Plaintiffs-Appellees Defendant Defendant-Appellant · pending resolution of Appeal Nos. 17-1591,...

No. 2018-1197

UNITED STATES COURT OF APPEALS FOR THE FEDERAL CIRCUIT

VIRNETX INC., LEIDOS, INC.,

Plaintiffs-Appellees, v.

CISCO SYSTEMS, INC.,

Defendant, APPLE INC.,

Defendant-Appellant.

On Appeal from the United States District Court for the Eastern District of Texas, No. 6:10-cv-00417-RWS, Judge Robert Schroeder, III

NON-CONFIDENTIAL PETITION OF DEFENDANT-APPELLANT APPLE INC. FOR PANEL REHEARING AND REHEARING EN BANC

BRITTANY BLUEITT AMADI DANIEL WINIK WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Ave., NW Washington, DC 20006 (202) 663-6000

THOMAS G. SPRANKLING WILMER CUTLER PICKERING HALE AND DORR LLP 950 Page Mill Road Palo Alto, CA 94304 (650) 858-6000

February 21, 2019

WILLIAM F. LEE MARK C. FLEMING LAUREN B. FLETCHER WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 (617) 526-6000 Attorneys for Defendant-Appellant Apple Inc.

Case: 18-1197 Document: 78 Page: 1 Filed: 02/21/2019

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CERTIFICATE OF INTEREST

Counsel for Appellant Apple Inc. certifies the following:

1. The full name of every party or amicus represented by me is:

Apple Inc.

2. The name of the real party in interest represented by me is:

Not applicable.

3. All parent corporations and any publicly held companies that own 10 percent or more of the stock of the party or amicus curiae represented by me are:

None.

4. The names of all law firms and the partners or associates that appeared for the party or amicus now represented by me in the trial court or agency or are expected to appear in this court (and who have not or will not enter an appearance in this case) are:

WILMER CUTLER PICKERING HALE AND DORR LLP: Jonathan G. Cedarbaum, Rebecca Bact, Leah Litman (former), James L. Quarles III (former)

KIRKLAND & ELLIS, LLP: Robert A. Appleby, Gregory S. Arovas, Akshay S. Deoras, David N. Draper, Jeanne M. Heffernan, Joseph A. Loy, Thomas V. Matthew (former), F. Christopher Mizzo, John C. O’Quinn, Steve Papazian (former), Aaron D. Resetarits, Leslie M. Schmidt

ALBRITTON LAW FIRM: Eric M. Albritton

BLANK ROME LLP: Stephen E. Edwards

DESMARAIS LLP: John M. Desmarais, Ameet A. Modi, Michael P. Stadnick

DUANE MORRIS LLP: Megan W. Olesek

FINDLAY CRAFT PC: Roger B. Craft, Eric H. Findlay

GOODWIN PROCTER, LLP: Marcia H. Sundeen

JACKSON WALKER LLP: Leisa T. Peschel


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POTTER MINTON, A PROFESSIONAL CORPORATION: Allen F. Gardner (former), Michael E. Jones

WILLIAMS MORGAN, PC: Ruben S. Bains, Christopher N. Cravey (former) Kyung T. Kim (former), Terry D. Morgan, Matthew R. Rodgers (former), Danny L. Williams (former), Scott E. Woloson (former)

5. The title and number of any case known to counsel to be pending in this or any other court or agency that will directly affect or be directly affected by this court’s decision in the pending appeal:

VirnetX Inc. v. Apple Inc., Nos. 17-1591, -1592, -1593 (Fed. Cir.) (VirnetX’s appeals from Apple and Cisco reexaminations holding unpatentable claims of U.S. Patent Nos. 7,418,504 (“the ’504 patent”) and 7,921,211 (“the ’211 patent”)) (argued Jan. 8, 2019)

VirnetX Inc. v. The Mangrove Partners Master Fund, Ltd., Nos. 17-1368, -1383 (Fed. Cir.) (VirnetX’s appeals from IPRs holding unpatentable claims of U.S. Patent Nos. 6,502,135 (“the ’135 patent”) and 7,490,151 (“the ’151 patent”)) (argued Jan. 8, 2019)

VirnetX Inc. v. Iancu, Nos. 17-2593, -2594 (Fed. Cir.) (VirnetX’s appeals from IPRs holding unpatentable claims of ’504 and ’211 patents) (stayed pending resolution of Appeal Nos. 17-1591, -1592, -1593)

VirnetX Inc. v. Iancu, No. 18-1751 (Fed. Cir.) (VirnetX’s appeal from Cisco reexamination holding unpatentable claims of ’504 patent) (fully briefed, awaiting argument date)

VirnetX Inc. v. Apple Inc., No. 19-1050 (Fed. Cir.) (Apple’s appeal from district court judgment awarding damages in related case involving ’135, ’151, ’504, and ’211 patents) (briefing in progress)

