Virnetx, Inc. v. Cisco Systems, Inc. ( 2014 )

United States Court of Appeals
for the Federal Circuit
______________________
VIRNETX, INC.,
Plaintiff-Appellee,
AND
SCIENCE APPLICATIONS INTERNATIONAL
CORPORATION,
Plaintiff-Appellee,
v.
CISCO SYSTEMS, INC.,
Defendant,
AND
APPLE INC.,
Defendant-Appellant.
______________________
2013-1489
______________________
Appeal from the United States District Court for the
Eastern District of Texas in No. 10-CV-0417, Chief Judge
Leonard Davis.
______________________
Decided: September 16, 2014
______________________
2 VIRNETX, INC. v. CISCO SYSTEMS, INC.
WILLIAM F. LEE, Wilmer Cutler Pickering Hale and
Dorr, LLP, of Boston, Massachusetts, argued for defend-
ant-appellant. With him on the brief were MARK C.
FLEMING, LAUREN B. FLETCHER, and REBECCA BACT, of
Boston, Massachusetts, and JONATHAN G. CEDARBAUM,
BRITTANY BLUEITT AMADI, and LEAH LITMAN, of Washing-
ton, DC. Of counsel on the brief was DANNY L. WILLIAMS,
Williams, Morgan & Amerson, P.C., of Houston, Texas.
J. MICHAEL JAKES, Finnegan, Henderson, Farabow,
Garrett & Dunner, LLP, of Washington, DC, argued for
plaintiffs-appellees. With him on the brief for Virnetx,
Inc. were KARA F. STOLL and SRIKALA ATLURI, of Washing-
ton, DC, and BENJAMIN R. SCHLESINGER, of Atlanta,
Georgia. Of counsel on the brief were BRADLEY W.
CALDWELL, JASON D. CASSADY, and JOHN AUSTIN CURRY,
Caldwell, Cassady & Curry, of Dallas, Texas. On the brief
for Science Applications International Corporation were
DONALD URRABAZO, ARTURO PADILLA, and RONALD
WIELKOPOLSKI, Urrabazo Law, P.C., of Los Angeles,
California; and ANDY TINDEL, Mann, Tindel & Thompson,
of Tyler, Texas.
______________________
Before PROST, ∗ Chief Judge and CHEN, Circuit Judge. ∗∗
PROST, Chief Judge.
Apple Inc. appeals from a final judgment of the U.S.
District Court for the Eastern District of Texas, in which
a jury found that Apple infringed U.S. Patent Nos.
6,502,135 (“’135 patent”), 7,418,504 (“’504 patent”),
∗
Sharon Prost assumed the position of Chief Judge
on May 31, 2014.
∗∗
Randall R. Rader, who retired from the position of
Circuit Judge on June 30, 2014, did not participate in this
decision.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 3
7,490,151 (“’151 patent”), and 7,921,211 (“’211 patent”).
The jury further found that none of the infringed claims
were invalid and awarded damages to plaintiffs-appellees
VirnetX, Inc. and Science Applications International
Corporation (“SAIC”) in the amount of $368,160,000.
For the reasons that follow, we affirm the jury’s find-
ings 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. We
also affirm the district court’s exclusion of evidence relat-
ing to the reexamination of the patents-in-suit. However,
we reverse the jury’s finding that the VPN On Demand
product infringes claim 1 of the ’151 patent under the
doctrine of equivalents. We also reverse the district
court’s construction of the claim term “secure communica-
tion link” in the ’504 and ’211 patents and remand for
further proceedings to determine whether the FaceTime
feature infringes those patents under the correct claim
construction. Finally, we vacate the jury’s damages
award and remand for further proceedings consistent
with this opinion.
BACKGROUND
The patents at issue claim technology for providing
security over networks such as the Internet. The patents
assert priority to applications filed in the 1990s, originally
assigned to SAIC. VirnetX, a Nevada-based software
development and licensing enterprise, acquired the pa-
tents from SAIC in 2006.
I. The ’504 and ’211 Patents and FaceTime
The ’504 and ’211 patents share a common specifica-
tion disclosing a domain name service (“DNS”) system
that resolves domain names and facilitates establishing
“secure communication links.” ’504 patent col. 55 ll. 49–
50. In one embodiment, an application on the client
computer sends a query including the domain name to a
4 VIRNETX, INC. v. CISCO SYSTEMS, INC.
“secure domain name service,” which contains a database
of secure domain names and corresponding secure net-
work addresses. Id. at col. 50 ll. 54–57, col. 51 ll. 11–19,
col. 51 ll. 29–32. This allows a user to establish a secure
communication link between a client computer and a
secure target network address. Id. at col. 51 ll. 34–40.
Representative claim 1 of the ’504 patent recites:
1. A system for providing a domain name service
for establishing a secure communication link, the
system comprising:
a domain name service system configured to be
connected to a communication network, to store a
plurality of domain names and corresponding
network addresses, to receive a query for a net-
work address, and to comprise an indication that
the domain name service system supports estab-
lishing a secure communication link.
Id. at col. 55 ll. 49–56.
Before the district court, VirnetX accused Apple of in-
fringement based on its “FaceTime” feature. Specifically,
VirnetX accused Apple’s servers that run FaceTime on
Apple’s iPhone, iPod, iPad (collectively, “iOS devices”),
and Mac computers of infringing claims 1, 2, 5, 16, 21,
and 27 of the ’504 patent as well as claims 36, 37, 47, and
51 of the ’211 patent. In operation, FaceTime allows
secure video calling between select Apple devices. J.A.
1443. To use FaceTime, a caller enters an intended
recipient’s e-mail address or telephone number into the
caller’s device (e.g., iPhone). J.A. 1451–52. An invitation
is then sent to Apple’s FaceTime server, which forwards
the invitation to a network address translator (“NAT”)
which, in turn, readdresses the invitation and sends it on
to the receiving device. J.A. 1821, 1824–25. The recipient
may then accept or decline the call. J.A. 1453. If accept-
ed, FaceTime servers establish a secure FaceTime call.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 5
J.A. 1453. Once connected, the devices transmit au-
dio/video data as packets across the secure communica-
tion path without passing through the FaceTime server.
J.A. 1820, 1825.
II. The ’135 and ’151 Patents and VPN On Demand
A conventional DNS resolves domain names (e.g.,
“Yahoo.com”) into Internet Protocol (“IP”) addresses.
See ’135 patent col. 37 ll. 22–27. A user’s web browser
then utilizes the IP address to request a website. Id. at
col. 37 ll. 24–29.
The ’135 and ’151 patents share a common specifica-
tion disclosing a system in which, instead of a convention-
al DNS receiving the request, a DNS proxy intercepts it
and determines whether the request is for a secure site.
Id. at col. 38 ll. 23–25. If the proxy determines that a
request is for a secure site, the system automatically
initiates a virtual private network (“VPN”) between the
proxy and the secure site. Id. at col. 38 ll. 30–33. If the
browser determines that the request was for a non-secure
website, then the DNS proxy forwards the request to a
conventional DNS for resolution. Id. at col. 38 ll. 43–47.
Representative claim 1 of the ’135 patent recites:
1. A method of transparently creating a virtual
private network (VPN) between a client computer
and a target computer, comprising the steps of:
(1) generating from the client computer a Domain
Name Service (DNS) request that requests an IP
address corresponding to a domain name associat-
ed with the target computer;
(2) determining whether the DNS request trans-
mitted in step (1) is requesting access to a secure
web site; and
6 VIRNETX, INC. v. CISCO SYSTEMS, INC.
(3) in response to determining that the DNS re-
quest in step (2) is requesting access to a secure
target web site, automatically initiating the VPN
between the client computer and the target com-
puter.
Id. at col. 47 ll. 20–32.
Claims 1 and 13 of the ’151 patent are similar to claim
1 of the ’135 patent except that they recite initiating an
“encrypted channel” and creating a “secure channel,”
respectively, instead of creating a “VPN.” ’151 patent col.
46 ll. 55–67, col. 48 ll. 18–29.
Before the district court, VirnetX accused Apple’s iPh-
one, iPad, and iPod Touch of infringing claims 1, 3, 7, and
8 of the ’135 patent and claims 1 and 13 of the ’151 patent
because they include a feature called “VPN On Demand.”
When a user enters a domain name into the browser of an
iOS device, a DNS request is generated. J.A. 1393–94.
VPN On Demand receives the request and checks a list of
domain names for which a VPN connection should be
established, known as a “configuration file.” J.A. 1377. If
the entered domain name matches a domain name in the
configuration file, VPN On Demand contacts a VPN
server to authenticate the user and, if successful, auto-
matically establishes a VPN between the user’s browser
and the target computer with which the requested domain
name is associated. J.A. 1377–78, 1396–98.
