of winning its argument at the Federal Circuit. Apple has filed an appeal against the 0.98 percent royalty, and an earlier appeal related to the $368 million verdict has already been argued.
VirnetX wins have held up on appeal before. In 2010, VirnetX scored $200 million settlement out of Microsoft following litigation, and it went ahead and sued the software giant again in 2013. The company has also reached licensing deals with NEC, Siemens, and Avaya, among others.
Yesterday's decision (PDF) comes out of a process called an "inter partes review," which patent insiders sometimes abbreviate to IPR. It's a process created by the 2011 America Invents Act, and it replaces an earlier, more cumbersome process called inter partes reexamination.
The idea of an IPR is to replace a lengthy, expensive court battle with a more compressed time frame for argument, topped off by a one-day trial. It has turned out to be very friendly to those challenging patents. Patent-defense lawyers and other defense-oriented businesses are just waking up to how effective the process can be.
But it wasn't Apple that asked for the IPR in this case. The company was barred from filing an IPR against VirnetX patents because it had already had a chance to make its arguments in court.
Instead, two other mysterious companies came forward seeking to challenge VirnetX's patents. First was a shell company called New Bay Capital, which filed an IPR and then reportedly asked VirnetX for 10 percent of its massive jury award in exchange for backing off. New Bay dropped its case on April 4 without getting any money—and without revealing who was behind the claim.
Then came RPX, a defensive patent aggregator that has become increasingly well-known, and increasingly profitable, in recent years. RPX works by selling memberships to companies that feel harangued by patent trolls, including Apple and many other tech companies.
RPX basically buys up patents it believes will be used by trolls. By uniting the buying power of many companies, it can get the patents for a bargain price. This lowers the cost of the "troll" problem in many situations, but it doesn't work toward eliminating it. (One could argue it actually perpetuates the problem by ensuring the trolls have a "market" to sell into.)
Cutting patent deals isn't the only thing RPX is up to these days. It's also taken to filing IPRs to invalidate dangerous patents altogether. It's something of a divergence from its main business, but it makes sense. Filing an IPR allows RPX to put patents at serious risk—even if the endgame is to buy the patent owners out, such a threat could lower the cost.
In this case, filing the IPR has backfired in a big way. The three-judge panel determined that RPX was just a "proxy" for Apple, which is the "real-party-in interest" and thus barred from filing the review request.
The decision goes on to describe how Apple tried, but failed, to create an arms-length approach that would make it look like RPX was acting independently. It describes how Apple paid RPX an additional $500,000 under an "Addendum" agreement, in which it would perform certain activities including filing "request for reexamination... or inter partes review with respect to patents of questionable quality."
And of course, the two parties had already agreed that the VirnetX patents were "of questionable quality."
RPX used the same law firm as Apple, the same expert, and filed a petition that it admitted was "substantially identical" to two other proceedings, including one by Apple.
All those factors led the Patent Trial and Appeal Board judges to realize that Apple was the one really in charge. "[T]he interaction between RPX and Apple show an implicit authorization to challenge the VirnetX patents," write the judges. "A party bound by a judgment may not avoid its preclusive force by relitigating through a proxy."
The issue of who the "real party in interest" is behind IPR petitions could have a very big impact beyond this case. First of all, RPX will have to tighten up its act to file future petitions, and it's not clear it will be able to do so at all. Another defensive patent business, Unified Patents, is based wholly on filing IPRs against patents it deems dangerous.
And finally, one public interest group, the Electronic Frontier Foundation, filed a patent reexamination request against patent troll Personal Audio, which claims to own podcasting. Personal Audio has tried, but has so far failed, to prove that the EFF's crowdfunded petition was nothing more than a sham for deep-pocketed defendants.