Inter Partes Reexamination No. 95/001,679 (PTO) (Cisco reexamination of ’135 patent) (PTAB denied VirnetX’s request for rehearing Jan. 18, 2019)

Inter Partes Reexamination No. 95/001,682 (PTO) (Apple reexamination of ’135 patent) (PTAB proceedings ongoing)


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Inter Partes Reexamination No. 95/001,697 (PTO) (Cisco reexamination of ’151 patent) (PTAB proceedings ongoing)

Inter Partes Reexamination No. 95/001,714 (PTO) (Apple reexamination of ’151 patent) (PTAB proceedings ongoing)

Dated: February 21, 2019 /s/ William F. Lee

WILLIAM F. LEE WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 (617) 526-6000


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TABLE OF CONTENTS

Page

CERTIFICATE OF INTEREST ................................................................................. i

TABLE OF AUTHORITIES .................................................................................... vi

STATEMENT OF COUNSEL .................................................................................. 1

INTRODUCTION ..................................................................................................... 2

BACKGROUND ....................................................................................................... 4

ARGUMENT ............................................................................................................. 6

I. REHEARING IS WARRANTED TO RESTORE THIS COURT’S PRECEDENT

THAT DAMAGES CALCULATIONS—INCLUDING THOSE BASED ON

COMPARABLE LICENSES—MUST BE APPORTIONED TO THE VALUE

THE CLAIMED INVENTION CONTRIBUTES TO THE ACCUSED

PRODUCTS. ....................................................................................................... 7

A. The Panel’s Ruling Shows This Court Has Erroneously Abandoned The Apportionment Requirement When The Patentee’s Damages Theory Relies On Comparable Licenses. ................................................................................................ 7

B. Daubert Requires Courts To Exclude Damages Theories That Rely On Comparable Licenses But Fail To Comply With Garretson And Ericsson............................................................. 11

II. REHEARING IS WARRANTED BECAUSE THE PANEL DECISION

ENCOURAGES ADMISSION OF LARGE DOLLAR FIGURES NOT

DIRECTLY TIED TO ANY DAMAGES THEORY, CONTRARY TO THIS

COURT’S PRECEDENT. ..................................................................................... 13

III. REHEARING IS WARRANTED BECAUSE THE $94 MILLION

PREJUDGMENT INTEREST AWARD IS INCONSISTENT WITH THE

SUPREME COURT’S AND THIS COURT’S PRECEDENT. ..................................... 14

IV. AT A MINIMUM, THIS COURT SHOULD HOLD THIS PETITION

PENDING RESOLUTION OF THE UNPATENTABILITY PROCEEDINGS. ................ 16


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CONCLUSION ........................................................................................................ 18

ADDENDUM

CERTIFICATE OF SERVICE

CERTIFICATE OF COMPLIANCE

CONFIDENTIAL MATERIAL OMITTED

The material omitted from page 5 contains confidential information regarding the amount of royalties received by VirnetX and the number of units sold pursuant to certain third-party license agreements.


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TABLE OF AUTHORITIES

CASES

Page(s)

Carnegie Mellon University v. Marvell Technology Group, Ltd., 805 F.3d 1382 (Fed. Cir. 2015) (en banc) (per curiam) ............................... 17-18

Click-To-Call Technologies, LP v. Ingenio, Inc., 899 F.3d 1321 (Fed. Cir. 2018) .......................................................................... 18

Commonwealth Scientific & Industrial Research Organisation v. Cisco Systems, Inc., 809 F.3d 1295 (Fed. Cir. 2015) ................................................................ 8, 10, 11

County of Sacramento v. Lewis, 523 U.S. 833 (1998) ...................................................................................... 16-17

Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed. Cir. 2014) ...................................................................passim

Fresenius USA, Inc. v. Baxter International, Inc., 721 F.3d 1330 (Fed. Cir. 2013) .......................................................................... 16

Garretson v. Clark, 111 U.S. 120 (1884) ................................................................................ 1, 3, 7, 11

General Motors Corp. v. Devex Corp., 461 U.S. 648 (1983) ........................................................................................ 1, 14

Imperium IP Holdings (Cayman), Ltd. v. Samsung Electronics Co., __ F. App’x __, Nos. 17-2107, -2133, 2019 WL 404570 (Fed. Cir. Jan. 31, 2019) (nonprecedential) ........................................................................ 16

LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51 (Fed. Cir. 2012) .............................................................................. 14

Mentor Graphics Corp. v. EVE-USA, Inc., 870 F.3d 1298 (Fed. Cir. 2017) ............................................................................ 7

Nevor v. Moneypenny Holdings, LLC, 842 F.3d 113 (1st Cir. 2016) ............................................................................... 15


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Oiness v. Walgreen Co., 88 F.3d 1025 (Fed. Cir. 1996) ............................................................................ 15

