IP Law Daily, PATENT—Fed. Cir.: Invalidity of two VirnetX security patents guts jury’s $502 million award against Apple, (Mar 31, 2023)

By Cheryl Beise, J.D.

The Federal Circuit had vacated the Board’s earlier invalidation of the patents, but substantial evidence supported the Board’s finding of anticipation on remand.

The U.S. Court of Appeals for the Federal Circuit on March 30 affirmed two Patent Trial and Appeal Board inter partes review decisions finding all challenged claims of two internet security patents owned by VirnetX invalid as anticipated. In 2019, the Federal Circuit had vacated the Board’s earlier decision invalidating the patents, but substantial evidence supported the Board’s finding of anticipation on remand. The decision had the effect of vacating a Texas jury’s infringement verdict and $502 million damage award against Apple for infringement of both patents. On March 31, the appellate panel issued a brief opinion confirming that its decision affirming invalidity mooted Apple’s appeal and deprived VirnetX of its cause of action in the Texas case (VirnetX Inc. v. Mangrove Partners Master Fund, Ltd., March 30, 2023, Stark, L.).

The patents at issue were U.S. Patent Nos. 6,502,135 (the ’135 patent), titled "Agile network protocol for secure communications with assured system availability," and 7,490,151 (the ’151 patent), titled "Establishment of a secure communication link based on a domain name service (DNS) request." The patents disclosed improvements in techniques for securely and privately transmitting communications over public networks.

Litigation history. In 2010, VirnetX sued Apple in federal district court in Tyler, Texas, accusing its FaceTime and VPN on Demand products of infringing the patents, as well as two others. In 2017, the federal district court in Texas affirmed a jury verdict in favor of VirnetX, and awarding over $302 million.

In two inter partes review decisions, the Board ruled certain claims of the ’135 patent and the ’151 patent unpatentable. On appeal, the Federal Circuit in July 2019 reversed the PTAB decisions based on a number of errors. In November 2019, the Federal Circuit vacated a $502.6 million damages award granted to VirnetX in the case, after it affirmed the district court’s judgment of infringement as to the ‘135 and ‘151 patents but reversed as to two others.

On October 30, 2020, after a new trial on damages, a second Texas jury awarded VirnetX nearly $503 million in reasonable royalty damage, based on $0.84 per accused device sold since the 2013 launce of Apple’s iOS7 operating system. Apple appealed this decision.

PTAB invalidity decisions. Mangrove Partners Master Fund, Ltd. (Mangrove) petitioned for inter partes review of several claims of both patents, based on anticipation and obviousness. After the board instituted review, Apple, Inc. was joined to both IPR proceedings and Black Swamp IP, LLC was joined to one. In July 2020, after remand from the Federal Circuit vacating the earlier IPR decisions, the Board concluded that the challenged claims were anticipated by a 1996 article authored by Kiuchi and Kaihara, entitled “C-HTTP – The Development of a Secure, Closed HTTP-based Network on the Internet” (Kiuchi).

VirnetX appealed. VirnetX argued that substantial evidence did not support the Board’s findings that Kiuchi disclosed direct communication between the client computer and target computer which satisfied the patents’ description of a VPN and that Kiuchi taught a DNS module.

VirnetX argued that substantial evidence did not support the Board’s findings that Kiuchi disclosed direct communication between the client computer and target computer which satisfied the patents’ description of a VPN and that Kiuchi taught a domain name server (DNS) module. With regard to both claims, the court found that Kiuchi described “forwarding” of data packets as distinguished from “relaying” of packets, which under the claim terms and expert testimony meant a connection which was direct rather than mediated by a separate computer which would assemble the entire message and then send it on. On both of these issues, the court held that the board was free to credit Mangrove’s expert testimony.

The ‘135 patent. The Federal Circuit determined that substantial evidence supported the Board’s finding that Kiuchi teaches a direct-communication VPN and is therefore within the scope of the claims of VirnetX’s ‘135 patent, and not an indirect-communication VPN, which was within the scope of a disclaimer made by VirnetX during reexamination. On remand, the Board found “by a preponderance of evidence that Kiuchi discloses direct communication that satisfies the claimed VPN.” The Board was free to credit petitioner’s expert testimony on this issue.

The ‘151 patent. The Federal Circuit rejected VirnetX’s argument that Kiuchi does not teach a DNS proxy module capable of performing the determining, forwarding, and creating steps of the challenged claims. The court found that substantial evidence supported the Board determination that Kuchi teaches a DNS module and, therefore, anticipates claims 13 and 14 of the ’151 patent. The court agreed with the Board that Kiuchi’s “client-side proxy, working with the C-HTTP name server, acts as the claimed DNS proxy module.”

The Cases are No. 20-2271 and No. 21-1672.

Attorneys: Stephen B. Kinnaird (Paul Hastings LLP) and Jeffrey A. Lamken (Mololamken LLP) for VirnetX Inc. Donald Santos Urrabazo (Urrabazo Law, PC) for Leidos, Inc., f/k/a Science Applications International Corp. James T. Bailey (Law Office of James T. Bailey) for Mangrove Partners Master Fund, Ltd. Thomas H. Martin (Martin & Ferraro, LLP) for Black Swamp IP, LLC. William F. Lee (Wilmer Cutler Pickering Hale and Dorr LLP) for Apple Inc. Maureen Donovan Queler, Office of the Solicitor, for USPTO.

Companies: VirnetX Inc.; Leidos, Inc., f/k/a Science Applications International Corp.; Mangrove Partners Master Fund, Ltd.; Black Swamp IP, LLC; Apple Inc.

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