VirnetX And Google? Will Apple Settle, Or Risk Going The Distance?

Disclosure: I am long VHC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

On November 8, 2012, VirnetX (VHC) secured $368M in damages, awarded by a federal jury in east Texas, against Apple (AAPL) for infringing on VirnetX's secure communication/Virtual Private Network (VPN) technology in Apple's Facetime application. This jury verdict follows a $200M settlement with Microsoft (MSFT) in 2010, following a jury trial and decision in VirnetX's favor, and subsequent licensing deals with former defendants Aastra, Mitel (MITL), and NEC in 2012. VirnetX's asserted patents are battle hardened from two winning jury verdicts over Microsoft and Apple, including surviving a re-exam by the USPTO, fully intact, in 2010. For additional background and due diligence, please read this comprehensive "white paper" by J.P. Moreno. I have also written about this case here and here.

Now Benzinga is floating a rumor that Google (GOOG) may be interested in buying VirnetX for $50 per share (based on reading J.P. Moreno's white paper, I find the $50 per share rumor to be at least $50 short of a realistic valuation of VirnetX's technology). Whether this rumor has any legs or not, I don't know -- but if it is true, I believe this should cause Apple to re-evaluate its legal strategy against VirnetX and settle.

What are some of the current risk factors for Apple as it relates to VirnetX?

1) Injunction Against Apple - If the judge determines that a monetary judgment won't fully compensate VirnetX for the damages incurred from Apple's infringment, and that Apple's infringing of VirnetX's technology hinders VirnetX from marketing that technology, he could order an injunction against any Apple products that use the infringing technology (Facetime). The consumer blowback to this -- especially after the Apple Maps debacle in 2012 -- would be painful to Apple. Also, it is unlikely that Apple could design around VirnetX's technology without it being a considerable nuisance to the consumer. If Apple had an easy and cheap "design around," then why wouldn't it have employed it prior to all the legal wrangling?

2) Significant Forward Royalty - If Apple and VirnetX do not settle, then the judge will set the future royalties that Apple will have to pay VirnetX for all of the products that use the infringing technology. Does Apple really want to be at the mercy of the court regarding future royalties -- especially considering the shellacking that lead attorney Doug Cawley and the team at McKool Smith put on Apple's defense team?

3) Google buys VirnetX - This would really be a finger-in-the-eye. Can you imagine Google buying VirnetX, then developing a similar app to Facetime and charging Apple a licensing fee to use the technology they were proven to have been stealing from VirnetX?

In addition to the above, VirnetX has a trial date set for the beginning of March in 2013, in the same courtroom with the same judge, against Cisco (CSCO), Avaya, and Siemens (SI), for infringement. The case against Cisco is for "willful" infringement, which if proven, will triple any damages a jury awards.

VirnetX's CEO, Kendall Larsen, has likened VirnetX to the next Qualcomm:

"If I were to look at an analogous company, I can best draw a comparison to being the next Qualcomm. We believe our designs, our patents, and our overall impact on the marketplace are very similar to what Qualcomm looked at when they were undertaking, pursuing, licensing and implementing circuit- switched CDMA technologies with the equivalence in the Internet Protocol world and bringing next generation network technology to us."

The sky is the limit right now for VirnetX as it flawlessly continues to strengthen and waterproof its patent portfolio and implement its licensing strategy for 3G and 4G/LTE secure communications. This is an exciting time to be an investor in VirnetX.

Additional disclosure: This article is informational and intended to spur thought and discussion. This article is NOT a substitute for your own extensive due diligence and does NOT qualify as investment advice. DO NOT BUY OR SELL STOCKS BASED ON THIS ARTICLE. I do not short stocks nor do I invest in options.

Source: http://seekingalpha.com/article/1106531-virnetx-and-google-will-apple-settle-or-risk-going-the-distance?source=feed

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