Sprint Communications Co. v. Time Warner Cable, Inc., __ F. App’x __, No. 17-2247, 2018 WL 6266319 (Fed. Cir. Nov. 30, 2018) (nonprecedential) .................................................................................. 8

Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011) ...................................................................... 1, 14

VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308 (Fed. Cir. 2014) .................................................................. 4, 7, 12

STATUTES AND RULES

35 U.S.C. § 317(b) (2006) ....................................................................................... 17

Fed. Cir. R. 35(b) ....................................................................................................... 7

Fed. Cir. R. 40 ............................................................................................................ 7


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STATEMENT OF COUNSEL

Based on my professional judgment, I believe the panel decision is contrary

to the following decisions of the Supreme Court and this Court: Garretson v. Clark,

111 U.S. 120 (1884); Ericsson, Inc. v. D-Link Systems, Inc., 773 F.3d 1201 (Fed.

Cir. 2014); Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292 (Fed. Cir. 2011);

General Motors Corp. v. Devex Corp., 461 U.S. 648 (1983).

Based on my professional judgment, I believe this appeal requires an answer

to one or more precedent-setting questions of exceptional importance:

1. Whether damages testimony based on assertedly comparable licenses

automatically satisfies (or is otherwise exempt from) Garretson’s requirement that

“in every case” damages must be apportioned to the incremental value the patented

invention adds to the accused products.

2. Whether a high-dollar figure not used to calculate damages is

admissible, where its only apparent purpose is to skew the jury’s damages horizon

upwards.

3. Whether prejudgment interest on damages awarded as a running royalty

can be calculated as though the entire amount accrued on the date of first

infringement, rather than when the accused sales actually occurred.

/s/ William F. Lee WILLIAM F. LEE


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INTRODUCTION

This case presents an extraordinary situation: The panel summarily affirmed

a $439 million infringement judgment, even though the PTO has found every

asserted claim unpatentable multiple times. Five PTO appeals (involving

unpatentability findings for all asserted claims) arrived at this Court well before this

district court appeal, but the Court assigned them all to a single panel. Rather than

decide the parallel appeals together, however, the panel issued a Rule 36 decision

affirming the district court judgment while the companion PTO appeals remain

pending.1

Not only does this unusual procedure arbitrarily risk requiring Apple to pay a

judgment on unpatentable claims based on an accident of timing, but the panel’s

summary affirmance is inconsistent with binding precedent on important damages

issues. After this Court vacated the original $368 million award in this case due to

VirnetX’s failure to apportion its royalty demand to the claimed inventions’ value in

Apple’s products, VirnetX’s damages expert concocted a new theory based entirely

on prior licenses—but still without evidence that the requested royalty was

apportioned. The panel’s affirmance, like other recent panel rulings, carves out an

improper exception to the Supreme Court’s apportionment rule when the patentee’s

1 The patents-in-suit relate to secure network communications. This Court has affirmed the PTO’s unpatentability findings for several related VirnetX patents with nearly-identical specifications and similar claims. Apple Br. 3.


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theory relies on comparable licenses. It also renders meaningless the related rule

that an expert “must account for … distinguishing facts” between comparable

licenses and the hypothetical negotiation. Ericsson, 773 F.3d at 1227. The case

should be reheard so the panel can correct its errors or the en banc Court can clarify

that—as the Supreme Court held over a century ago—a patentee must apportion the

value the patent contributes to the infringing product, and must do so “in every case.”

Garretson, 111 U.S. at 121 (emphasis added).

The failure to require apportionment was not the only serious legal error the

panel affirmed without explanation. The district court allowed VirnetX to tell the

jury that redesigning Apple’s products would supposedly cost $1.3 billion, even

though that number figured nowhere in VirnetX’s damages calculation and only

skewed the damages horizon, contrary to Uniloc. The district court also awarded

$94 million in prejudgment interest, erroneously calculated as though the jury

awarded a lump-sum rather than a running royalty and thus requiring Apple to pay

interest back to 2009 even for sales that did not occur until 2013. That violated

Devex and gave VirnetX a more-than-$30-million windfall.

At a minimum, the Court should hold this petition in abeyance pending

resolution of the related cases regarding the claims’ patentability. It would be unjust


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if Apple had to pay $439 million based on unpatentable claims due to the sequencing

of decisions in ongoing proceedings.2

BACKGROUND

VirnetX alleged that the FaceTime and VPN on Demand features in Apple’s

iPhone, iPad, iPod touch, and Mac products infringed four VirnetX patents. In 2012,

a jury found the patents infringed and not invalid and awarded $368 million. In a

first appeal, this Court rejected VirnetX’s damages theory whereby its expert Roy

Weinstein multiplied a percentage royalty rate (derived from VirnetX’s licensing

policy and prior licenses) by the accused products’ unapportioned sales prices.

