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`
` 1 THE UNITED STATES DISTRICT COURT
` FOR THE EASTERN DISTRICT OF TEXAS
` 2 TYLER DIVISION
` 3 VIRNETX, INC. )
` ) DOCKET NO. 6:10cv417
` 4 -vs- )
` ) Tyler, Texas
` 5 ) 9:00 a.m.
` APPLE, INC. ) October 18, 2012
` 6
` 7 TRANSCRIPT OF PRETRIAL CONFERENCE
` BEFORE THE HONORABLE LEONARD DAVIS,
` 8 UNITED STATES CHIEF DISTRICT JUDGE
` 9
` A P P E A R A N C E S
` 10
` 11 (SEE SIGN-IN SHEETS DOCKETED IN THE MINUTES OF THE CASE.)
` 12
` 13
` 14
` 15 COURT REPORTER: MS. SHEA SLOAN
` 211 West Ferguson
` 16 Tyler, Texas 75702
` 17
` 18 Proceedings taken by Machine Stenotype; transcript was
` produced by a Computer.
` 19
` 20
` 21
` 22
` 23
` 24
` 25
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`
` 2
` 1 P R O C E E D I N G S
` 2 THE COURT: Please be seated.
` 3 All right. Ms. King, if you will call the case,
` 4 please.
` 5 THE CLERK: Court calls Case No. 6:10cv417, VirnetX,
` 6 Inc., v. Apple, Inc.
` 7 THE COURT: Announcements.
` 8 MR. CAWLEY: Good morning, Your Honor. Douglas
` 9 Cawley for the Plaintiff VirnetX. With me today to argue on
` 10 some motions, assuming the Court asks for argument on them,
` 11 Mr. Brad Caldwell, Mr. Jason Cassady, Mr. Austin Curry, and
` 12 Mr. Daniel Pearson. We also have with us Robert Parker and
` 13 Chris Bunt. We are ready to proceed.
` 14 THE COURT: Okay. Thank you.
` 15 Defendants?
` 16 MR. WILLIAMS: Your Honor, Danny Williams for Apple.
` 17 I have with me today Mr. Drew Kim, Matt Rodgers, Scott
` 18 Woloson, Mr. Chris Cravey, Mr. Steve Edwards; and I also have
` 19 with me Ms. Katie Prescott from Apple. We are ready to
` 20 proceed, Your Honor.
` 21 THE COURT: Thank you.
` 22 MR. JONES: Your Honor, for Cisco Systems, Mike
` 23 Jones. Lead Counsel, Mr. John Desmarais. Also arguing for us
` 24 will be Mr. Paul Bondor and Mr. Michael Stadnick. And also
` 25 representing Cisco Systems are John Bufe and Eric Findlay.
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` 3
` 1 THE COURT: Anybody else?
` 2 MR. WARD: Good morning, Your Honor. Johnny Ward
` 3 for Siemens. I don't think you will hear much argument from
` 4 me, but you may on a very limited issue on one motion.
` 5 THE COURT: Okay.
` 6 MR. TINDEL: Your Honor, Andy Tindel here for SAIC.
` 7 THE COURT: Anyone else?
` 8 Okay. Very well. We have a lot to do this morning,
` 9 so let's move through it. The first thing, I have the
` 10 parties' joint motion to exceed limits for exhibit and
` 11 deposition designations for trial, and I don't have a problem
` 12 with that. So that is granted. I would encourage you to try
` 13 to limit your exhibits and depositions, but I know you will.
` 14 All right. Then we have various motions here. I
` 15 think I would like to take up, first, Defendant Cisco and
` 16 Apple's motion to stay, pending ongoing reexamination
` 17 proceedings, Docket No. 477.
` 18 MR. STADNICK: Good morning, Your Honor. Michael
` 19 Stadnick for Cisco Systems. Your Honor, we are preparing to
` 20 go to trial on scores of patent claims that currently stand
` 21 rejected in the Patent Office.
` 22 And it is not just an initial rejection. For 110
` 23 out of 136 claims that remain asserted in this case, we have
` 24 reached the stage, which is called an "action closing
` 25 prosecution." There are inter partes reexaminations. What
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`
` 4
` 1 that means is we filed reexamination requests. The Patent
` 2 Office considered them. They rejected the patent claims.
