Can VirnetX's Legal Strategy Survive Losing to Cisco?

It's a little early to order lilies for the casket yet, but VirnetX certainly took a heavy blow this week.

Anders Bylund
Anders Bylund
Mar 15, 2013 at 7:00PM
Technology and Telecom

Technology licensing firm VirnetX (NYSEMKT:VHC) lost a crucial patent infringement case against networking giant Cisco Systems (NASDAQ:CSCO) on Thursday. The stock plunged 28% in regular trading hours and continued to sink in after-hours action. Cisco shares barely budged on the news.

It's black and blue on white: Not guilty at all.

The verdict (link opens PDF from the free RECAP court-tracker service) found VirnetX's secure networking patents to be valid, but the company failed to prove that Cisco had infringed on any of them. The jury was deadlocked in the afternoon but ordered back to further deliberations by Judge Leonard Davis. It didn't take long after that to reach a unanimous decision.

The jury spent just one day deliberating the case, but jurors were active in sending notes back to the courtroom to get more information. That's a stark contrast to the rushed and ultimately flawed jury process in last summer's Apple (NASDAQ:AAPL) vs. Samsung trial. In that case, the jury foreman seemed to have decided on his own that Samsung needed to be punished, and then convinced the other jurors to support his scheme. Judge Lucy Koh later found the $1.1 billion damage award there unenforceable, slashing it by half.

That won't happen here, since Cisco was found to owe VirnetX exactly $0.

Speaking of Apple, VirnetX won a $368 million damages award against the Cupertino company last November in front of the same judge and using the same patent claims (but with a different jury) as the Cisco case. The stock has consistently traded about 20% higher since that verdict, and investors were clearly hoping for another big payday from Cisco. If nothing else, another victory would have affirmed that VirnetX's litigation-heavy strategy is working and perhaps forced many more settlements as well as juicy licensing agreements in the future.

Now that strategy is up in the air. I expect VirnetX to appeal this decision, because the company's future depends on looking invincible in court. Don't cry too hard for VirnetX's shareholders, though. Shares have still more than quadrupled in value over the last three years, starting with a $200 million settlement from Microsoft. The company isn't dead yet -- just down for the count.