VirnetX, Inc. v. Cisco Systems, Inc., 767 F.3d 1308, 1325 (Fed. Cir. 2014) (“VirnetX

I”). The Court vacated the damages award, explaining that Mr. Weinstein disobeyed

the “law requir[ing] patentees to apportion the royalty down to a reasonable estimate

of the value of its claimed technology.” Id. at 1329.

On remand, Mr. Weinstein again offered a damages calculation based on

VirnetX’s prior licenses. But rather than apportion the royalty base as VirnetX I

instructed, Mr. Weinstein merely converted each license to a “per-unit rate.” Apple

Br. 20. None of the licenses had been negotiated in that way, however. One license

(Microsoft) represented a one-time, lump-sum payment. Appx1846. The other five

2 Apple has appealed (No. 19-1050) an additional $595 million judgment for infringement of the same patents by redesigned products. That appeal involves the same comparable-license and prejudgment-interest issues raised here.


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used percentages of the entire market value of the licensees’ products, which were

simple Voice-Over-Internet-Protocol phones. Appx1780. Nevertheless, Mr.

Weinstein assigned a per-unit rate to each, dividing the royalties paid by the units

sold under each license:

Licensee Royalties Paid Unit Sales Per-Unit Rate

Microsoft $200,000,000 $0.19

Avaya $0.34

Siemens $1.21

Mitel $1.43

Aastra $1.80

NEC $2.26

Appx20095.

As shown, the smallest amounts paid to settle litigation over small numbers

of units produced the highest per-unit rates, whereas the more substantial Microsoft

payment produced a substantially lower per-unit rate. Mr. Weinstein nonetheless

gave all six licenses equal weight by taking the simple average of their implied per-

unit rates, resulting in a proposed rate of $1.20 per unit. Apple Br. 20-22. Applying

that to 250 million Apple units, Mr. Weinstein calculated a royalty of $302 million.

Id.

Notably, Mr. Weinstein made no attempt to apportion his proposed royalty to

the value that VirnetX’s four patents contributed to Apple’s products. Although he

claimed generally that VirnetX’s prior licenses were apportioned, he was “not

CONFIDENTIAL MATERIAL FILED UNDER SEAL REDACTEDCase: 18-1197 Document: 78 Page: 13 Filed: 02/21/2019

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certain” how. Appx1862-1863. Indeed, he admitted that VirnetX typically

demanded 1-5% of “the final total value” of licensed end-products. Appx1778;

Appx20122. Mr. Weinstein also made no adjustments for the differences between

the VirnetX licenses and a hypothetical negotiation with Apple, including that the

prior licenses resulted from settlements, involved many more patents, and (for five

licenses) covered much simpler products and far fewer units sold. Apple Br. 20-22.

The jury awarded $302 million, precisely what Mr. Weinstein proposed.

Appx8-9. The district court added $94 million in prejudgment interest, treating the

jury’s award as if it were a lump-sum payment made in June 2009, even though the

accused sales extended through 2013. Appx66-67; Appx71.

Meanwhile, the PTO has held all asserted claims unpatentable in

reexaminations and IPRs filed by Apple, Cisco, and others starting in 2011. See

supra pp. ii-iii. VirnetX appealed five of those decisions in December 2016 (Nos.

17-1368, -1383) and February 2017 (Nos. 17-1591, -1592, -1593)—well before

Apple filed this appeal in November 2017. In April 2018, this Court sua sponte

ordered those PTO appeals treated as companion cases with this one, and all were

argued on January 8, 2019. One week later, the panel summarily affirmed this case.

ARGUMENT

Apple respectfully requests rehearing. Either the panel should correct its

decision in light of Garretson, Ericsson, Uniloc, and Devex, or the Court should


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rehear the case en banc. Fed. Cir. R. 35(b), 40. At a minimum, the petition should

be held pending resolution of the related PTO cases.

I. REHEARING IS WARRANTED TO RESTORE THIS COURT’S PRECEDENT THAT

DAMAGES CALCULATIONS—INCLUDING THOSE BASED ON COMPARABLE

LICENSES—MUST BE APPORTIONED TO THE VALUE THE CLAIMED

INVENTION CONTRIBUTES TO THE ACCUSED PRODUCTS.

A. The Panel’s Ruling Shows This Court Has Erroneously Abandoned The Apportionment Requirement When The Patentee’s Damages Theory Relies On Comparable Licenses.

The Supreme Court has made clear that a patentee “must in every case give

evidence tending to separate or apportion the defendant’s profits and the patentee’s

damages between the patented feature and the unpatented features.” Garretson, 111

U.S. at 121 (emphasis added); see Apple Br. 40-41. This Court has historically

recognized—including in VirnetX I, 767 F.3d at 1326-1331—that the Garretson

apportionment rule ensures a patentee receives compensation only for what its

patented invention adds to the accused products. See Mentor Graphics Corp. v.