III. Five-Day Jury Trial and Post-Trial Motions
On August 11, 2010, VirnetX filed this infringement
action, alleging that Apple’s FaceTime servers infringe
certain claims of the ’504 and ’211 patents, and that
Apple’s VPN On Demand feature infringes certain claims
of the ’135 and ’151 patents. Apple responded that
FaceTime and VPN On Demand do not infringe, and that
the asserted claims were invalid as anticipated by a 1996
publication by Takahiro Kiuchi et al. (“Kiuchi”).
VIRNETX, INC. v. CISCO SYSTEMS, INC. 7
On April 25, 2012, the district court construed disput-
ed claim terms, and a jury trial commenced on October
31, 2012. After a five-day trial, the jury returned its
verdict, finding all of the asserted claims valid and in-
fringed. The jury awarded VirnetX $368,160,000 in
reasonable royalty damages. Apple moved for judgment
as a matter of law (“JMOL”) or, alternatively, for a new
trial or remittitur. On February 26, 2013, the district
court denied Apple’s motions. VirnetX, Inc. v. Apple Inc.,
925 F. Supp. 2d 816 (E.D. Tex. 2013).
Apple now appeals the denial of its post-trial motion
for JMOL or a new trial. This court has jurisdiction
under 28 U.S.C. § 1295(a)(1).
DISCUSSION
I. Claim Construction
On appeal, Apple argues that the district court erred
in construing the terms “domain name” and “secure
communication link,” both recited in the ’504 and ’211
patents. For the reasons that follow, we affirm the con-
struction of “domain name” and reverse the construction
of “secure communication link.”
Claim construction is a question of law that we review
de novo. Lighting Ballast Control LLC v. Philips Elecs. N.
Am. Corp., 744 F.3d 1272, 1276–77 (Fed. Cir. 2014) (en
banc); Cybor Corp. v. FAS Techs., Inc., 138 F.3d 1448,
1456 (Fed. Cir. 1998) (en banc). The process of construing
a claim term begins with the words of the claims them-
selves. See Vitronics Corp. v. Conceptronic, Inc., 90 F.3d
1576, 1582 (Fed. Cir. 1996); Phillips v. AWH Corp., 415
F.3d 1303, 1312–14 (Fed. Cir. 2005) (en banc). However,
the claims “must be read in view of the specification, of
which they are a part.” Phillips, 415 F.3d at 1315 (quot-
ing Markman v. Westview Instruments, Inc., 52 F.3d 967,
979 (Fed. Cir. 1995) (en banc), aff’d 517 U.S. 370 (1996)).
Additionally, the doctrine of claim differentiation disfa-
8 VIRNETX, INC. v. CISCO SYSTEMS, INC.
vors reading a limitation from a dependent claim into an
independent claim. See InterDigital Commc’ns, LLC v.
Int’l Trade Comm’n, 690 F.3d 1318, 1324 (Fed. Cir. 2012).
Although courts are permitted to consider extrinsic evi-
dence like expert testimony, dictionaries, and treatises,
such evidence is generally of less significance than the
intrinsic record. Phillips, 415 F.3d at 1317 (citing C.R.
Bard, Inc. v. U.S. Surgical Corp., 388 F.3d 858, 862 (Fed.
Cir. 2004)).
A. “Domain Name”
The district court construed “domain name” as “a
name corresponding to an IP address.” Memorandum
Opinion & Order at 16, VirnetX, Inc. v. Cisco Sys. Inc., No.
6:10-cv-416 (E.D. Tex. Apr. 25, 2012), ECF No. 266
(“Claim Construction Order”). Apple argues, as it did
below, that the proper construction is “a hierarchical
sequence of words in decreasing order of specificity that
corresponds to a numerical IP address.” Apple insists
that its construction represents the plain and ordinary
meaning of the term, relying primarily on a technical
dictionary definition and several examples in the specifi-
cation (e.g., “Yahoo.com”). We disagree. Intrinsic evi-
dence supports the district court’s construction of “domain
name.” The specification of the ’504 and ’211 patents
suggests the use of the invention for secure communica-
tions between application programs like “video conferenc-
ing, e-mail, word processing programs, telephony, and the
like.” ’504 patent col. 21 ll. 27–29. The disclosure of such
applications demonstrates that the inventors did not
intend to limit “domain name” to the particular format-
ting limitations of websites sought by Apple, i.e., a top-
level domain, second-level domain, and host name.
Additionally, fundamental principles of claim differ-
entiation disfavor reading Apple’s hierarchical limitation
into the independent claims. Dependent claims in both
patents require that “at least one” of the domain names
VIRNETX, INC. v. CISCO SYSTEMS, INC. 9
stored by the system comprise a top-level domain name.
See, e.g., ’504 patent col. 55 ll. 57–59 (“The system of
claim 1, wherein at least one of the plurality of domain
names comprises a top-level domain name.”); ’211 patent
col. 57 ll. 47–50 (“The non-transitory machine-readable
medium of claim 36, wherein the instructions comprise
code for storing the plurality of domain names and corre-
sponding network addresses including at least one top-
level domain name.”). The specific limitation of hierar-
chical formatting in the dependent claims strongly sug-
gests that the independent claims contemplate domain
names both with and without the hierarchical format
exemplified by “Yahoo.com.” See InterDigital, 690 F.3d at
1324 (“The doctrine of claim differentiation is at its
strongest . . . ‘where the limitation that is sought to be
“read into” an independent claim already appears in a
dependent claim.’” (quoting Liebel-Flarsheim Co. v.
Medrad, Inc., 358 F.3d 898, 910 (Fed. Cir. 2004))).
Such intrinsic evidence is not outweighed by the ex-
trinsic evidence of one dictionary definition. This is
particularly true here, where the dictionary definition
seems to contemplate web addresses on the Internet,
while the specification makes clear that the claim term in
question is not so limited. See J.A. 6139–40. Thus, we
affirm the district court’s construction of the term “do-
main name” as “a name corresponding to an IP address.”
B. “Secure Communication Link”
The district court construed “secure communication
link” as “a direct communication link that provides data
security.” Claim Construction Order at 13. Apple argues
that this term should be construed consistent with “VPN,”
10 VIRNETX, INC. v. CISCO SYSTEMS, INC.
which the district court construed to require not only data
security but also anonymity. 1
As an initial matter, we note that there is no dispute
that the word “secure” does not have a plain and ordinary
meaning in this context, and so must be defined by refer-
ence to the specification. See Oral Arg. 31:50–32:40,
available at http://www.cafc.uscourts.gov/oral-argument-
recordings/13-1489/all (acknowledgement by VirnetX’s
counsel that construction of “secure” requires considera-
tion of the specification).
Moreover, we agree with Apple that, when read in
light of the entire specification, the term “secure commu-
nication link” requires anonymity. Indeed, the addition of
anonymity is presented as one of the primary inventive
contributions of the patent. For example, the Background
of the Invention states that “[a] tremendous variety of
methods have been proposed and implemented to provide
security and anonymity for communications over the
Internet.” ’504 patent col. 1 ll. 32–35 (emphasis added).
It goes on to define these two concepts as counterpart
safeguards against eavesdropping that could occur while
two computer terminals communicate over the Internet.
Id. at col. 1 ll. 38–54. Security in this context refers to
protection of data itself, to preserve the secrecy of its
contents, while anonymity refers to preventing an eaves-
dropper from discovering the identity of a participating
terminal. Id. at col. 1 ll. 40–54.
1 The district court construed VPN to mean “a net-
work of computers which privately and directly communi-
cate with each other by encrypting traffic on insecure
paths between the computers where the communication is
both secure and anonymous.” Claim Construction Order
at 8.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 11
Having thus framed the problem, the patent (as ex-
pected) proposes a solution. Specifically, the Summary of
the Invention begins by explaining how the invention
improves security by using a “two-layer encryption for-
mat” known as the Tunneled Agile Routing Protocol, or
TARP. Id. at col. 3 ll. 14–17. First, an “inner layer”
secures the data itself, id. at col. 4 ll. 5–7, and then a
second “outer layer” conceals the data’s “true destination,”
id. at col. 3 ll. 34–35. The fact that the Summary of the
Invention gives primacy to these attributes strongly
indicates that the invention requires more than just data
security. See, e.g., C.R. Bard, 388 F.3d at 864 (giving
particular weight to statements in the Summary of the
Invention because “[s]tatements that describe the inven-
tion as a whole, rather than statements that describe only
preferred embodiments, are more likely to support a
limiting definition of a claim term”).
Consistent with this emphasis, the Detailed Descrip-
tion states that “the message payload is embedded behind
an inner layer of encryption” and “[e]ach TARP packet’s
true destination is concealed behind an outer layer of
encryption.” ’504 patent col. 9 ll. 60–61, col. 11 ll. 2–4.
