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How will Oil States impact VirnetX? Will VirnetX's damages be increased to $1.5B?

Zachary Silbersher

Our earlier post on VirnetX’s ($VHC) recent $502M jury verdict commended the company and its counsel on an incredible win, but nevertheless pointed out that it might be for naught.  The patents asserted in the trial for the $502M damages currently stand invalid pursuant to petitions for inter partes re-examination and inter partes review.  Many of those invalidity decisions from the Patent Office (specifically from the PTAB) are currently pending review before the Federal Circuit.  If the Federal Circuit upholds those invalidity decisions, which is statistically most likely, that will most likely eviscerate VirnetX’s hard-earned damages award against Apple.

But what about Oil States?  The case is currently pending before the Supreme Court, and it addresses the constitutionality of petitions for inter partes review (IPR).  The case has already heard oral argument, and a decision is expected imminently.  Some commentators have suggested that if the Supreme Court holds IPRs unconstitutional, then that will vacate the invalidity decisions of VirnetX’s patents from the PTAB, and nothing will finally stand in the way of VirnetX’s damages. 

This question is all the more important because, on April 12, 2018, the jury issued another verdict finding that in addition to infringing VirnetX’s asserted patents to the tune of $502M in damages, Apple’s infringement was willful.  (See VirnetX v. Apple, 12-cv-855 (E.D. Tex.)(Dkt. 728).  Under the Patent statute, a finding of willful infringement permits the court to potentially treble damages.  That means that VirnetX’s $502M verdict could, in theory, be turned into $1.5B.  A finding of willful infringement does not automatically treble or enhance damages, but that will likely be decided pursuant to motions to the court soon.

VirnetX’s recent damages award for $502M was based upon the assertion of four patents, the ‘135, ‘504, ‘151 and ‘211 patents.  Each of those patents currently stands invalidated pursuant to petitions for inter partes review (IPR), which are on appeal to the Federal Circuit.  But the patents have also each been challenged pursuant to petitions for inter partes re-examination (re-exams).  VirnetX has lost those re-exams for the ‘504 and ‘211 patents, and those decisions are currently on appeal to the Federal Circuit.  The ‘135 and ‘151 patents face two re-exams each, which have all been pending for seven years.  VirnetX has not fared well in any of them.  In one of the two re-exams for the ‘135 patent (95/001,679), the Board has affirmed the Examiner’s rejection of the claims as of April 5, 2018.  That decision is likely to be appealed to the Federal Circuit shortly.  In the other pending re-exams (‘135 - 95/001,682; ‘151 - 95/001,697 and 95/001,714), the claims stand rejected by the Examiner, and those decisions are on appeal before the Board, but they have yet to reach the Federal Circuit.  It is unclear when those decisions will reach the Federal Circuit.

The reason this is important is because Oil States will address the constitutionality of IPRs, but not the constitutionality of re-exams.  The issue regarding the constitutionality of re-exams is not currently pending before the Supreme Court in the Oil States decision.  Even if the Supreme Court deems IPRs to be unconstitutional in its upcoming Oil States decision, that will not implicate the constitutionality or legitimacy of re-exams.  Unlike IPRs, which are just five years old, re-exams have been around for a much longer time, and a challenge to their constitutionality would be much more difficult, for a number of reasons.  Thus, VirnetX’s damages award may not be saved by Oil States, since the pending re-exam decisions invalidating the patents will nevertheless survive.

Strangely, and rather awkwardly, there is a silver-lining for VirnetX because of the timing—and delay—of the re-exams.  For two of the patents (‘504 and ‘211), the re-exams are on appeal to the Federal Circuit.  Those appeals should likely be decided within months.  The point is that they will be decided almost assuredly long before VirnetX’s damages verdict for $502M (or potentially more) reaches the Federal Circuit. 

But the re-exams for the other two patents may not be decided by the Federal Circuit any time soon.  For the ‘135 and ‘151 patents, there are at least three re-exam decisions that remain on appeal at the Patent Office.  The appeals appear to have faced delays, but there is no set deadline by which the Board at the Patent Office must act on pending re-exam appeals.  Thus, there is no way to know how much longer the re-exams will remain pending at the Patent Office before they can be appealed to the Federal Circuit. 

The reason that is important is because—and here is the silver-lining—if Apple’s appeal of the damages verdict can run its course through the Federal Circuit, and reach final judgment, before the appeals of the re-exams for the ‘135 and ‘151 patents do the same at the Federal Circuit, then those re-exams may become moot.  There is Federal Circuit precedent suggesting that once judgment for infringement is appealed through final judgment at the Federal Circuit, a subsequent invalidation of that patent cannot upset that judgment.  See  Fresenius USA, Inc. v. Baxter Int’l, Inc., 721 F.3d 1330 (Fed. Cir. 2013).  That all assumes that Oil States actually deems IPRs unconstitutional, and thus, the only Patent Office invalidity decisions that stand in the way of VirnetX’s damages are the re-exams, rather than the IPRs.  That also assumes that VirnetX prevails on its infringement verdict on appeal at the Federal Circuit. 

