(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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239) –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)(cid:240)
`
` 1
`
` 1 IN THE UNITED STATES DISTRICT COURT
` FOR THE EASTERN DISTRICT OF TEXAS
` 2 TYLER DIVISION
` 3
` VIRNETX, INC. )
` 4 DOCKET NO. 6:10cv417
` -vs- )
` 5 Tyler, Texas
` ) 9:00 a.m.
` 6 APPLE, INC. October 31, 2012
` 7
` 8 TRANSCRIPT OF TRIAL
` MORNING SESSION
` 9 BEFORE THE HONORABLE LEONARD DAVIS,
` UNITED STATES CHIEF DISTRICT JUDGE, AND A JURY
` 10
` 11
` 12 A P P E A R A N C E S
` 13
` 14 FOR THE PLAINTIFFS:
` 15
` MR. DOUGLAS CAWLEY
` 16 MR. BRADLEY W. CALDWELL
` MR. JASON D. CASSADY
` 17 MR. JOHN AUSTIN CURRY
` McKOOL SMITH
` 18 300 Crescent Court, Ste. 1500
` Dallas, TX 75201
` 19
` 20
` 21 COURT REPORTERS: MS. JUDITH WERLINGER
` MS. SHEA SLOAN
` 22 shea_sloan@txed.uscourts.gov
` 23
` 24 Proceedings taken by Machine Stenotype; transcript was
` produced by a Computer.
` 25
`
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`
` 2
`
` 1 FOR THE PLAINTIFF:
` 2 MR. ROBERT M. PARKER
` MR. ROBERT CHRISTOPHER BUNT
` 3 PARKER BUNT & AINSWORTH
` 100 East Ferguson, Ste. 1114
` 4 Tyler, TX 75702
` 5
` 6
` 7
` 8
` FOR THE DEFENDANT:
` 9
` MR. DANNY L. WILLIAMS
` 10 MR. TERRY D. MORGAN
` MR. RUBEN S. BAINS
` 11 MR. CHRIS CRAVEY
` MR. MATT RODGERS
` 12 MR. DREW KIM
` MR. SCOTT WOLOSON
` 13 WILLIAMS, MORGAN & AMERSON, P.C.
` 10333 Richmond, Ste. 1100
` 14 Houston, TX 77042
` 15
` MR. ERIC ALBRITTON
` 16 MR. STEPHEN E. EDWARDS
` MS. DEBRA COLEMAN
` 17 MR. MATTHEW C. HARRIS
` ALBRITTON LAW FIRM
` 18 P.O. Box 2649
` Longview, TX 75606
` 19
` 20 MR. JOHN M. DESMARAIS
` MR. MICHAEL P. STADNICK
` 21 DESMARAIS, LLP - NEW YORK
` 230 Park Avenue
` 22 New York, NY 10169
` 23
` 24
` 25
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:237) –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)(cid:238)
`
` 3
`
` 1 P R O C E E D I N G S
` 2 (Jury out.)
` 3 COURT SECURITY OFFICER: All rise.
` 4 THE COURT: Please be seated.
` 5 All right. I understand there are couple
` 6 of matters before we bring the jury in; is that correct?
` 7 MR. CASSADY: Yes, Your Honor.
` 8 THE COURT: Okay.
` 9 MR. CASSADY: Your Honor, Jason Cassady
` 10 for the Plaintiff.
` 11 We have the joint stipulation on the MILs
` 12 and one final document for Your Honor to hopefully enter
` 13 as an order, for opening. And then we have a small -- a
` 14 small oral motion in limine that Eric Albritton and I
` 15 have agreed to, and we want to get that on the record
` 16 before we start argument.
` 17 THE COURT: All right. Let's do it.
` 18 MR. CASSADY: Okay. May I approach?
` 19 THE COURT: Yes. Uh-huh.
` 20 MR. CASSADY: Your Honor, the parties
` 21 shared this document last night. Everybody is in
` 22 agreement on this as long as we get the other small oral
` 23 motion in limine in.
` 24 And at the very end of this is -- the
` 25 paperclip -- is an order for Your Honor, but obviously
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:236) –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)(cid:237)
`
` 4
`
` 1 we will take your word for it on the record, Your Honor.
` 2 THE COURT: Thank you.