The concealment requirement appears throughout the
specification and is implicated in every embodiment
associated with the “two-layer encryption” or TARP VPN.
The fact that anonymity is “repeatedly and consistently”
used to characterize the invention strongly suggests that
it should be read as part of the claim. See Eon-Net LP v.
Flagstar Bancorp., 653 F.3d 1314, 1321–23 (Fed. Cir.
2011).
VirnetX attempts to rebut this suggestion by pointing
to a single place in the specification where a “secure
communication path” is referred to as providing only
security, without anonymity. See ’504 patent col. 39 ll.
24–35. But that disclosure relates to the “conventional
architecture” of the prior art that suffers precisely be-
cause it “hamper[s] anonymous communications on the
12 VIRNETX, INC. v. CISCO SYSTEMS, INC.
Internet.” Id. at col. 39 ll. 24, 32–33. And indeed, the
specification goes on to explain how the invention solves
that very problem by setting up a VPN, which requires
anonymity. Id. at col. 39 ll. 46–62.
VirnetX also argues that the specification teaches that
different users have “different needs” such that some
users need data security while, in other cases, “it may be
desired” to also have anonymity. Appellee’s Br. 48 (cit-
ing ’504 patent col. 1 ll. 33–52). Thus, VirnetX insists, the
TARP protocol (with its requirement of anonymity) is but
one type of “secure communication link,” and does not
limit the construction of that term. To be sure, the speci-
fication mechanically prefaces most passages with the
phrase “according to one aspect of the present invention.”
See, e.g., ’504 patent col. 6 l. 36. But the Background and
Summary of the Invention clearly identify the TARP
protocol as a key part of the novel solution to the specific
problem identified in the prior art. Unsurprisingly,
therefore, VirnetX has not identified even a single embod-
iment that provides data security but not anonymity.
Moreover, in several instances the specification ap-
pears to use the terms “secure communication link” and
“VPN” interchangeably, suggesting that the inventors
intended the disputed term to encompass the anonymity
provided by a VPN. See Nystrom v. Trex Co., 424 F.3d
1136, 1143 (Fed. Cir. 2005) (“Different terms or phrases in
separate claims may be construed to cover the same
subject matter where the written description and prosecu-
tion history indicate that such a reading of the terms or
phrases is proper.”). For example, it states that “[w]hen
software module 3309 is being installed or when the user
is off-line, the user can optionally specify that all commu-
nication links established over computer network 3302
are secure communication links. Thus, anytime that a
communication link is established, the link is a VPN
link.” ’504 patent col. 52 ll. 15–19 (emphases added).
Similarly, in the very next paragraph the specification
VIRNETX, INC. v. CISCO SYSTEMS, INC. 13
states that “a user at computer 3301 can optionally select
a secure communication link through proxy computer
3315. Accordingly, computer 3301 can establish a VPN
communication link 3323 with secure server computer
3320 through proxy computer 3315.” Id. at col. 52 ll. 25–
29 (emphases added). In both of these instances, the
specification equates the term “secure communication
link” with a “VPN.” The only counter-example VirnetX
can point to is an instance where the specification states,
in relation to one aspect of the invention, that “[t]he
secure communication link is a virtual private network
communication link over the computer network.” Id. at
col. 6 ll. 61–63. But equating the two terms with respect
to one aspect of the present invention is a far cry from
expressly divorcing those terms elsewhere, particularly in
the absence of any embodiment or disclosure that does so.
Thus, we reverse the district court’s claim construc-
tion and conclude that the term “secure communication
link” as used in the ’504 and ’211 patents requires ano-
nymity. Accordingly, the term should be construed as “a
direct communication link that provides data security and
anonymity.”
II. Infringement
We review the denial of a motion for JMOL or a new
trial under the law of the regional circuit. Verizon Servs.
Corp. v. Cox Fibernet Va., Inc., 602 F.3d 1325, 1331 (Fed.
Cir. 2010). The Fifth Circuit requires that a jury’s deter-
mination must be upheld if it is supported by substantial
evidence. ClearValue, Inc. v. Pearl River Polymers, Inc.,
668 F.3d 1340, 1343 (Fed. Cir. 2012) (citing Med. Care
Am., Inc. v. Nat’l Union Fire Ins. Co., 341 F.3d 415, 420
(5th Cir. 2003)).
A. ’504 and ’211 Patents
Apple argues that there was not substantial evidence
to support the jury’s verdict that its FaceTime servers
14 VIRNETX, INC. v. CISCO SYSTEMS, INC.
infringe the asserted claims of the ’504 and ’211 patents.
Apple insists that FaceTime does not infringe the “secure
communication link” claim term for two reasons: first,
because when properly construed it requires anonymity,
which the FaceTime servers do not provide, and second,
because they do not provide “direct” communication, as
required by the district court’s claim construction.
With respect to the first argument, we have now
construed the disputed claim term so as to require ano-
nymity. See supra at 13. However, the jury was not
presented with the question of whether FaceTime infring-
es the asserted claims under a construction requiring
anonymity. Thus, we remand for further proceedings to
determine whether Apple’s FaceTime servers provide
anonymity.
With respect to the second argument, Apple argues
that FaceTime servers do not provide “direct” communica-
tion because the communications are addressed to a NAT,
rather than to the receiving device. Appellant’s Br. 43.
The district court concluded that there was substantial
evidence to support the jury’s finding that the NAT rout-
ers used by FaceTime do not impede direct communica-
tion, VirnetX, 925 F. Supp. 2d at 831, and we agree. As
the district court noted, VirnetX’s expert testified that the
NAT routers still allow for “end-to-end communication
between the two devices,” J.A. 1565, because they merely
translate addresses from the public address space to the
private address space, but do not terminate the connec-
tion. J.A. 1465, 1536–37. Even Apple’s expert admitted
that the connection does not stop at the NAT routers.
J.A. 1984.
Apple argues that this testimony cannot support a
finding of infringement because it is inconsistent with the
court’s claim construction that required “direct addressa-
bility.” Appellant’s Br. 43–45. But the district court
considered this argument and disagreed, noting that its
VIRNETX, INC. v. CISCO SYSTEMS, INC. 15
claim construction expressly provided that “routers,
firewalls, and similar servers . . . do not impede ‘direct’
communication,” and VirnetX presented evidence that
NATs operate like routers or firewalls. VirnetX, 925 F.
Supp. 2d at 831.
Thus, we do not think the district court erred in find-
ing that there was substantial evidence on which the jury
could have relied to reach its finding of infringement on
this element.
B. ’135 and ’151 Patents
Apple also argues that there was not substantial
evidence to support the jury’s verdict that its VPN On
Demand product infringed the asserted claims of the ’135
and ’151 patents for several reasons, discussed in turn
below.
1. “Determining Whether”
Apple argues that its VPN On Demand feature does
not infringe the asserted claims of the ’135 and ’151
patents because it does not “determine whether” a re-
quested domain name is a secure website or server.
Instead, Apple insists that it merely determines whether
the requested website is listed in the user-created “con-
figuration file” and initiates a VPN connection for any
domain name on that list, regardless of whether or not it
is secure. In response, VirnetX argues that there was
substantial evidence demonstrating that the VPN On
Demand system is designed and intended to be used only
for accessing secure private networks. We agree with
VirnetX.
Here, the evidence presented at trial supports the
conclusion that Apple’s VPN On Demand product infring-
es the asserted claim limitation in its normal configura-
tion. In particular, VirnetX’s expert testified that Apple’s
technical design documents and internal technical presen-
tations relating to the VPN On Demand system (many of
16 VIRNETX, INC. v. CISCO SYSTEMS, INC.
which are confidential and cannot be quoted here) make
clear that a VPN connection should only be established
for private web addresses. Thus, regardless of whether a
user could misconfigure the list by entering public domain
names, Apple’s planning documents, internal emails, and
presentations all explained that VPN On Demand’s
primary use is to connect users to secure sites using a
VPN. That is all that is required. See Hilgraeve Corp. v.
Symantec Corp., 265 F.3d 1336, 1343 (Fed. Cir. 2001).
Moreover, this description of the VPN On Demand
feature is consistent with how the claimed functionality is
described in the specification. For example, in one embod-
iment, the DNS proxy determines whether a request is for
a secure site by checking the domain name against a table
or list of domain names. ’135 patent col. 38 ll. 23–30. In
other words, the proxy identifies a request for “access to a
secure site . . . by reference to an internal table of such
sites.” Id. That is precisely how the VPN On Demand
feature operates.
We therefore conclude that the jury’s finding that the
VPN On Demand product infringes the “determining
whether” limitation was supported by substantial evi-
dence.