` 3 Both VirnetX and the defendants had the opportunity to be
` 4 heard by the Patent Office. The Patent Office considered
` 5 those arguments, and then they rejected the claims again.
` 6 And for at least 110 out of the 136 claims of the
` 7 patents-in-suit that are asserted, we have now reached the
` 8 stage where we are essentially ready to go up on appeal,
` 9 barring some unsuspected circumstances in the Patent Office.
` 10 So the rejections of all but four of the 136 patents-in-suit
` 11 are not initial rejections.
` 12 They are also not narrow rejections. For most of
` 13 the rejected claims of the patents-in-suit, we are talking
` 14 about a situation where the individual-rejected claims are
` 15 rejected over numerous independent grounds, 10 separate
` 16 grounds of validity. In some cases 12, 15, up to 19 separate
` 17 grounds of invalidity for some of the patents-in-suit, some of
` 18 the asserted claims.
` 19 So what does that mean for the trial? If we move
` 20 forward with trial now, we know two things. First of all, it
` 21 is almost certain that at least some of the 136 claims that
` 22 are asserted in the case are going to be cancelled as a result
` 23 of the reexamination proceedings; so that we will potentially
` 24 waste time litigating claims that will ultimately be
` 25 cancelled.
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`
` 5
` 1 Even if that doesn't take place, given the number
` 2 and nature -- the scope of the rejections in the Patent
` 3 Office, in order for VirnetX to manage to salvage some of
` 4 those claims to avoid invalidation, they are going to have to
` 5 either amend the claims or make some arguments to get around
` 6 the prior art, and those arguments are going to have
` 7 consequences on the scope of the claims.
` 8 That is not mere speculation. We know that is the
` 9 case because we have seen it actually with these very patents.
` 10 As Your Honor is aware, there was a previous case involving
` 11 some of these patents against Microsoft.
` 12 In that litigation Your Honor construed the claims
` 13 of at least two of the patents-in-suit in here. That case
` 14 went to trial, and VirnetX got a verdict of infringement
` 15 against Microsoft and ultimately settled.
` 16 Within months of that settlement, VirnetX is in the
` 17 Patent Office on a reexamination that was then pending. Their
` 18 claims were rejected. In order to salvage those claims, in
` 19 order to avoid invalidation, they had to make narrowing
` 20 arguments on very important claim allegations, including
` 21 "virtual private network."
` 22 We then moved forward into this litigation. VirnetX
` 23 came back at the Court, and they wanted to switch back and go
` 24 back to the broad construction that was applied in the
` 25 Microsoft case. And we had a claim construction, and Your
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` 6
` 1 Honor considered what happened in the earlier reexamination
` 2 proceeding and correctly narrowed their claims.
` 3 So the claims that are in this litigation now, even
` 4 though they are nominally the same claims that were in the
` 5 Mircrosoft case are narrower in scope. You had a jury
` 6 verdict -- or there was a jury verdict in the Microsoft case.
` 7 The claims are narrower than they were in the Microsoft case.
` 8 So we know that what happens in the reexamination
` 9 proceedings can impact the scope of the asserted claims.
` 10 It also happened again in this very litigation.
` 11 Your Honor had a claim construction hearing in this case in
` 12 January of this year, construed the claims of the
` 13 patents-in-suit based upon the intrinsic record as it existed
` 14 at that time, and issued a Markman ruling in April.
` 15 The trouble is in the interim in the reexamination
` 16 proceedings that we are talking about today, VirnetX, again,
` 17 made arguments to narrow its claims to avoid certain prior art
` 18 to avoid invalidation on claim language, such as, "secure
` 19 communication link."
` 20 So what happened was, Your Honor issued your claim
` 21 construction ruling on that term, based upon the intrinsic
` 22 evidence as it existed in January of this year. And because
` 23 VirnetX had narrowing arguments at the Patent Office in the
` 24 interim, we were forced to come to Your Honor and ask for
` 25 reconsideration; and Your Honor had to change the claim
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` 7
` 1 construction that it handed down based upon the intrinsic
` 2 record as it existed in January.
` 3 So what we see here as what is going on in the
` 4 reexamination proceedings, really does impact the proper
` 5 interpretation of the claims. And that, of course, has an
` 6 impact on the infringement analysis, the invalidity analysis,
` 7 and the other issues that we will be addressing if we move
` 8 forward to trial now.