EVE-USA, Inc., 870 F.3d 1298, 1300-1301 (Fed. Cir. 2017) (Dyk, J., dissenting from

denial of rehearing en banc) (“For over a century, it has been established by both the

decisions of the Supreme Court and this court that … reasonable royalties for patent

infringement must be apportioned between patented and unpatented features.”). The

Court has also held that licensing-based evidence “is relevant and reliable” only

“where the damages testimony regarding those licenses takes into account the very


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types of apportionment principles contemplated in Garretson.” Ericsson, 773 F.3d

at 1228.

More recently, however, the apportionment requirement has been effectively

abandoned where a patentee’s damages theory relies upon comparable licenses. This

error has its roots in Commonwealth Scientific & Industrial Research Organisation

v. Cisco Systems, Inc., 809 F.3d 1295, 1302-1303 (Fed. Cir. 2015) (“CSIRO”), where

the panel assumed apportionment was “built in” because the parties had previously

negotiated over the specific patent-in-suit and similar products. CSIRO’s unusual

facts are not present in most comparable-license cases—here, for example, VirnetX

never negotiated with Apple over the patents-in-suit—but patentees have sought to

twist CSIRO’s narrow holding into a broader principle that any comparable license

reflects “built in apportionment.” VirnetX Br. 50 (quoting CSIRO for proposition

“that where, as in the licenses VirnetX relied upon, ‘the parties negotiated over the

value of the asserted patent[s],’ the results of that negotiation embody ‘built in

apportionment’”). That distortion of CSIRO has made its way into this Court’s

rulings. In Sprint Communications Co. v. Time Warner Cable, Inc., 2018 WL

6266319, at *5-6 (Fed. Cir. Nov. 30, 2018) (nonprecedential), pet. for reh’g filed


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(Jan. 29, 2019), for instance, the panel expressly assumed that “real-world relevant

licens[ing]” necessarily “takes into account” apportionment.3

While the panel’s Rule 36 decision obscures its reasoning, questions at

argument suggest the panel accepted VirnetX’s view that a theory based on

comparable licenses does not require apportionment:

[H]aven’t our cases … said, okay, apportionment is one thing … but then we have a principle that you can use comparable licenses to gauge it, and that … doesn’t involve an apportionment question.… It doesn’t matter whether or not, we’re not going to do an analysis about the [comparable] license being apportioned … our cases say, you can use that value of the license for the accused product to get you where you want to go, leaving aside all those apportionment issues we deal with here.

Oral Arg. Recording 21:27-22:19 (emphases added). This approach is inconsistent

with Garretson and its progeny, and allows patentees to evade apportionment’s

fundamental purpose—ensuring that damages compensate only for the value the

patented invention adds to the accused products. Apple Reply 18-20.

Indeed, VirnetX’s expert Mr. Weinstein improperly assumed that reliance on

comparable licenses either satisfied or rendered unnecessary any apportionment

requirement. He claimed generally “that the rates in VirnetX’s licensing policy are

apportioned,” but when asked how the apportionment was done, he said: “I’m not

3 If the Sprint rehearing petition (raising a similar apportionment issue) is granted, the Court should likewise grant this petition or hold it until that case is resolved. The denial of the Sprint petition would not require denying this petition, which raises additional questions.


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certain.” Appx1862-1863. VirnetX’s licenses were in fact not apportioned—as Mr.

Weinstein admitted, they were based on VirnetX’s policy of negotiating licenses as

a percentage of “the entire price of the [licensed] product.” Appx1778; see Apple

Br. 21-22.4

Even if the six licenses were somehow apportioned for the products made by

those licensees, they still could not have reflected the apportioned value that

VirnetX’s asserted patents contributed to Apple’s products. All six agreements

resulted from settlements and licensed several more patents than the four at issue

here, and five involved far simpler products. See supra pp. 4-6. Mr. Weinstein made

no adjustments to ensure his damages estimate represented only the contribution of

the four patents-in-suit to Apple’s complex devices. Apple Br. 42-47.

The panel decision is thus inconsistent with not only Garretson, but also this

Court’s precedent requiring that an expert asserting comparable licenses “must

account for … distinguishing facts when invoking them to value the patented

invention,” including that the licenses “cover more patents than are at issue” or were

“calculated as some percentage of the value of a multi-component product.”

Ericsson, 773 F.3d at 1227 (emphasis added); see CSIRO, 809 F.3d at 1305-1306 &

4 Mr. Weinstein’s conversion of the license payments to “per-unit” rates rearranged the math, but did not change that the underlying numbers represented a percentage of end-products’ entire market value.


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n.4 (remanding for consideration whether factors—including standardization,

prospective litigation costs, and falling chip prices—required adjustment of rate

from allegedly comparable negotiation).