2. “Between”
a. Literal Infringement of Claim 1 of the ’135 Patent and
Claim 13 of the ’151 Patent
Claim 1 of the ’135 patent requires creating a “VPN”
“between” the client and a target computer. ’135 patent
col. 47 ll. 20–22. Similarly, claim 13 of the ’151 patent
requires creating a “secure channel” “between” the client
and the secure server. ’151 patent col. 48 ll. 28–29. For
both claims, the district court construed “between” to
mean “extending from” the client to the target computer.
Claim Construction Order at 26.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 17
Apple argues that its VPN On Demand product fails
to meet this limitation because it only secures communi-
cations between the iPhone and the VPN server, but not
between the VPN server and the target computer. Vir-
netX responds that Apple’s product is intended to be used
with private networks, which are generally configured to
be both secure and anonymous. In other words, VirnetX
argues that the secure channel between the VPN server
and the target computer is provided by the target com-
puter itself. After considering the record as a whole, we
conclude that there was substantial evidence to support
the jury’s verdict of infringement on this limitation.
At trial, VirnetX presented evidence and testimony to
the jury that “the virtual private network extend[s] from
the client computer to the target computer . . . because it’s
encrypted on the insecure paths, and it’s secure within
the corporate network.” J.A. 1400–01. VirnetX’s expert
testified that one of ordinary skill would understand that
the path extending from the VPN server to the target
computer, i.e., within the private network, would be
secure and anonymous owing to protection provided by
the private network. J.A. 1080 (“That network is secure,
because it’s been physically secured; and it also has
what’s called a firewall between its network and the
public network. So it keeps the bad guys out.”); J.A. 1379
(“If that’s a private network of the company that they’ve
set up behind a VPN server, the company would have
configured that to be secure.”); J.A. 1396 (“[T]hese are . . .
private networks that are not to be accessed by others.
They require authorization for access.”). The jury also
heard testimony that while in some situations traffic
could be unsecured behind the VPN server, J.A. 1997–98,
this scenario would be “atypical.” J.A. 1992–93. For
example, VirnetX presented evidence to the jury that
Apple itself advertised that VPN On Demand is designed
to connect with “private corporate networks” and “works
with a variety of authentication methods.” J.A. 20001.
18 VIRNETX, INC. v. CISCO SYSTEMS, INC.
And, more to the point, the jury heard that the “private
corporate networks” to which VPN On Demand is intend-
ed to connect employ security measures including VPN
servers, VPN authentication servers, proxy servers, and
firewalls which regulate access to private resources and
prevent unauthorized users from breaching. J.A. 1080,
1379, 1401.
Apple argues that this finding of infringement neces-
sarily rests on a series of “assumptions” about how all
private networks operate in order to conclude that VPN
On Demand is “typically” configured to operate in the
manner accused of infringement. Appellant’s Br. 30–31.
However, VirnetX’s expert relied on Apple’s own internal
technical documentation, product specifications, and
marketing presentations, several of which describe specif-
ic security measures used by the private networks to
which VPN On Demand is intended to connect. This
evidence demonstrates not only that VPN On Demand
may be configured to interact with private networks, but
that this was apparently Apple’s primary objective. Apple
would have VirnetX prove that VPN On Demand has no
non-infringing modes of operation. But, as noted above,
VirnetX bears no such burden. See supra at 15–16; see
also z4 Techs., Inc. v. Microsoft Corp., 507 F.3d 1340, 1350
(Fed. Cir. 2007) (“[I]nfringement is not avoided merely
because a non-infringing mode of operation is possible.”).
We cannot agree that the jury’s finding lacks substantial
evidence because VirnetX did not specifically disprove
that VPN On Demand can, in atypical situations, estab-
lish a VPN with insecure networks.
Apple also responds that this evidence is insufficient
because VirnetX’s expert testified that VPN On Demand
only encrypts communications between the iPhone and
the VPN server—by implication leaving the path from the
VPN server to the target unencrypted. Appellant’s Br. 29
(quoting J.A. 1392). However, the district court’s con-
struction of “VPN” does not require that traffic on a
VIRNETX, INC. v. CISCO SYSTEMS, INC. 19
secure path be encrypted. Rather, the construction only
requires encryption of traffic “on insecure paths.” Claim
Construction Order at 8. Moreover, as indicated by
the ’135 patent, encryption is just one possible way to
address data security. ’135 patent col. 1 ll. 38–39 (“Data
security is usually tackled using some form of data en-
cryption.” (emphasis added)). And VirnetX provided
substantial evidence for the jury to conclude that paths
beyond the VPN server may be rendered secure and
anonymous by means of “physical security” present in the
private corporate networks connected to by VPN On
Demand. See, e.g., J.A. 1401.
Accordingly, we conclude that the jury’s finding that
the VPN On Demand feature creates a “VPN” or a “secure
channel” that extends from the client to the target com-
puter was supported by substantial evidence. We there-
fore affirm the district court’s denial of JMOL as to claim
1 of the ’135 patent and claim 13 of the ’151 patent.
b. Infringement of Claim 1 of the ’151 Patent Under the
Doctrine of Equivalents
Claim 1 of the ’151 patent is similar to claim 13 except
that it requires initiating an “encrypted channel”—rather
than a “secure channel”—“between” the client and the
secure server. ’151 patent col. 46 ll. 66–67. With respect
to infringement, VirnetX conceded that VPN On Demand
does not literally practice this limitation because the
private network between the VPN server and the target is
“not necessarily encrypted” from end to end. J.A. 1420–
21. Rather, VirnetX asserted that VPN On Demand
infringes under the doctrine of equivalents because the
difference between secure communication via encryption
and secure communication in general is insubstantial.
J.A. 1421–24. Apple argues that VirnetX’s theory of
equivalents is legally insufficient because it vitiates the
“encrypted channel” element. Appellant’s Br. 32–33.
20 VIRNETX, INC. v. CISCO SYSTEMS, INC.
To find infringement under the doctrine of equiva-
lents, any differences between the claimed invention and
the accused product must be insubstantial. See Graver
Tank & Mfg. Co. v. Linde Air Prods. Co., 339 U.S. 605,
608 (1950). Insubstantiality may be determined by
whether the accused device performs substantially the
same function in substantially the same way to obtain
substantially the same result as the claim limitation.
Crown Packaging Tech., Inc. v. Rexam Beverage Can Co.,
559 F.3d 1308, 1312 (Fed. Cir. 2009). This is a question of
fact. Anchor Wall Sys., Inc. v. Rockwood Retaining Walls,
Inc., 340 F.3d 1298, 1313 (Fed. Cir. 2003). Vitiation is not
an exception to the doctrine of equivalents. Deere & Co. v.
Bush Hog, LLC, 703 F.3d 1349, 1356 (Fed. Cir. 2012).
Rather, it is a legal determination that “the evidence is
such that no reasonable jury could determine two ele-
ments to be equivalent.” Id. (citation omitted).
After considering the record as a whole, we conclude
that the evidence presented at trial does not support the
jury’s finding of infringement under the doctrine of equiv-
alents. VirnetX’s expert testified that VPN On Demand
(a) performs substantially the same function because it
secures the communication between the client and the
secure server, (b) does so in substantially the same way
by protecting data through encryption on insecure paths
that are vulnerable to eavesdroppers, and (c) achieves
substantially the same result of successfully protecting
the entire communication path from potential eavesdrop-
pers. See J.A. 1424.
Notably, in explaining the “way” that VPN On De-
mand secures communications, the expert did not testify
that VPN On Demand provides encryption on the alleged-
ly secure pathway between the VPN server and the pri-
vate network, but only on the insecure portion of the
pathway. Thus, his testimony effectively equates the
“security” of the private network with the “encryption”
provided by the VPN server. But the patent consistently
VIRNETX, INC. v. CISCO SYSTEMS, INC. 21
differentiates between “security” and “encryption.” Both
the claims and the specification of the ’151 patent make
clear that encryption is a narrower, more specific re-
quirement than security. For example, the specification
states that encryption is just one possible way to address
data security. ’151 patent col. 1 ll. 49–50 (“Data security
is usually tackled using some form of data encryption.”
(emphasis added)). Additionally, one of the primary
differences between the steps performed in claim 1 of
the ’151 patent and the steps performed in claim 13 is
that claim 13 requires creating a “secure” channel, while
claim 1 specifically requires that the channel be “encrypt-
ed.”
In light of these distinctions in the patent itself, the
jury’s implicit finding that VPN On Demand achieves the
result of protecting communications from eavesdropping
in “substantially the same way” as contemplated by the
“encrypted channel” claim limitation was not supported
by VirnetX’s expert’s testimony. See Crown Packaging,
559 F.3d at 1312. No reasonable jury could have deter-
mined that the security provided by the VPN On Demand
system—which includes encryption on the insecure paths
but otherwise relies on the security provided by private
networks—is equivalent to the “encrypted channel”
required by claim 1 of the ’151 patent. The district court’s
denial of JMOL as to that claim must therefore be re-
versed.