` 9 So the question is, why would -- why would we press
` 10 forward for trial at this stage? Why would we take the risk
` 11 of spending all of the resources and the expense of going
` 12 through a trial when claims might be cancelled. We might wind
` 13 up having to revisit issues because the prosecution has
` 14 changed the scope of the claims.
` 15 And if you look at the briefing, the only answer
` 16 that VirnetX offers is that we should go forward with trial
` 17 because we are ready to. We are at a stage where we are ready
` 18 to proceed with trial.
` 19 But if you look at the three-factor test that
` 20 governs motions like this, you will look at the unique
` 21 circumstances of this case and what is going on in the
` 22 reexaminations, the extent towards the claims that are
` 23 rejected, the numerous grounds for rejection, I think we need
` 24 something more than the fact that we are ready to go forward
` 25 with trial to justify the potential significant waste of time
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` 8
` 1 and expense.
` 2 So I would like to spend just a minute kind of
` 3 drilling down a little more in detail on where I think things
` 4 stand in the reexamination.
` 5 Would you pull up Slide 1.
` 6 There are, of course, six patents-in-suit between
` 7 the trial against Apple and the trial against Cisco. There
` 8 are reexaminations pending against all six. Some of them were
` 9 initiated by Apple. Some were initiated by Cisco. There are
` 10 actually only nine pending reexaminations because Cisco and
` 11 Apple instituted the reexams on the '151 patent -- have been
` 12 consolidated.
` 13 Next slide.
` 14 So if you look at where things stand in all of the
` 15 individual reexaminations, of the 136 total claims that are
` 16 still at issue in this case, 132 of them are rejected. Only
` 17 four have been confirmed in one of the patents, and that
` 18 patent isn't even relevant to the Apple case. Each and every
` 19 one of the claims that are at issue for the Apple trial, at
` 20 least, currently stands rejected. And 127, I believe it is,
` 21 of the 131 claims asserted against Cisco, stand rejected.
` 22 I want to go down a little bit on what the nature of
` 23 those rejections are.
` 24 Go to the next slide.
` 25 Just taking the '504 patent, for example. The
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` 9
` 1 patent has 60 claims; 46 of them are asserted in the
` 2 litigation. Each and every one of those asserted claims
` 3 currently stands rejected in the Patent Office. In fact, all
` 4 60 of the claims in the patent are rejected.
` 5 And they are not rejected on one or two grounds.
` 6 There are up to 19 separate independent grounds for rejection
` 7 for each claim.
` 8 And it is not just a preliminary rejection. It is
` 9 at the stage where the action includes the prosecution that I
` 10 mentioned earlier. So the Patent Office has had several
` 11 opportunities to consider contributions from both sides, weigh
` 12 the arguments, and it has now at least twice concluded that
` 13 the patents shouldn't have issues; and they shouldn't have
` 14 issued for up to 19 separate issues for each claim.
` 15 Moving on to the '211 patent, same story. 60 claims
` 16 asserted; all 60 of them stand rejected, including the 46
` 17 asserted claims in this case. Again, you have up to 19
` 18 independent grounds of rejection for each claim. And the
` 19 reexams have advanced to the stage of the ACP.
` 20 On the next slide.
` 21 '151 patent, similar story. The reexam hasn't
` 22 advanced quite as far. But, again, there are three asserted
` 23 claims. All of the claims in the patent, including the
` 24 asserted claims are rejected; and they are rejected on 10
` 25 independent grounds apiece.
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` 10
` 1 '135 patent, similar story. 12 asserted claims.
` 2 All of the asserted claims, all of the claims in the patent
` 3 are rejected. And in this case you have up to 11 independent
` 4 grounds for rejection, and so on.
` 5 The '759 patent, likewise. Most of the asserted
` 6 claims are rejected with the exception of four of them. They
` 7 are rejected under multiple independent grounds, and they have
` 8 been rejected through the action close of prosecution stage.
` 9 Of the '180 patent, which is only asserted against
` 10 Cisco, again, all of the asserted claims stand rejected. That
` 11 one was moving through the Patent Office a little more slowly,
` 12 so it is a little more of a preliminary stage of the analysis,
` 13 but all of the claims do currently stand rejected.
` 14 I think if you look at what is going on in the
` 15 Patent Office where things stand, this is really not your
` 16 ordinary reexamination situation. It isn't your typical stay
` 17 motion.
