Apple eviscerates VirnetX’s royalty theories in Federal Circuit

VirnetX, Inc. v. Cisco Systems, Inc., 2014 U.S. LEXIS 17748 (Sept. 16, 2014)

In spring 2010, VirnetX Inc. sued multiple leading technology companies in federal district court (E.D. Tex.), including Cisco and Apple, alleging infringement of several patents related to creating secure protocols for virtual private networks. The court severed the cases. In the Apple suit, VirnetX claimed that Apple’s FaceTime and VPN On Demand products violated four of its patents. A jury found Apple liable and awarded VirnetX $368 million in reasonable royalty damages.

Apple subsequently appealed the verdict to the Federal Circuit, claiming that none of the royalty theories VirnetX’s expert proposed was reliable. According to Apple, the district court erred when it did not exclude the testimony under Daubert. What’s more, it erred when it gave a jury instruction that allowed VirnetX's expert to use the entire value of Apple's iOS devices as the royalty base simply by claiming the devices represented the smallest salable unit featuring the patented component—thus, without showing that the protected component drove customer demand and without further apportioning.

The Federal Circuit used the occasion to review the building blocks of patent damages law: entire market value rule, apportionment, and smallest salable unit. And it commented on the Nash Bargaining Solution.

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