III. Invalidity
A party challenging the validity of a patent must es-
tablish invalidity by clear and convincing evidence. See
Microsoft Corp. v. i4i Ltd. P’ship, 131 S. Ct. 2238, 2242
(2011). Anticipation is a factual question that we review
for substantial evidence. SynQor, Inc. v. Artesyn Techs.,
Inc., 709 F.3d 1365, 1373 (Fed. Cir. 2013). A claim is
anticipated only if each and every element is found within
a single prior art reference, arranged as claimed. See
22 VIRNETX, INC. v. CISCO SYSTEMS, INC.
NetMoneyIN, Inc. v. VeriSign, Inc., 545 F.3d 1359, 1369
(Fed. Cir. 2008).
Apple argues that the asserted claims are anticipated
by the Kiuchi reference. However, we conclude that the
jury heard substantial evidence that at least one element
of each asserted claim was missing from that reference.
With respect to the ’135, ’504, and ’211 patents, the jury
heard evidence that Kiuchi’s proxy servers at least do not
teach “direct communication” between a client and target
computer, which is sufficient to defeat a claim of anticipa-
tion. J.A. 2343–44. Specifically, the jury heard expert
testimony that Kiuchi’s client-side and server-side proxies
terminate the connection, process information, and create
a new connection—actions that are not “direct” within the
meaning of the asserted claims. J.A. 2334–35. VirnetX
distinguished such proxy activities from the operation of
NAT routers which—unlike proxy servers in the prior
art—do not terminate the connection.
Additionally, with respect to the ’151 patent, there
was substantial evidence to support VirnetX’s argument
that Kiuchi fails to disclose the requirement that the DNS
request be “sent by a client.” ’151 patent col. 46 l. 57.
Apple argued that the “client-side proxy” of Kiuchi meets
the “client” limitation, but there was evidence that the
“client” of Kiuchi is actually a web browser, a component
that is distinguishable from the client-side proxy. See
J.A. 2341. Thus, the district court did not err in denying
Apple’s JMOL motion with respect to invalidity.
IV. Exclusion of Evidence
At trial, to prove induced infringement, VirnetX at-
tempted to show that Apple knew or was willfully blind to
the fact that its customers’ use of its products would
infringe valid patent claims. In defense, Apple sought to
inform the jury that, after learning of VirnetX’s allega-
tions, Apple initiated reexaminations against the asserted
patents. Apple’s requests for reexamination resulted in
VIRNETX, INC. v. CISCO SYSTEMS, INC. 23
initial rejections of the asserted claims at the United
States Patent and Trademark Office (“PTO”). Apple
offered these rejections as evidence of Apple’s reasonably-
held belief that the patents were invalid. The district
court, however, excluded this proffer, concluding that
such non-final actions in pending reexaminations would
be “highly prejudicial evidence that risks misleading the
jury.” VirnetX, 925 F. Supp. at 842.
We apply regional circuit law to evidentiary issues.
The Fifth Circuit reviews a district court’s exclusion of
evidence under Federal Rule of Evidence 403 for “clear
abuse of discretion” resulting in substantial prejudice.
Wellogix, Inc. v. Accenture, L.L.P., 716 F.3d 867, 882 (5th
Cir. 2013). In this case, we cannot say that the district
court abused its discretion in excluding this evidence.
Apple asserts that the rejections are relevant because
they establish its good faith belief that the asserted
claims are invalid, thereby negating the requisite intent
for inducement. Appellant’s Br. 50 (citing Commil USA,
LLC v. Cisco Sys., Inc., 720 F.3d 1361, 1368–69 (Fed. Cir.
2013)). As an initial matter, we note that this court’s
precedent has often warned of the limited value of actions
by the PTO when used for such purposes. See, e.g.,
Hoechst Celanese Corp. v. BP Chems. Ltd., 78 F.3d 1575,
1584 (Fed. Cir. 1996) (“[G]rant by the examiner of a
request for reexamination is not probative of unpatenta-
bility.”); Acoustical Design, Inc. v. Control Elecs. Co., 932
F.2d 939, 942 (Fed. Cir. 1991) (“[I]nitial rejection by the
[PTO] . . . hardly justifies a good faith belief in the inva-
lidity of the claims.”). However, in this case we need not
decide whether our opinion in Commil justifies reliance
on reexamination evidence to establish a good faith belief
of invalidity. Instead, we conclude that, regardless of the
evidence’s relevance to a fact at issue at trial, the district
court would still not have abused its discretion in finding
that the probative value was substantially outweighed by
the risk of unfair prejudice to the patentee, confusion with
24 VIRNETX, INC. v. CISCO SYSTEMS, INC.
invalidity (on the merits), or misleading the jury, thereby
justifying exclusion under Federal Rule of Evidence 403.
See, e.g., SynQor, 709 F.3d at 1380 (finding no abuse of
discretion for excluding non-final reexamination evidence
as being “confusing and more prejudicial than probative”);
Callaway Golf Co. v. Acushnet Co., 576 F.3d 1331, 1342–
43 (Fed. Cir. 2009) (finding the probative value of a co-
pending reexamination marginal and the effect likely to
be highly prejudicial). Thus, we affirm the district court’s
exclusion of this evidence.
V. Damages
At trial, VirnetX’s damages expert, Mr. Roy Wein-
stein, provided three reasonable royalty theories, which
the district court admitted over Apple’s challenges under
Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S.
579 (1993).
Weinstein’s first approach began with the lowest sale
price of each model of the accused iOS devices containing
the accused features. J.A. 1616–23. Weinstein then
applied a 1% royalty rate to the base, derived from a
VirnetX policy of seeking to license its patents for at least
1–2% of the entire value of products sold and several
allegedly comparable licenses. J.A. 1595, 1613–14. This
theory yielded a $708 million demand, consisting of $566
million for products including both FaceTime and VPN
On Demand, and $142 million for those including only
VPN On Demand. J.A. 1622–24, 1644.
Weinstein also offered a second damages theory, re-
garding FaceTime alone, relying on a mathematical
theorem proved by John Nash, a mathematician who
proved a number of results in game theory that have
become important in economics and other fields. J.A.
1628–29. Nash was a co-winner of the 1994 Nobel Prize
in Economics for some of this work, though not the theo-
rem at issue here—published as “The Bargaining Prob-
lem” in 18 Econometrica 155–62 (Apr. 1950). Like other
VIRNETX, INC. v. CISCO SYSTEMS, INC. 25
mathematical theorems, this theorem states a number of
premises and establishes a conclusion that follows from
those premises. In particular, under the conditions stated
in the premises, where two persons bargain over a matter,
there is a “solution” to the negotiation problem satisfying
stated conditions on a desirable result (bargain). That
solution—in which “each bargainer get[s] the same money
profit,” id. at 162—has come to be called the Nash Bar-
gaining Solution.
Weinstein, invoking the Nash Bargaining Solution,
testified that “the parties [would have] split between
themselves the incremental or additional profits that are
associated with the use of the patented technology.” J.A.
1630. Weinstein derived the profits associated with
FaceTime from the revenue generated by the addition of a
“front-facing” camera on Apple’s mobile devices. Without
examining the applicability to this case of all the precon-
ditions for the Nash Bargaining Solution, he invoked the
Solution as suggesting a 50/50 split of those profits, and
then modified that result by 10%, explaining that VirnetX
would have received only 45% of the profit because of its
weaker bargaining position, leaving 55% for Apple. J.A.
1633, 1709. This calculation amounted to $588 million in
damages for infringement by FaceTime. J.A. 1633–38.
Finally, Weinstein offered yet another theory for
FaceTime, again relying on the Nash Bargaining Solu-
tion. This time, he claimed that FaceTime “drove sales”
for Apple iOS products. J.A. 1639. Weinstein extrapolat-
ed from a customer survey to assert that 18% of all iOS
device sales would not have occurred without the addition
of FaceTime. J.A. 1641. From that figure, he determined
the amount of Apple’s profits that he believed were at-
tributable to the FaceTime feature, and apportioned 45%
of the profits to VirnetX, consistent with his previous
application of the Nash theory. Using this approach,
Weinstein arrived at damages of $5.13 per unit, totaling
$606 million in damages for FaceTime. J.A. 1643.
26 VIRNETX, INC. v. CISCO SYSTEMS, INC.
Ultimately, the jury awarded VirnetX $368 million in
damages. Apple now challenges each of Weinstein’s
damages theories, as well as the district court’s jury
instruction on damages. For the reasons stated below, we
vacate the jury’s damages award and remand for further
proceedings consistent with this opinion.