` 18 Let's briefly turn to the legal standard, which I
` 19 know Your Honor is familiar with. There are three factors
` 20 that the Court typically considers when deciding whether to
` 21 exercise its discretion to grant the stay in situations like
` 22 this. I will take them one at a time.
` 23 The first is whether the stay will unduly prejudice
` 24 or present a tactical disadvantage to the non-moving party,
` 25 which, of course, is VirnetX here. The fact is if you look at
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` 11
` 1 the briefing, VirnetX doesn't point to any recognizable
` 2 prejudice that will result from the stay. The only thing that
` 3 VirnetX really points to in their briefing is the fact that a
` 4 stay is going to cause some delay in the case, and that is
` 5 certainly true. That is the nature of the stay.
` 6 But if you look at the relevant authority, the delay
` 7 that accompanies the stay is not, in and of itself, sufficient
` 8 to establish prejudice that would warrant denial of the stay
` 9 motion.
` 10 That is particularly true in a situation like this
` 11 when you are dealing with a patentee that doesn't actually
` 12 practice his invention and compete in the marketplace by
` 13 practicing its invention and offer the products or services
` 14 that use the claimed technology.
` 15 That is because -- and under those circumstances any
` 16 delay can ultimately be compensated for, damages -- if damages
` 17 wind up being appropriate, patents may get out of the Patent
` 18 Office and wind up being infringed. They can secure damages.
` 19 They can secure interest, if appropriate, to compensate them
` 20 for any delay in receiving those damages.
` 21 As far as tactical advantage goes, there is no
` 22 tactical advantage being sought by the defendants here. If
` 23 you look at what happened, we filed our reexamination requests
` 24 in a timely manner. We filed them right around the same time
` 25 we served our initial invalidity contentions, consistent with
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` 12
` 1 this Court's scheduling order.
` 2 There is no allegation that we have done anything
` 3 but pursue them as diligently as possible and move them
` 4 through the Patent Office as quickly as we could.
` 5 And if you need any indication that they were sought
` 6 for meritorious reason rather than for the purposes of delay,
` 7 you just have to look at what the Patent Office has done. I
` 8 mean, the sheer number of rejections for each of the asserted
` 9 claims confirms it. These are meritorious reexaminations that
` 10 have been sought for legitimate reasons rather than for the
` 11 purpose of delay.
` 12 In fact, if anybody is seeking an unfair tactical
` 13 advantage here, it is VirnetX, as we saw in the Microsoft
` 14 case. Having the District Court litigation proceed at the
` 15 same time as the reexamination proceedings, opens the door for
` 16 some mischief where a patentee can seek to apply a broader
` 17 claim construction for the purposes of infringement in the
` 18 District Court while at the same time making narrowing
` 19 arguments in the PTO to prevent the patents from becoming
` 20 invalidated. A stay will help to prevent that.
` 21 Turning to the next factor, which is the likelihood
` 22 that a stay will simplify issues for trial. Again, if you
` 23 consider where things stand in the Patent Office, where
` 24 virtually all of the 136 claims are rejected and they are
` 25 rejected for multiple, different, independent reasons; and at
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` 13
` 1 least 110 of the rejections have advanced to the action
` 2 closing prosecution stage, it is very likely that the
` 3 patents -- or at least many of the asserted claims, aren't
` 4 going to make it out of the Patent Office. We can't tell
` 5 which of them now, obviously; but it seems almost certain that
` 6 a substantial number of the patents aren't going to make it
` 7 out of the Patent Office; over 10 or a dozen or 18 separate
` 8 grounds of rejection.
` 9 So if we don't have a stay, we will waste time and
` 10 resources and effort litigating patent claims that will
` 11 ultimately be canceled.
` 12 Even if some patent claims do somehow make it
` 13 through the reexamination proceedings, as we have discussed,
` 14 there is a high likelihood that they are going to be
` 15 substantially narrowed either by amendments or by arguments
` 16 that are made in the reexamination proceedings. And that
` 17 could impact -- you know, that could force us to revisit the
` 18 claim constructions we already had to on at least two separate
` 19 occasions.
` 20 It could call into question any determination that
` 21 is made by a jury on a claim construction that was rendered in
` 22 the absence of that intrinsic evidence.