Perhaps the clearest indication that Mr. Weinstein’s methodology did not

value the contribution of VirnetX’s four patents-in-suit to Apple’s products is that

his $1.20 per-unit royalty was the same regardless of: (1) how many VirnetX patents

were infringed; (2) which Apple feature infringed (FaceTime or VPN on Demand);

and (3) which Apple product infringed (iPod touch, iPhone, iPad, or Mac). The

reason is simple: Mr. Weinstein did not tailor his analysis to valuing “the patented

feature[s]” in Apple’s products. Garretson, 111 U.S. at 121.

B. Daubert Requires Courts To Exclude Damages Theories That Rely On Comparable Licenses But Fail To Comply With Garretson And Ericsson.

The reliability of a damages expert’s testimony cannot simply be left to the

jury to puzzle out. “[G]iven the great financial incentive parties have to exploit the

inherent imprecision in patent valuation, courts must be proactive to ensure that the

testimony presented—using whatever methodology—is sufficiently reliable to

support a damages award.” CSIRO, 809 F.3d at 1301. “[T]he essential requirement”

for establishing reliability under Daubert is that a reasonable royalty “must be based

on the incremental value that the patented invention adds to the end product.”

Ericsson, 773 F.3d at 1226. Accordingly, Garretson and Ericsson require courts—


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not jurors—to police the requirement that a damages expert apportion and account

for differences between comparable licenses and the hypothetical negotiation.

Even where prior licenses are sufficiently comparable to be admissible, that

does not automatically render any damages methodology based on those licenses

reliable. VirnetX I proves the point: the Court agreed with VirnetX that its past

licenses were admissible but still excluded Mr. Weinstein’s damages theory. 767

F.3d at 1328 (district court failed to “exercise[] its gatekeeping authority to ensure

that only theories comporting with settled principles of apportionment were allowed

to reach the jury”). Yet on remand, the district court again ignored its gatekeeping

responsibilities, stating that Apple’s “valid criticisms of Mr. Weinstein’s opinion …

go to the weight of the evidence rather than its admissibility.” Appx80.

At argument, the panel likewise suggested that the problems with Mr.

Weinstein’s methodology were issues for the jury. Oral Arg. Recording 14:14-48,

18:15-23, 23:17-50. That might have been true if Mr. Weinstein attempted to tailor

his damages calculation to the patented inventions in Apple’s products, and the

question was merely whether he succeeded. But that is not what happened. Mr.

Weinstein made no adjustments to the per-unit rates from the comparable licenses

to apportion or otherwise account for the differences from the hypothetical

negotiation. Those methodological errors are threshold matters for the court to


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decide. This Court should enforce that gatekeeping role to ensure that damages

compensate only for infringement—and no more. Ericsson, 773 F.3d at 1228.

II. REHEARING IS WARRANTED BECAUSE THE PANEL DECISION ENCOURAGES

ADMISSION OF LARGE DOLLAR FIGURES NOT DIRECTLY TIED TO ANY

DAMAGES THEORY, CONTRARY TO THIS COURT’S PRECEDENT.

The district court allowed VirnetX to discuss Apple’s post-verdict redesign of

FaceTime as “relevant to damages.” Appx4. VirnetX asked nearly every witness

about the redesign, using it to improperly suggest Apple had conceded infringement

by the prior, accused FaceTime implementation. Apple Br. 23, 52-56. And Mr.

Weinstein testified the redesign meant “it would have cost Apple” $1.3 billion to

design-around two VirnetX patents. Appx1918-1920.

Admission of the redesign evidence was highly prejudicial. While VirnetX

urged the panel that a redesign may be relevant to damages as a non-infringing

alternative, Mr. Weinstein admitted he “didn’t use the $1.3 billion to calculate

damages in this case.” Appx1964. The only reason to introduce the $1.3 billion

figure was to make VirnetX’s $302 million demand look reasonable by comparison.

Apple Reply 25-27. It had the intended effect: the jury awarded the full amount

requested.5

5 The basis for the $1.3 billion figure was itself highly questionable. Apple Br. 54-56. Mr. Weinstein conceded it rested on an unrealistic estimate that “every man, woman and child in the United States” would make three FaceTime calls daily. Appx1837-1838.


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The panel’s decision is inconsistent with prior holdings that a patentee cannot

introduce a high-dollar figure not directly connected to its damages theory. See

Uniloc USA, Inc. v. Microsoft Corp., 632 F.3d 1292, 1318 (Fed. Cir. 2011);

LaserDynamics, Inc. v. Quanta Computer, Inc., 694 F.3d 51, 78 (Fed. Cir. 2012).

Allowing a patentee to present such an irrelevant, large figure—whether labeled a

“reasonableness” check or (as suggested at argument) a damages “cap”—is unduly

prejudicial and “skew[s] the damages horizon for the jury.” Uniloc, 632 F.3d at

1320.

