VirnetX Holding Corp. is likely to see the $368.2 million award from Apple Inc. in a 2010 patent infringement case dramatically reduced after the trial court reassesses the case following an adverse ruling by the Court of Appeals for the Federal Circuit.

“If you look at district court patent judgments over $100 million they do not fare well on appeal,” said Erich Spangenberg, the founder and owner of IPNavigation Group in Dallas , yesterday, in an email. “Most recent figures I have seen are less than 50% of these judgments survive appeal.”

The infringement action VirnetX filed against Apple in August 2010 now goes back to Chief Judge Leonard Davis of the U.S. District Court for the Eastern District of Texas after the Federal Circuit threw out the award.

The Federal Circuit ruled that although Apple infringed on the patents of Science Applications International Corp., which sold the patents to VirnetX in 2006, the amount awarded was excessive because Chief Judge Davis erred in his instructions to the jury.

Moreover, the appellate court ruled Chief Judge Davis also erred in allowing VirnetX’s expert witness to testify in the case and also in the reasonableness in which royalties were apportioned.

“We affirm the jury’s findings that none of the asserted claims are invalid and that many of the asserted claims of the ‘135 and ‘151 patents are infringed by Apple’s VPN On Demand product,” the Federal Circuit panel said in a ruling written by Chief Judge Sharon Prost.

The ruling also affirmed the district court’s exclusion of evidence related to the reexamination of the patents involved in the suit.

The appellate court, however, reversed the jury award on some claims under the doctrine of equivalents and court’s construction of the claim term “secure communication link” in two of the patents. It also remanded the case back to the trial court for further proceedings to determine whether Apple’s FaceTime feature infringed under the correct claim construction.

“While we are disappointed that the Federal Circuit has vacated portions of the judgment for further proceedings, we are bolstered by the fact that the patents were again found valid and that it was confirmed that Apple’s VPN on Demand functionality infringes the VirnetX patents,” said Kendall Larsen, VirnetX’s CEO in a statement late yesterday. “We look forward to readdressing the FaceTime infringement and damages issues as soon as possible.

VirnetX, based in Zephyr Cove, Nevada, filed the infringement action against Apple on Aug. 11, 2010 alleging that Apple’s FaceTime servers infringed certain claims of U.S. Patents ‘504 and ‘211, and that Apple’s virtual private network or VPN on demand feature infringed certain claims of patents ‘135 and ‘151.

Apple denied infringement.

After a 5-day trial, a jury disagreed with Apple and awarded VirnetX what then was termed “reasonable royalty damages” of $368.2 million.

Representatives for Apple in Cupertino, Calif. couldn’t be reached for comment.

But reasonable royalty damages are clearly in the eye of the beholder.

“I see a drastic reduction in the fee award,” said Lee Cheng, general counsel of Newegg Inc., the Los Angeles-based software maker that has made a name for itself as a slayer of patent trolls, yesterday in a phone interview. “A one time flat fee royalty will probably be part of it.”

The Federal Circuit’s decision erased about $341.4 million in market value from VirnetX after its common stock fell $6.62 cents a share, or 45%, to $8.30 a share yesterday.

It’s the second time this year the Federal Circuit has taken the air out of a patent assertion company after an adverse ruling Aug. 15 against Vringo Inc. That case involved an infringement action against AOL Inc. and Google Inc. over patents concerning a method of filtering Internet search queries which were ruled invalid because of obviousness.

That ruling overturned a $30 million jury award and 3.5% royalty that could have been worth hundreds of millions of dollars to Vringo. Shares of Vringo plunged 72% that day.

New York-based Vringo has said it is seeking an en banc appeal of the adverse ruling by the three judge panel before the full Federal Circuit.

Most patent market watchers say Vringo has very little chance of succeeding, though the company recently hired famed litigator David Boies to join its legal team.

Boies, chairman of the law firm Boies Schiller & Flechner LLP, is a respected litigator whose cases include defending IBM in a 13-year antitrust case brought by the U.S. Department of Justice and private company competitors. He also represented the Justice Department in its antitrust case against Microsoft Corp., winning a victory at trial before the breakup of the company was overturned on appeal and the George W. Bush administration settled the case.
“This is definitely another case that exposes how vulnerable to a strong sustained defense the abusive patent assertion entities are,” Cheng said.

“I’m not saying patent trolls are dead, but this is a clear sign that money isn’t as easy as it once was.”

“Look at the impact on VirnetX stock,” he said. “Forty five percent down in one day. Companies that live by the lawsuit can die by the court ruling.”

A lot of the abusive patent assertion companies “are penny stocks that get pumped like crazy,” he said. They rarely disclose how vulnerable they are to decisions like the ones against VirnetX and Vringo, he said.

For his part, Cheng said Apple and its defense team committed some tactical errors in not seeking an Inter Partes Review or Covered Business Method review by the U.S. Patent and Trademark Office.

“IPRs and CBMs are absolute tools that if employed properly can give defendants tremendous leverage,” he said.

Newegg employed an IPR successfully in an infringement action filed against it by the former MacroSolve Inc.

After spending millions of dollars bringing the suit, MacroSolve was suddenly confronted with millions of dollars more because of the IPR, which is basically a mini trial and can put an infringement suit on hold for 18 months.

In April, MacroSolve essentially went out of business after reverse merging with privately held Drone Aviation Holdings.

“The cost structure suddenly gets shifted southward,” Cheng said. “And for 18 months these patents are useless.”

Even if only half of the infringement actions brought by abusive non-practicing entries were invalidated in this way, it would make “the troll business model overvalued. They’re completely scamming investors.”

To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899, or email him at dan@thepatentinvestor.com.