` 3 Has this been entered electronically?
` 4 Has it been filed electronically?
` 5 MR. CASSADY: We didn't get a chance to
` 6 file it, because of the timing of the agreement, but
` 7 we're happy to do that.
` 8 THE COURT: All right. And if you will
` 9 file it, then I will -- no objection, is there, to the
` 10 order granting first supplemented notice of joint
` 11 stipulation relating to certain motions in limine?
` 12 MR. ALBRITTON: No objection, Your Honor.
` 13 THE COURT: All right. That will be
` 14 granted.
` 15 MR. CASSADY: Thank you, Your Honor.
` 16 And then the last thing is the motion in
` 17 limine regarding Apple's patents or reference to their
` 18 patents in the opening or throughout the case. We
` 19 understand this is a motion in limine, which means
` 20 people can approach and make arguments; but the parties
` 21 have agreed that for purposes of the situation, Apple
` 22 can say they have lots of patents, but they won't refer
` 23 to or hint or make any reference to having patents on
` 24 the products in this case or the software in this case.
` 25 THE COURT: Okay. Is that agreeable,
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» º –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)(cid:236)
`
` 5
`
` 1 Mr. Albritton?
` 2 MR. ALBRITTON: For purposes of the
` 3 opening. And if we want to do more, we will approach.
` 4 THE COURT: All right. Thank you.
` 5 That's granted.
` 6 Anything further?
` 7 MR. CASSADY: Your Honor, one other thing
` 8 is we have our admitted list. Obviously, I would like
` 9 to do that in front of the jury, but I want to make sure
` 10 we're all on the same procedure before I get
` 11 embarrassed.
` 12 THE COURT: That's exactly what we'll do.
` 13 MR. CASSADY: Okay. Thank you, Your
` 14 Honor.
` 15 THE COURT: Y'all come forward and have a
` 16 seat, if you need to find one. Are there seats
` 17 available? Y'all scrunch up. We're not going to have
` 18 anybody standing in the back of the courtroom. Getting
` 19 close and cozy back there.
` 20 Counsel, approach if you would, please.
` 21 (Bench conference.)
` 22 THE COURT: Mr. Brown, who I believe was
` 23 seated during the voir dire, and I think during the
` 24 opening, on the far back seat is not here. He looked
` 25 like he was having some trouble following everything, to
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» Œ –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)º
`
` 6
`
` 1 me.
` 2 Do y'all -- since he's not here, we can
` 3 either wait some time on him, or we can go ahead without
` 4 him. Does either side have a preference on that?
` 5 MR. ALBRITTON: We're happy to go ahead
` 6 without him, Your Honor.
` 7 MR. CAWLEY: So are we.
` 8 THE COURT: We will.
` 9 (Bench conference concluded.)
` 10 THE COURT: All right. I understand
` 11 Mr. Brown is not here yet.
` 12 COURT SECURITY OFFICER: That's correct,
` 13 Your Honor.
` 14 THE COURT: We will go ahead and bring
` 15 the jury in; and by agreement with the parties, we're
` 16 going to go ahead and proceed with eight jurors -- or
` 17 seven jurors instead of eight. Please have someone
` 18 notify him, if he shows up later, that he is excused.
` 19 Thank you.
` 20 COURT SECURITY OFFICER: All rise for the
` 21 jury.
` 22 (Jury in.)
` 23 THE COURT: Please be seated.
` 24 All right. Good morning, Ladies and
` 25 Gentlemen of the Jury. We are about to begin our
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» Ø –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:237)Œ
`
` 7
`
` 1 opening statements in the case, and I will ask you to
` 2 pay attention to the opening statements.
` 3 Remember they are not evidence. They are
` 4 an overview of what the attorneys expect the evidence to
` 5 show.
` 6 At this time, the Court will recognize
` 7 Mr. Cawley. Would that be correct?
` 8 MR. CAWLEY: Thank you, Your Honor.
` 9 THE COURT: Mr. Cawley.
` 10 MR. CAWLEY: Good morning, Ladies and
` 11 Gentlemen.
` 12 In the evidence in this case, you will
` 13 hear about a small team of four men who invented a way
` 14 to make it easier to communicate safely. Many of us use
` 15 this invention every day and don't even know about it.