` 23 So, again, moving forward with the litigation now,
` 24 while things are so far up in the air in the Patent Office,
` 25 threatens to create inefficiencies and inequities.
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`(cid:221)¿›» Œ(cid:230)(cid:239)(cid:240)(cid:243)‰“(cid:243)(cid:240)(cid:240)(cid:236)(cid:239)Ø(cid:243)(cid:212)(cid:219)(cid:220) (cid:220)–‰«‡»†‹ Œ(cid:240)Ø (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)(cid:236) –” (cid:238)(cid:239)Œ —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:240)Ø(cid:237)Ł
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` 14
` 1 And then I guess the last factor that obviously has
` 2 to be considered under the three-factor test, is the stage of
` 3 litigation. There is no doubt that we are in the advanced
` 4 stage of litigation. We are relatively close to trial,
` 5 certainly in the Apple case; and we are still four months away
` 6 from the trial in the Cisco case.
` 7 Again, I would submit that, given the unique set of
` 8 circumstances in the Patent Office and the uncertainty as to
` 9 the scope of the claim and the viabilities of the patents, the
` 10 mere fact that we are prepared to go to trial isn't a
` 11 sufficient justification for the risk of expense and wasted
` 12 effort that will confront us if we move forward in the absence
` 13 of a stay.
` 14 Thank you.
` 15 THE COURT: Thank you.
` 16 Response?
` 17 MR. WILLIAMS: May I have just one minute on behalf
` 18 of Apple before VirnetX responds?
` 19 THE COURT: Yes.
` 20 MR. WILLIAMS: I just want to take one minute, if I
` 21 could, Your Honor. On the overhead, the chart, I just want to
` 22 make sure that it is very clear, of the four patents that are
` 23 asserted against Apple, two of those patents, the '211 patent
` 24 and the '504 patent each have two reexamination proceedings
` 25 going on at this time.
`
`New Bay Capital, LLC-EX.1012
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`

`
`(cid:221)¿›» Œ(cid:230)(cid:239)(cid:240)(cid:243)‰“(cid:243)(cid:240)(cid:240)(cid:236)(cid:239)Ø(cid:243)(cid:212)(cid:219)(cid:220) (cid:220)–‰«‡»†‹ Œ(cid:240)Ø (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)º –” (cid:238)(cid:239)Œ —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:240)Ø(cid:237)(cid:231)
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` 15
` 1 And all four of those reexam proceedings with
` 2 respect to those two patents have gone to the stage of the
` 3 action closing prosecution. All of the claims stand
` 4 rejected. There are no confirmed claims in those two cases.
` 5 Of the other two patents, all of the claims stand rejected.
` 6 So insofar as it involves the patents that are
` 7 asserted against Apple, no claims have been reconfirmed; and,
` 8 in fact, all claims stand under rejections. And two of the
` 9 patents are under action closing prosecution. So I just
` 10 wanted to make sure that was clear. The only patent that has
` 11 had claims whatsoever confirmed is not asserted against Apple.
` 12 THE COURT: Okay.
` 13 MR. WILLIAMS: Thank you.
` 14 THE COURT: Response?
` 15 MR. CAWLEY: Thank you, Your Honor. With the
` 16 Court's permission, I would like to spend just a couple of
` 17 minutes discussing what actually is the status and future of
` 18 the reexamination procedure before I briefly go through the
` 19 three-factor test that Your Honor has set out in the Soverain
` 20 case.
` 21 First of all, we have heard much ado about claims
` 22 asserted in this case standing rejected in the reexam. Now,
` 23 Your Honor has been down this road before in various cases,
` 24 some of which I am familiar, although with some of them I am
` 25 not sure if the Court is aware of the entire story because
`
`New Bay Capital, LLC-EX.1012
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`

`
`(cid:221)¿›» Œ(cid:230)(cid:239)(cid:240)(cid:243)‰“(cid:243)(cid:240)(cid:240)(cid:236)(cid:239)Ø(cid:243)(cid:212)(cid:219)(cid:220) (cid:220)–‰«‡»†‹ Œ(cid:240)Ø (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)Œ –” (cid:238)(cid:239)Œ —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:240)Ø(cid:236)(cid:240)
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` 16
` 1 some of them unfolded after the proceedings before this Court
` 2 had finished.
` 3 For example, in the i4i case, we went