Nevertheless, it is strange to think that the chances that VirnetX will see a dollar from Apple may depend more on timing, and the race between two separate appeals, but that there is a possible universe where that may just be the case.  That does not mean it is a lock.  The re-exams on appeal at the PTAB have been fully briefed, and could in theory be decided imminently.  By contrast, there is likely to be another six months to a year of post-trial motion practice at the district court before Apple notices its appeal of the infringement verdict.  Apple is likely to do all that it can to delay that appeal.

These scenarios become more complicated for a few reasons.  The jury’s verdict form found $502M in damages, but it did not allocate portions of those damages to each patent.  Thus, even if the ‘504 and ‘211 patents fall (because the re-exam appeals are decided negatively for VirnetX before the infringement appeal,) and the ‘135 and ‘151 patents survive, then the court will have to figure out how to apportion the $502M damages to just those patents.  The damages award may shrink, but still be substantial.  One clue to how this will be untangled is that the ‘135 and ‘151 patents were found to infringe Apple’s VPN On Demand, whereas the ‘504 and ‘211 patents were found to infringe FaceTime.  Depending on which product commands the most revenue, that is a clue to how the damages award is likely to be apportioned.  (That all assumes the ‘135 and ‘151 patents survive, which remains admittedly a big if.)

Then there is the issue of willfulness.  Even if the damages award shrinks, won’t it still be trebled?  That is hard to say right now.  Courts do not automatically treble damages on a finding of willfulness.  But there are strong factors that may militate against the court enhancing the damages award at all.  Technically, Apple filed re-exams against the patents several years ago, and those re-exams have to date been successful.  Given that, Apple likely held a reasonable, good-faith belief that the patents were invalid.  In that case, the court may be unwilling to enhance damages at all.  One curious factor here is that the Court appears to have precluded the re-exam and IPR decisions from being shown to the jury.  It will be interesting to see how the court treats the enhancement issue in the face of the jury’s willfulness finding, given that withholding those invalidity decisions appears plainly relevant to the issue of whether Apple acted willfully.  This will likely be the subject of motion practice very shortly.

Finally, there is the question of what happens to patents invalidated by IPRs if the Supreme Court deems them to be unconstitutional.  There is a lot of assumption that if IPRs are deemed unconstitutional, they will just go away, no one will ever mention them again, and all patents previously invalidated in IPRs will automatically spring back to life.  As we previously argued, based upon precedent involving Bankruptcy Courts in the 1980’s, this author does not view that scenario to be very likely.  In fact, exactly what becomes of patents invalidated by a proceeding subsequently deemed to be unconstitutional remains an open question.

In the case of VirnetX, however, we can see a scenario where the IPRs do, in fact, go away if the Supreme Court deems the proceedings to be unconstitutional.  Just because an IPR is deemed unconstitutional, that does not mean that the findings of the PTAB will be deemed irrelevant.  Rather, a Final Written Decision invalidating a patent in an IPR may become tantamount to a ruling by a Magistrate Judge in District Court.  Magistrates, who are not technically Article III judges, frequently issue recommended findings, and then the District Court either affirms or denies those findings.  In most cases, barring something exceptional, a Magistrate’s findings are affirmed by the District Court.  Similarly, even if unconstitutional, IPRs may not go away entirely, they may just need an additional rubber stamp by an Article III District Court to actually invalidate the patent.  In most cases, the fact that IPRs are unconstitutional may, therefore, just mean there are a few more steps to the process, but not that they go away completely.

In the case of VirnetX, however, and its $502M jury verdict, that may not work.  It is very unusual for there to be two parallel decisions – one IPR decision holding a patent invalid, and another jury decision holding the same patent valid.  But that appears to be the case for the VirnetX patents, or at least most of them, upholding the $502M damages verdict.  The standard for assessing invalidity in District Court is clear-and-convincing, which is a higher standard than applied by the PTAB in IPRs.  Thus, if the trial court was forced to decide between which decision should trump—the jury’s decision upholding the patents’ validity, or the PTAB’s decision striking its validity—then the court should, in theory, side with the jury.  That is because the jury’s decision is the standard applied in District Court, and it is the more difficult standard to meet.  Thus, if IPRs are deemed unconstitutional, the fact that VirnetX currently has in hand a jury verdict of the patents’ validity may be an extremely important factor.

In sum, Oil States will not necessarily save VirnetX.  But all is not necessarily lost.  There are a lot if’s and maybe’s and possibly’s in the road towards VirnetX collecting its damages award.  But there is still a possible path.  Maybe not yet a light at the end of a tunnel.  But light in the tunnel nonetheless.