` 16 It's the text, the communications we have
` 17 with traditional computers, and it protects the
` 18 communications that we have today with computers that
` 19 you can hold in your hand called a smartphone.
` 20 These men submitted their invention to
` 21 the United States Patent & Trademark Office in
` 22 Washington, D.C. The Patent Office studied it for
` 23 several years and eventually decided that it was worthy
` 24 of protection by not one but by four United States
` 25 patents.
`
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`
` 8
`
` 1 Ladies and Gentlemen, the evidence in the
` 2 case will show you that Apple Computer Company uses this
` 3 invention to achieve security in many of its products
` 4 but that it refuses to pay fair value.
` 5 At the end of this case, we believe that
` 6 Judge Davis will ask you to determine the amount of a
` 7 reasonable royalty for Apple's use of VirnetX's
` 8 invention.
` 9 Now, on Monday, I introduced to you
` 10 Dr. Bob Short. I won't ask him to stand up yet here
` 11 again. Here he is standing in front of you.
` 12 You'll hear from Dr. Short this morning
` 13 how he was always fascinated by science and math. I
` 14 didn't know Dr. Short when he was a young man, but I
` 15 have to believe he's what -- in my high school,
` 16 anyway -- we used to call a brain. He loved those
` 17 subjects. He got an advanced degree in math.
` 18 But in addition to his interest in those
` 19 things, he had another compelling interest that has
` 20 guided the course of his entire adult life: He wanted
` 21 to make our country more secure. One of the first
` 22 projects he worked on, after he got out of school, was
` 23 developing a better way to detect Soviet submarines
` 24 sailing under the polar icecap.
` 25 Then he apparently hadn't had enough of
`
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`
` 9
`
` 1 cold, polar weather, because one of the next projects he
` 2 works on was this (indicating). This is a set of
` 3 antennas in Alaska that Dr. Short helped design and
` 4 spent time in Alaska to make sure they were working.
` 5 And it's these antennas that protected our country
` 6 against low-flying Soviet missiles during the Cold War.
` 7 Well, after a few years of this, I guess
` 8 that Dr. Short had had enough of that weather, so he
` 9 took a job at a company called Science Applications
` 10 International. You'll hear it talked about some in the
` 11 lawsuit. It's usually abbreviated SAIC.
` 12 And SAIC is a company that is in the
` 13 business of providing technology to the government, to
` 14 the military, to the CIA, to the FBI, and to other
` 15 security organizations like that.
` 16 When he joined SAIC, Dr. Short met a man
` 17 that he would work with for the next two decades, and
` 18 you will also hear from in this case by videotape. His
` 19 name is Gif Munger. Mr. Munger is a graduate of the
` 20 United States Naval Academy. This is a picture of him
` 21 when he commanded his first ship, a minesweeper at the
` 22 conclusion of the Vietnam War.
` 23 Mr. Munger spent a 20-year career as a
` 24 U.S. Naval officer; and upon his retirement, he joined
` 25 SAIC, the company that Dr. Short was in.
`
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`
` 10
`
` 1 Together, the first project they worked
` 2 on was one called the Global Hawk. Now, the Global
` 3 Hawk, as you see a drawing here, is an unmanned drone.
` 4 It's an aircraft that's not occupied by people. It's
` 5 run by remote control, and it can fly very high and
` 6 observe objects on the ground, on the battlefield, for
` 7 example.
` 8 Global Hawk was first used during the
` 9 first Gulf War. And the way it works is, the Global
` 10 Hawk would communicate the pictures that it saw with the
` 11 satellite high above the Earth; and that satellite could
` 12 send those pictures anywhere it wanted, for example, all
` 13 the way back to Washington, D.C., to the Defense
` 14 Department so that they could do analysis on what the
` 15 Global Hawk was able to see.
` 16 There was a problem, though, that
` 17 Dr. Short and Mr. Munger were asked to work on. The
` 18 military had run out of satellites. So during the
` 19 emergency of the first Gulf War, they were going to have
` 20 to use commercial satellites, satellites that anybody
` 21 like a television company can rent time on.