A. Jury Instruction
Upon a finding of infringement, “the court shall award
the claimant damages adequate to compensate for the
infringement, but in no event less than a reasonable
royalty for the use made of the invention by the infring-
er.” 35 U.S.C. § 284. The most common method for
determining a reasonable royalty is the hypothetical
negotiation approach, which “attempts to ascertain the
royalty upon which the parties would have agreed had
they successfully negotiated an agreement just before
infringement began.” Lucent Techs., Inc. v. Gateway, Inc.,
580 F.3d 1301, 1324 (Fed. Cir. 2009). A reasonable royal-
ty may be a lump-sum payment not calculated on a per-
unit basis, but it may also be, and often is, a running
payment that varies with the number of infringing units.
In that event, it generally has two prongs: a royalty base
and a royalty rate.
No matter what the form of the royalty, a patentee
must take care to seek only those damages attributable to
the infringing features. Indeed, the Supreme Court long
ago observed that a patentee
must in every case give evidence tending to sepa-
rate or apportion the defendant’s profits and the
patentee’s damages between the patented feature
and the unpatented features, and such evidence
must be reliable and tangible, and not conjectural
or speculative; or he must show, by equally relia-
ble and satisfactory evidence, that the profits and
damages are to be calculated on the whole ma-
chine, for the reason that the entire value of the
VIRNETX, INC. v. CISCO SYSTEMS, INC. 27
whole machine, as a marketable article, is proper-
ly and legally attributable to the patented feature.
Garretson v. Clark, 111 U.S. 120, 121 (1884).
Thus, when claims are drawn to an individual compo-
nent of a multi-component product, it is the exception, not
the rule, that damages may be based upon the value of
the multi-component product. LaserDynamics, Inc. v.
Quanta Computer, Inc., 694 F.3d 51, 67–68 (Fed. Cir.
2012). Indeed, we recently reaffirmed that “[a] patentee
may assess damages based on the entire market value of
the accused product only where the patented feature
creates the basis for customer demand or substantially
creates the value of the component parts.” Versata Soft-
ware, Inc. v. SAP Am., Inc., 717 F.3d 1255, 1268 (Fed. Cir.
2013) (emphasis added) (quoting SynQor, 709 F.3d at
1383). In the absence of such a showing, principles of
apportionment apply.
These strict requirements limiting the entire market
value exception ensure that a reasonable royalty “does not
overreach and encompass components not covered by the
patent.” LaserDynamics, 694 F.3d at 70; see also Garret-
son, 111 U.S. at 121 (“[T]he patentee must show in what
particulars his improvement has added to the usefulness
of the machine or contrivance.”). Thus, “[i]t is not enough
to merely show that the [patented feature] is viewed as
valuable, important, or even essential to the use of the
[overall product].” LaserDynamics, 694 F.3d at 68.
Instead, this court has consistently held that “a reasona-
ble royalty analysis requires a court to . . . carefully tie
proof of damages to the claimed invention’s footprint in
the market place.” ResQNet.com, Inc. v. Lansa, Inc., 594
F.3d 860, 869 (Fed. Cir. 2010); see also Cornell Univ. v.
Hewlett-Packard Co., 609 F. Supp. 2d 279, 285 (N.D.N.Y.
2009) (“The entire market value rule indeed permits
damages on technology beyond the scope of the claimed
invention, but only upon proof that damages on the un-
28 VIRNETX, INC. v. CISCO SYSTEMS, INC.
patented components or technology is necessary to fully
compensate for infringement of the patented invention.”).
Additionally, we have also cautioned against reliance on
the entire market value of the accused products because it
“cannot help but skew the damages horizon for the jury,
regardless of the contribution of the patented component
to this revenue.” Uniloc USA, Inc. v. Microsoft Corp., 632
F.3d 1292, 1320 (Fed. Cir. 2011).
Apple argues that the district court misstated this law
on the entire market value rule in its jury instruction.
The district court instructed the jury as follows:
In determining a royalty base, you should not use
the value of the entire apparatus or product un-
less either: (1) the patented feature creates the
basis for the customers’ demand for the product,
or the patented feature substantially creates the
value of the other component parts of the product;
or (2) the product in question constitutes the
smallest saleable unit containing the patented
feature.
J.A. 2515–16. Apple argues that this instruction inappro-
priately created a second exception that would allow a
patentee to rely on the entire market value of a multi-
component product so long as that product is the smallest
salable unit containing the patented feature.
We agree with Apple that the district court’s instruc-
tion misstates our law. To be sure, we have previously
permitted patentees to base royalties on the “smallest
salable patent-practicing unit.” LaserDynamics, 694 F.3d
at 67. However, the instruction mistakenly suggests that
when the smallest salable unit is used as the royalty base,
there is necessarily no further constraint on the selection
of the base. That is wrong. For one thing, the fundamen-
tal concern about skewing the damages horizon—of using
a base that misleadingly suggests an inappropriate
VIRNETX, INC. v. CISCO SYSTEMS, INC. 29
range—does not disappear simply because the smallest
salable unit is used.
Moreover, the smallest salable unit approach was in-
tended to produce a royalty base much more closely tied
to the claimed invention than the entire market value of
the accused products. Indeed, that language first arose in
the Cornell case, where the district court noted that,
rather than pursuing a “royalty base claim encompassing
a product with significant non-infringing components,”
the patentee should have based its damages on “the
smallest salable infringing unit with close relation to the
claimed invention.” 609 F. Supp. 2d at 287–88 (emphasis
added). In other words, the requirement that a patentee
identify damages associated with the smallest salable
patent-practicing unit is simply a step toward meeting the
requirement of apportionment. Where the smallest
salable unit is, in fact, a multi-component product con-
taining several non-infringing features with no relation to
the patented feature (as VirnetX claims it was here), the
patentee must do more to estimate what portion of the
value of that product is attributable to the patented
technology. To hold otherwise would permit the entire
market value exception to swallow the rule of apportion-
ment. 2
In reaching this conclusion, we are cognizant of the
difficulty that patentees may face in assigning value to a
feature that may not have ever been individually sold.
However, we note that we have never required absolute
precision in this task; on the contrary, it is well-
understood that this process may involve some degree of
2 As, indeed, it did in this case, where VirnetX ef-
fectively relied on the entire market value of the iOS
devices without showing that the patented features drove
demand for those devices, simply by asserting that they
were the smallest salable units.
30 VIRNETX, INC. v. CISCO SYSTEMS, INC.
approximation and uncertainty. See generally Unisplay,
S.A. v. Am. Elec. Sign Co., 69 F.3d 512, 517 (Fed. Cir.
1995).
We conclude that the district court’s jury instruction
regarding the entire market value rule was legally erro-
neous. Moreover, that error cannot be considered harm-
less, as VirnetX’s expert relied on the entire value of the
iOS devices as the “smallest salable units,” without at-
tempting to apportion the value attributable to the VPN
On Demand and FaceTime features. Thus, it is clear that
the jury’s verdict was tainted by the erroneous jury in-
struction.
B. Weinstein’s First Approach: Royalty Base
In addition to the erroneous jury instruction, Apple
argues that the testimony of VirnetX’s expert on the
proper royalty base should have been excluded because it
relied on the entire market value of Apple’s products
without demonstrating that the patented features drove
the demand for those products. For similar reasons to
those stated above, we agree.
The admissibility of expert testimony is governed by
the Federal Rules of Evidence and the principles laid out
in Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S.
579 (1993). The district court’s “gatekeeping obligation”
applies to all types of expert testimony. Kumho Tire Co.
v. Carmichael, 526 U.S. 137, 147 (1999). While questions
regarding which facts are most relevant for calculating a
reasonable royalty are properly left to the jury, a critical
prerequisite is that the underlying methodology be sound.
Here, it was not, and the district court should have exer-
cised its gatekeeping authority to ensure that only theo-
ries comporting with settled principles of apportionment
were allowed to reach the jury.
Under Weinstein’s first damages theory, he undisput-
edly based his calculations on the entire cost of the iOS
VIRNETX, INC. v. CISCO SYSTEMS, INC. 31
devices, ranging in value from $199 for the iPod Touch to
$649 for the iPhone 4S. Weinstein used the base price at
which each product was sold, excluding only charges for
additional memory sold separately. He called this the
smallest salable unit. However, when asked whether this
“remove[d] features that aren’t accused in this case,”
Weinstein answered as follows:
To the extent that the products that we’re talking
about here contain additional features, like addi-
tional memory, for instance, that Apple was charg-
ing for, by using the lowest saleable unit, I’m
doing as much as I can to remove payments for
those features . . . .
J.A. 1620 (emphasis added). This testimony confirms that
Weinstein did not even attempt to subtract any other
unpatented elements from the base, which therefore
included various features indisputably not claimed by
VirnetX, e.g., touchscreen, camera, processor, speaker,
and microphone, to name but a few. J.A. 1143–44.
