VirnetX Holding Corp.’s (VHC) shares plummeted 44.4% ($6.62) after the United States Court of Appeals for the Federal Circuit (USCAFC) rejected a jury award of $368.2 million that the company had won against Apple (AAPL) for patent infringement.
The two companies have been involved in a legal battle for quite some time. In 2010, VirnetX had accused Apple of infringing four of its patents covering virtual private networking (VPN) technology and Facetime video chat technology. VirnetX had acquired the patents from Science Applications International Corp. in 2006.
In 2012, VirnetX was awarded damages worth $368.2 million. Apple appealed against this ruling in April 2013. However, the earlier ruling was upheld.
Encouraged by the proceedings, VirnetX broadened its attack against Apple by including the latter’s latest products like iPhone 5, the fourth-generation iPad, iPad Mini, the fifth-generation iPod Touch as well as Apple's Mac computers in its patent infringement lawsuit.
Apple filed a lawsuit in the Court of Appeals in 2014. The court ruled that Apple had infringed two of VirnetX’s patents relating to VPN technology but at the same time ordered a review to be conducted in the lower courts concerning the Facetime patents.
Moreover, the Court of Appeals also rejected the jury award that had been given in the earlier ruling. Rejecting the claim, the court declared that even if Apple was found guilty of infringing on VirnetX’s patents, the calculation of damages was highly biased and not based on reality.
VirnetX primarily earns its revenues from patent licensing. In 2013, VirnetX reported total revenue of $2.2 million. Hence, if Apple is found guilty eventually, then the resultant damages will provide a significant boost to VirnetX’ top line.
VirnetX has a long history of suing companies on grounds of patent infringement. In 2007 and 2010, the company had sued Microsoft (MSFT) over two of its patents for VPN technology. Some of the other companies that it had sued in the recent past include the likes of Cisco (CSCO) and Avaya.
However, we believe that this kind of lawsuit take a considerable time to yield any result of significance and often ends-up in an out-of-court settlement. We believe that the lawsuit will not have any effect on Apple’s share price in the near term.
Both, VirnetX and Apple carries Zacks Rank #3 (Hold).
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