If left unchecked, the panel’s ruling will encourage patentees to introduce

large figures for no purpose other than to make their actual damages claims “appear

modest by comparison.” LaserDynamics, 694 F.3d at 68. The panel—or the en banc

Court—should rehear this case to reaffirm Uniloc and ensure fair trials on damages.

III. REHEARING IS WARRANTED BECAUSE THE $94 MILLION PREJUDGMENT

INTEREST AWARD IS INCONSISTENT WITH THE SUPREME COURT’S AND

THIS COURT’S PRECEDENT.

The panel also overlooked a clear and significant error regarding prejudgment

interest. Prejudgment interest should date only “from the time that the royalty

payments would have been received.” Devex, 461 U.S. at 655-656. That is because

prejudgment interest serves “merely … to make the patent[ee] whole” by

compensating for “the forgone use of the money between the time of infringement

and the date of the judgment.” Id. at 656.


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Thus, in Oiness v. Walgreen Co., 88 F.3d 1025, 1033 (Fed. Cir. 1996), this

Court held that prejudgment interest cannot be awarded on “the projection of future

damages.” Such an award would violate the rule that “[p]rejudgment interest has no

punitive, but only compensatory, purposes.” Id.; see Nevor v. Moneypenny

Holdings, LLC, 842 F.3d 113, 124-125 (1st Cir. 2016) (explaining “commonsense

notion that interest should not accrue before the harm itself has occurred”).

The district court violated this principle by calculating prejudgment interest

as though damages had been awarded as a lump-sum at the time of the first accused

sale. Appx67 (awarding interest at “prime rate compounded annually, to be applied

on the entire jury award beginning at the date of the hypothetical negotiation”). That

improperly requires Apple to pay interest back to 2009 even for products not sold

until 2013. Apple Br. 67. Because the jury undisputedly awarded damages on a per-

unit basis (VirnetX Br. 42; Appx50), interest should have accrued instead from the

time of each accused sale. The correct approach would reduce the interest by more

than $30 million. D.I. 1066 at 28-29.

Because the district court’s award conflicts with Devex and Oiness, the panel

should vacate the judgment and remand for the district court to apply the correct

prejudgment-interest methodology. Alternatively, the en banc Court should rehear

this issue to clarify Devex’s application to running-royalty awards.


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IV. AT A MINIMUM, THIS COURT SHOULD HOLD THIS PETITION PENDING

RESOLUTION OF THE UNPATENTABILITY PROCEEDINGS.

The PTO has now held the asserted claims unpatentable multiple times,

including in cases currently on appeal. If this Court affirms the PTO’s

unpatentability determinations, VirnetX will no longer have a cause of action against

Apple. Fresenius USA, Inc. v. Baxter Int’l, Inc., 721 F.3d 1330, 1340 (Fed. Cir.

2013); Imperium IP Holdings (Cayman), Ltd. v. Samsung Elecs. Co., 2019 WL

404570, at *5 (Fed. Cir. Jan. 31, 2019) (nonprecedential).6

This Court sua sponte ordered that this appeal be argued to the same panel as

five of the eight pending appeals from the PTO’s unpatentability determinations for

the patents-in-suit. That approach benefited VirnetX, since the PTO appeals were

docketed well before this appeal and ordinarily would have been argued earlier. But

the order presumably was meant to ensure that neither party would unfairly benefit

from an accident of timing. The panel’s Rule 36 decision creates exactly that risk,

raising at least two serious concerns.

First, Apple’s vulnerability to a $439 million judgment should not depend on

the sequence in which this Court decides pending appeals. Judgments should turn

on the law, not the happenstance of docket management. County of Sacramento v.

6 Affirmance of the PTO’s unpatentability determinations for one, two, or three patents-in-suit (depending on which patents) would require a remand to redetermine damages, because the patents cover different accused products and have different issue dates and therefore different damages periods.


- 17 -

Lewis, 523 U.S. 833, 845-846 (1998) (“‘[T]he touchstone of due process is

protection of the individual against arbitrary action of government[.]’”).

Second, the panel’s early disposition threatens to prevent en banc or Supreme

Court review of an important question in Appeal Nos. 17-1591, -1592 regarding 35

U.S.C. § 317(b) (2006), which requires terminating a reexamination “[o]nce a final

decision has been entered against a party in a civil action … that the party has not

sustained its burden of proving the invalidity of any patent claim in suit.” The PTO

ruled that such termination occurs only after exhaustion of all opportunities for

Supreme Court review of the district court’s no-invalidity determination. The prior

coordination of these appeals meant the statutory-interpretation question would be

answered and, if resolved against Apple, could have been presented for further

review at the same time as this case. But by unnecessarily deciding this case before

Nos. 17-1591, -1592, the panel has risked mooting the issue. If the Supreme Court

were to deny certiorari in this case, § 317(b) would require terminating Apple’s

reexaminations.