VirnetX defends Weinstein’s approach by insisting
that “software creates the largest share of the product’s
value” for these popular iOS products. Appellee’s Br. 60.
But this misses the point. Whether “viewed as valuable,
important, or even essential,” the patented feature must
be separated. LaserDynamics, 694 F.3d at 68. Weinstein
made no attempt to separate software from hardware,
much less to separate the FaceTime software from other
valuable software components.
Indeed, the record supports Apple’s contention that
Weinstein could have apportioned a smaller per unit
figure for FaceTime; namely, for the use of FaceTime on
Mac computers he used a royalty base of $29—the cost of
the software upgrade. J.A. 1619. And he used an even
lower estimate to represent the patentable contributions
to iOS devices in his application of the Nash Bargaining
Solution, calculating incremental revenues due to
32 VIRNETX, INC. v. CISCO SYSTEMS, INC.
FaceTime at $15 per iOS device. J.A. 1634–36. The only
reason Weinstein gave for not using the $29 as the base
for other iOS products was that Apple does not actually
charge separately for FaceTime on those devices. J.A.
1673–74. But, as explained above, a patentee’s obligation
to apportion damages only to the patented features does
not end with the identification of the smallest salable unit
if that unit still contains significant unpatented features. 3
Thus, VirnetX cannot simply hide behind Apple’s
sales model to avoid the task of apportionment. This
court rejects the excuse that “practical and economic
necessity compelled [the patentee] to base its royalty on
the price of an entire [device].” LaserDynamics, 694 F.3d
at 69. There is no “necessity-based exception to the entire
market value rule.” Id. at 70. On the contrary, a patent-
ee must be reasonable (though may be approximate) when
seeking to identify a patent-practicing unit, tangible or
intangible, with a close relation to the patented feature.
In the end, VirnetX should have identified a patent-
practicing feature with a sufficiently close relation to the
claimed functionality. The law requires patentees to
apportion the royalty down to a reasonable estimate of the
value of its claimed technology, or else establish that its
patented technology drove demand for the entire product.
VirnetX did neither. As we noted in LaserDynamics:
Whether called “product value apportionment” or
anything else, the fact remains that the royalty
was expressly calculated as a percentage of the
entire market value of a [multi-component prod-
3 Because Apple has not challenged it, we offer no
opinion on whether the $29 software upgrade is itself so
closely related to the patented feature that VirnetX may
rely on its entire value in determining the proper royalty
base for the FaceTime feature.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 33
uct] rather than a patent-practicing [component]
alone. This, by definition, is an application of the
entire market value rule.
Id. at 68. In calculating the royalty base, Weinstein did
not even try to link demand for the accused device to the
patented feature, and failed to apportion value between
the patented features and the vast number of non-
patented features contained in the accused products.
Because Weinstein did not “carefully tie proof of damages
to the claimed invention’s footprint in the market place,”
Uniloc, 632 F.3d at 1317 (quoting ResQNet, 594 F.3d at
869), his testimony on the royalty base under this ap-
proach was inadmissible and should have been excluded.
C. Weinstein’s First Approach: Royalty Rate
In addition to challenging Weinstein’s testimony with
respect to the royalty base, Apple argues that his testi-
mony with respect to the royalty rate should also have
been excluded.
After determining the royalty base, Weinstein applied
a 1% royalty rate, based on six allegedly comparable
licenses, as well as his understanding that VirnetX had a
“policy” of licensing its patents for 1–2%. Apple argues
that the licenses on which Weinstein relied were not
sufficiently comparable to the license that would have
resulted from the hypothetical negotiation. In particular,
Apple points out that two of the licenses predated the
patents-in-suit. Both of those agreements related to
technology leading to the claimed invention, and one
contained a software license in addition to a license for
various patent applications. Apple further complains that
three of the other licenses were entered into in 2012, a full
three years after the date of the “hypothetical negotia-
tion,” set in June 2009. Apple argues that at the time
those licenses were entered into, VirnetX was in a much
better financial position (and therefore a better bargain-
ing position) than it was in 2009. Finally, Apple notes
34 VIRNETX, INC. v. CISCO SYSTEMS, INC.
that the sixth license covered sixty-eight VirnetX patents,
and was therefore much broader than the license to four
patents Apple would be seeking in the hypothetical nego-
tiation. It also equated to a 0.24% royalty rate, which is
significantly lower than the 1–2% rate Weinstein testified
VirnetX would accept.
We have held that in attempting to establish a rea-
sonable royalty, the “licenses relied on by the patentee in
proving damages [must be] sufficiently comparable to the
hypothetical license at issue in suit.” Lucent, 580 F.3d at
1325. “When relying on licenses to prove a reasonable
royalty, alleging a loose or vague comparability between
different technologies or licenses does not suffice.” La-
serDynamics, 694 F.3d at 79. However, we have never
required identity of circumstances; on the contrary, we
have long acknowledged that “any reasonable royalty
analysis ‘necessarily involves an element of approxima-
tion and uncertainty.’” Lucent, 580 F.3d at 1325 (quoting
Unisplay, 69 F.3d at 517). Thus, we have cautioned that
“district courts performing reasonable royalty calculations
[must] exercise vigilance when considering past licenses
to technologies other than the patent in suit,” ResQNet,
594 F.3d at 869, and “must account for differences in the
technologies and economic circumstances of the contract-
ing parties,” Finjan, Inc. v. Secure Computing Corp., 626
F.3d 1197, 1211 (Fed. Cir. 2010).
With those principles in mind, we conclude that the
district court here did not abuse its discretion in permit-
ting Weinstein to rely on the six challenged licenses. To
begin with, four of those licenses did indeed relate to the
actual patents-in-suit, while the others were drawn to
related technology. Moreover, all of the other differences
that Apple complains of were presented to the jury, allow-
ing the jury to fully evaluate the relevance of the licenses.
See J.A. 1600, 1650, 1678–82. No more is required in
these circumstances.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 35
Our case law does not compel a contrary result. In
ResQNet, we faulted the district court for relying on
licenses with “no relationship to the claimed invention,”
nor even a “discernible link to the claimed technology.”
594 F.3d at 870. And in Lucent, we rejected reliance on
licenses from “vastly different situation[s]” or where the
subject matter of certain agreements was not even ascer-
tainable from the evidence presented at trial. 580 F.3d at
1327–28. The licenses in this case—though not immune
from challenge—bear a closer relationship to the hypo-
thetical negotiation that would have occurred.
This case is therefore much more akin to the circum-
stances in Finjan and ActiveVideo Networks, Inc. v. Veri-
zon Communications, Inc., 694 F.3d 1312 (Fed. Cir. 2012).
In Finjan, there were several differences between the
single license relied upon and the hypothetical negotia-
tion, most notably that Finjan did not compete with the
licensee as it did with the defendant in the case, and that
the license involved a lump sum rather than a running
royalty. 626 F.3d at 1212. Nevertheless, we affirmed the
damages award based on that license because “[those]
differences permitted the jury to properly discount the . . .
license.” Id. And in ActiveVideo, the damages expert
relied on two agreements, one of which post-dated the
hypothetical negotiations by two years, did not involve the
patents-in-suit, and did not cover the technologies in the
case, while the other agreement covered both patents and
software services. 694 F.3d at 1333. Nevertheless, we
concluded that the “degree of comparability” of the license
agreements was “[a] factual issue[] best addressed by
cross examination and not by exclusion.” Id. Similarly,
here, though there were undoubtedly differences between
the licenses at issue and the circumstances of the hypo-
thetical negotiation, “[t]he jury was entitled to hear the
expert testimony and decide for itself what to accept or
reject.” i4i Ltd. P’ship v. Microsoft Corp., 598 F.3d 831,
856 (Fed. Cir. 2010), aff’d 131 S. Ct. 2238 (2011).
36 VIRNETX, INC. v. CISCO SYSTEMS, INC.
Thus, we do not believe the district court abused its
discretion by permitting Weinstein’s testimony regarding
the proper royalty rate based on these allegedly compara-
ble licenses.
D. Weinstein’s Second and Third Approaches:
Nash Bargaining Solution
Weinstein also offered two other estimates of the
damages attributable to the FaceTime feature. Both of
these estimates relied on the Nash Bargaining Solution.
Weinstein began by determining “incremental or addi-
tional profits that are associated with the use of the
patented technology.” J.A. 1630. Weinstein used two
different methods to estimate the incremental profits
associated with the FaceTime feature. First, he used the
front-facing camera as a proxy for the FaceTime feature,
and calculated the profits that he believed were attribut-
able to the addition of the front-facing camera to certain
Apple products. And second, he relied on customer sur-
veys to assert that 18% of iOS device sales would not have
occurred but for the inclusion of FaceTime, and deter-
mined the profits attributable to those sales.
Having thus purported to determine those profits,
Weinstein then testified about how the parties would split
those incremental profits. To do this, he began with the
assumption that each party would take 50% of the incre-
mental profits, invoking the Nash Bargaining Solution,
and then adjusted that split based on “the relative bar-
gaining power of the two entities.” J.A. 1632.
Apple challenges both steps of Weinstein’s analysis.
First, Apple insists that Weinstein did not adequately
isolate the incremental profits attributable to the patent-
ed technology under either approach. And second, Apple
argues that the invocation of a 50/50 starting point based
on the Nash Bargaining Solution is akin to the “25 per-
cent rule of thumb” that we rejected in Uniloc as being
insufficiently grounded in the specific facts of the case.
VIRNETX, INC. v. CISCO SYSTEMS, INC. 37
Because we agree with Apple on the second point, we need
not reach the first.
In recent years, numerous district courts have con-
fronted experts’ invocations of the Nash Bargaining
Solution as a model for reasonable royalty damages, with
varying results. Compare Robocast, Inc. v. Microsoft
Corp., No. 10-1055, 2014 WL 350062 (D. Del. Jan. 29,
2014) (excluding expert testimony based on Nash Bar-
gaining Solution because it was not sufficiently tied to the
facts of the case); Dynetix Design Solutions, Inc. v. Synop-
sys, Inc., No. 11-5973, 2013 WL 4538210, at *4–5 (N.D.
Cal. Aug. 22, 2013) (excluding expert testimony on royalty
rate that began from a starting point of a 50/50 split
because the expert’s methodology was “indistinguishable
from 25% rule”); Oracle Am., Inc. v. Google Inc., 798 F.
Supp. 2d 1111, 1119–21 (N.D. Cal. 2011) (excluding
testimony based on Nash Bargaining Solution because it
“would invite a miscarriage of justice by clothing a fifty-
percent assumption in an impenetrable façade of mathe-
matics”) with Mformation Techs., Inc. v. Research in
Motion Ltd., No. 08-4990, 2012 WL 1142537, at *3 n.19
(N.D. Cal. Mar. 29, 2012) (declining to exclude Wein-
stein’s testimony based on Nash Bargaining Solution
because he used it only “as a check” in addition to the
Georgia-Pacific analysis, rather than in lieu of it); Gen-
Probe Inc. v. Becton Dickinson & Co., No. 09-2319, 2012
WL 9335913, at *3 (S.D. Cal. Nov. 26, 2012) (permitting
testimony based on Nash Bargaining Solution because
calculation was sufficiently tied to the facts of the case,
“including the competitive environment and Gen-Probe’s
policy of exploiting its own patents”); Sanofi-Aventis
Deutschland Gmbh v. Glenmark Pharms. Inc., USA, No.
07-5855, 2011 WL 383861, at *12–13 (D.N.J. Feb. 3, 2011)
(determining that expert’s testimony asserting a 50/50
profit split was based on the specific facts of the case);
Amakua Dev. LLC v. Warner, No. 05-3082, 2007 WL
2028186, at *20 (N.D. Ill. July 10, 2007) (permitting
38 VIRNETX, INC. v. CISCO SYSTEMS, INC.
reliance on Nash because the “[d]efendants ha[d] not
challenged the reliability of Nash’s theories, and the
assessment of whether the theory persuasively can be
applied in the context of this case is for the jury”).
For the reasons that follow, we agree with the courts
that have rejected invocations of the Nash theorem with-
out sufficiently establishing that the premises of the
theorem actually apply to the facts of the case at hand.
The use here was just such an inappropriate “rule of
thumb.”
Previously, damages experts often relied on the “25
percent rule of thumb” in determining a reasonable
royalty rate in a hypothetical negotiation. That rule
hypothesized that 25% of the value of the infringing
product would remain with the patentee, while the re-
maining 75% would go to the licensee. In Uniloc, howev-
er, we held the “25 percent rule of thumb” to be
inadmissible “because it fails to tie a reasonable royalty
base to the facts of the case at issue.” 632 F.3d at 1315.
In so doing, we noted that the rule did not differentiate
between different industries, technologies, or parties. Id.
at 1317. Rather, it assumed the same 25/75 royalty split
regardless of the size of the patent portfolio in question or
the value of the patented technology. Id. The problem
was that the 25% rule made too crude a generalization
about a vastly more complicated world.
The problem with Weinstein’s use of the Nash Bar-
gaining Solution, though somewhat different, is related,
and just as fatal to the soundness of the testimony. The
Nash theorem arrives at a result that follows from a
certain set of premises. It itself asserts nothing about
what situations in the real world fit those premises.
Anyone seeking to invoke the theorem as applicable to a
particular situation must establish that fit, because the
50/50 profit-split result is proven by the theorem only on
those premises. Weinstein did not do so. This was an
VIRNETX, INC. v. CISCO SYSTEMS, INC. 39
essential failing in invoking the Solution. Moreover, we
do not believe that the reliability of this methodology is
saved by Weinstein’s attempts to account for the unique
facts of the case in deviating from the 50/50 starting
point. As we noted in Uniloc:
It is of no moment that the 25 percent rule of
thumb is offered merely as a starting point to
which the Georgia-Pacific factors are then applied
to bring the rate up or down. Beginning from a
fundamentally flawed premise and adjusting it
based on legitimate considerations specific to the
facts of the case nevertheless results in a funda-
mentally flawed conclusion.
632 F.3d at 1317. Indeed, Weinstein’s thin attempts to
explain his 10% deviation from the 50/50 baseline in this
case demonstrates how this methodology is subject to
abuse. His only testimony on the matter was that alt-
hough he “considered other splits,” he ultimately deter-
mined that a 10% deviation—resulting in a 45/55 split—
was appropriate “to reflect the fact that Apple would have
additional bargaining power over VirnetX back in . . .
2009.” JA. 1708–09. Such conclusory assertions cannot
form the basis of a jury’s verdict. See Gen. Elec. Co. v.
Joiner, 522 U.S. 136, 146 (1997) (noting that where an
expert considers relevant material but fails to provide an
opinion explaining how that material leads to his conclu-
sion, “[a] court may conclude that there is simply too
great an analytical gap between the data and the opinion
proffered”).
More importantly, even if an expert could identify all
of the factors that would cause negotiating parties to
deviate from the 50/50 baseline in a particular case, the
use of this methodology would nevertheless run the
significant risk of inappropriately skewing the jury’s
verdict. This same concern underlies our rule that a
patentee may not balance out an unreasonably high
40 VIRNETX, INC. v. CISCO SYSTEMS, INC.
royalty base simply by asserting a low enough royalty
rate. See Uniloc, 632 F.3d at 1320. Although the result of
that equation would be mathematically sound if properly
applied by the jury, there is concern that the high royalty
base would cause the jury to deviate upward from the
proper outcome. Id. Thus, in Uniloc, we noted that “[t]he
disclosure that a company has made $19 billion dollars in
revenue from an infringing product cannot help but skew
the damages horizon for the jury, regardless of the contri-
bution of the patented component to this revenue.” Id.
Similarly, here, the use of a 50/50 starting point—itself
unjustified by evidence about the particular facts—
provides a baseline from which juries might hesitate to
stray, even if the evidence supported a radically different
split.
Even the 25% rule had its share of support in the lit-
erature, which had observed that, at least as an anecdotal
matter, a 25% royalty rate was a common starting point—
and not far off from a common end point—of licensing
negotiations across numerous industries. See Uniloc, 632
F.3d at 1313 (citing Robert Goldscheider, John Jarosz and
Carla Mulhern, Use of the 25 Per Cent Rule in Valuing IP,
37 les Nouvelles 123, 132–33 (Dec. 2002); Stephen A.
Degnan & Corwin Horton, A Survey of Licensed Royalties,
32 les Nouvelles 91, 95 (June 1997)). Nevertheless, we
rejected it, insisting on testimony tied to the particular
facts. The same insistence is vital here.
We note that the Nash Bargaining Solution does offer
at least one noticeable improvement over the 25% rule:
where the 25% rule was applied to the entire profits
associated with the allegedly infringing product, the Nash
theory focuses only on the incremental profits earned by
the infringer from the use of the asserted patents. But
while we commend parties for using a theory that more
appropriately (and narrowly) defines the universe of
profits to be split, the suggestion that those profits be
split on a 50/50 basis—even when adjusted to account for
VIRNETX, INC. v. CISCO SYSTEMS, INC. 41
certain individual circumstances—is insufficiently tied to
the facts of the case, and cannot be supported.
For each of the reasons stated above, we vacate the
damages award and remand for further proceedings
consistent with this opinion.
AFFIRMED-IN-PART, REVERSED-IN-PART,
VACATED-IN-PART and REMANDED
COSTS
Each party shall bear its own costs.