These serious concerns can be avoided by deferring action on this petition.

The Court has held rehearing petitions pending resolution of related proceedings

before. E.g., Carnegie Mellon Univ. v. Marvell Tech. Grp., Ltd., 805 F.3d 1382


- 18 -

(Fed. Cir. 2015) (en banc) (per curiam); Click-To-Call Techs., LP v. Ingenio, Inc.,

899 F.3d 1321, 1328 (Fed. Cir. 2018). It should do the same here.7

CONCLUSION

The petition should be granted, or at least held in abeyance pending resolution

of the related unpatentability proceedings.

Respectfully submitted,

/s/ William F. Lee BRITTANY BLUEITT AMADI DANIEL WINIK WILMER CUTLER PICKERING HALE AND DORR LLP 1875 Pennsylvania Ave., NW Washington, DC 20006 (202) 663-6000 THOMAS G. SPRANKLING WILMER CUTLER PICKERING HALE AND DORR LLP 950 Page Mill Road Palo Alto, CA 94304 (650) 858-6000

WILLIAM F. LEE MARK C. FLEMING LAUREN B. FLETCHER WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 (617) 526-6000 Attorneys for Defendant-Appellant Apple Inc.

February 21, 2019

7 This appeal should be held at least until the Court decides the companion appeals, including any rehearing petitions. Depending on the outcome of those appeals, further abeyance might be warranted—e.g., for decisions in the Cisco reexamination appeals (including No. 18-1751, which is ready for argument) or if the panel remands any PTO proceedings.


ADDENDUM


NOTE: This disposition is nonprecedential.

United States Court of Appeals for the Federal Circuit

______________________

VIRNETX INC., LEIDOS, INC., Plaintiffs-Appellees

v.

CISCO SYSTEMS, INC., Defendant

APPLE INC.,

Defendant-Appellant ______________________

2018-1197

______________________

Appeal from the United States District Court for the Eastern District of Texas in No. 6:10-cv-00417-RWS, Judge Robert Schroeder, III.

______________________

JUDGMENT ______________________

JEFFREY A. LAMKEN, MoloLamken LLP, Washington,

DC, argued for all plaintiffs-appellees. Plaintiff-appellee VirnetX Inc. also represented by JAMES A. BARTA, RAYINER HASHEM, MICHAEL GREGORY PATTILLO, JR.; ALLISON MILEO GORSUCH, New York, NY; BRADLEY WAYNE CALDWELL, JASON DODD CASSADY, JOHN AUSTIN CURRY, Caldwell Cassady & Curry, Dallas, TX.


DONALD SANTOS URRABAZO, Urrabazo Law, P.C., Los Angeles, CA, for plaintiff-appellee Leidos, Inc. Also represented by ANDY TINDEL, Mann, Tindel & Thompson, Tyler, TX. WILLIAM F. LEE, Wilmer Cutler Pickering Hale and Dorr LLP, Boston, MA, argued for defendant-appellant. Also represented by REBECCA A. BACT, MARK CHRISTOPHER FLEMING, LAUREN B. FLETCHER; THOMAS GREGORY SPRANKLING, Palo Alto, CA; BRITTANY BLUEITT AMADI, Washington, DC.

______________________

THIS CAUSE having been heard and considered, it is ORDERED and ADJUDGED: PER CURIAM (PROST, Chief Judge, MOORE and REYNA, Circuit Judges).

AFFIRMED. See Fed. Cir. R. 36. ENTERED BY ORDER OF THE COURT

January 15, 2019 /s/ Peter R. Marksteiner Date Peter R. Marksteiner Clerk of Court


CERTIFICATE OF SERVICE

I hereby certify that, on this 21st day of February, 2019, I filed the foregoing

Non-Confidential Petition of Defendant-Appellant Apple Inc. for Panel Rehearing

and Rehearing En Banc with the Clerk of the United States Court of Appeals for the

Federal Circuit via the CM/ECF system, which will send notice of such filing to all

registered CM/ECF users.

/s/ William F. Lee WILLIAM F. LEE WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 (617) 526-6000


CERTIFICATE OF COMPLIANCE

Pursuant to Fed. R. App. P. 32(g), the undersigned hereby certifies that this

petition complies with the type-volume limitation of Fed. R. App. P. 35(b)(2).

1. Exclusive of the exempted portions of the petition, as provided in Fed.

Cir. Rule 35(c)(2), the petition contains 3,898 words.

2. The petition has been prepared in proportionally spaced typeface using

Microsoft Word 2010 in 14 point Times New Roman font. As permitted by Fed. R.

App. P. 32(g), the undersigned has relied upon the word count feature of this word

processing system in preparing this certificate.

/s/ William F. Lee WILLIAM F. LEE WILMER CUTLER PICKERING HALE AND DORR LLP 60 State Street Boston, MA 02109 (617) 526-6000

February 21, 2019


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