` 22 Now, the military is going to be using
` 23 not its own satellite but a commercial satellite, and
` 24 those communications were insecure; therefore, the
` 25 military asked Dr. Short and Mr. Munger to develop a way
`
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`
` 11
`
` 1 to secure the communications between Global Hawk and the
` 2 satellite and the satellite and the ground.
` 3 They did come up with a way to do that
` 4 and, therefore, prevented hackers on the ground from
` 5 intercepting what the Global Hawk was doing. You might
` 6 be interested to know, even after all of these years,
` 7 the Global Hawk is still flying, still using the
` 8 technology that Dr. Short developed; and that a year and
` 9 a half ago, when a team of Navy Seals attacked on Osama
` 10 bin Laden's compound, the Global Hawk was flying
` 11 overhead.
` 12 But the Global Hawk is not the invention
` 13 in this case; but its importance is, it set Dr. Short
` 14 and Mr. Munger thinking, thinking about this problem of
` 15 the military or others who needed to have secure
` 16 communications, wanting to be able to use public,
` 17 insecure methods of communication.
` 18 And they saw as early as the early 1990s
` 19 that this was going to be an important issue for the
` 20 future. And one of the ways of communication that they
` 21 were thinking about was the Internet.
` 22 Now, most of us hadn't heard of the
` 23 Internet by the early 1990s, but Dr. Short and Mr.
` 24 Munger had, and they knew one day the Internet would be
` 25 an important means of communication for the military,
`
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`
` 12
`
` 1 for security agencies like the CIA, and eventually for
` 2 people like us.
` 3 The Internet, as you may know, is open
` 4 and accessible to anyone who wants to use it. It
` 5 responds to anyone who asks and trusts for security,
` 6 that's the problem of whoever wants to use it. So the
` 7 Internet doesn't provide that.
` 8 In the late 1990s, there were a few ways
` 9 to achieve security on the Internet. One of them was
` 10 called a virtual private network. Another, which you'll
` 11 hear about in this case, is called a secure
` 12 communication link. But even though these ways of
` 13 securing communications on the Internet were known in
` 14 the 1990s, there was a problem with them. They were
` 15 very difficult to set up and use.
` 16 Here's an article that you will hear
` 17 about from 1998, in a publication called Network World,
` 18 and it's talking about this issue of how difficult it
` 19 was back then to achieve secure communications over the
` 20 Internet. The article said that remote access via the
` 21 Internet is cheap. Unfortunately, it's also insecure
` 22 and unreliable. Remote access is a nightmare for
` 23 support desks. Adding VPN -- that's virtual private
` 24 network -- makes it work. So this is a problem that
` 25 Dr. Short and Mr. Munger saw.
`
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`
` 13
`
` 1 One of the next projects they got
` 2 involved in was a project for the CIA that was called
` 3 netEraser. Dr. Short will explain some about it to you
` 4 later.
` 5 But during the course of their work on
` 6 netEraser, the inventors were again confronted with this
` 7 problem of how to take public means of communication,
` 8 like the Internet, be able to make it secure, but to be
` 9 able to do it in a way that ordinary people could
` 10 actually do and use.
` 11 So remember, we discussed that the
` 12 Internet is open and accessible to anyone on the one
` 13 hand; and on the other hand, there were some kinds of
` 14 secure communications known -- shown over to the
` 15 right -- that are not open to the Internet. They are
` 16 not accessible to just anyone. They have to be set up
` 17 by professionals, because they are so complicated.
` 18 In their work on netEraser, Dr. Short had
` 19 an idea, and Mr. Munger and the other team members
` 20 immediately saw how it could work: That they could
` 21 combine the public communication access of the Internet
` 22 with a secure way of communicating that was so easy that
` 23 it only required one click of a computer, one click of a
` 24 button on the smartphone.
` 25 Mr. Munger thought of the name VirnetX,
`
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)(cid:236) –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:236)(cid:237)
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` 14
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` 1 which means virtual network exchange, to describe the
` 2 project that they were working on that was this
` 3 invention.
` 4 Now, you'll hear in a lot of detail in
` 5 this case about their idea and about how their invention
` 6 works. I am going to describe it to you very briefly
` 7 here. But, of course, as you've already heard from
` 8 Judge Davis, the actual invention is described by the
` 9 claim in the patent; and when we have more time, when
` 10 you hear the testimony, we will spend a lot of time
` 11 actually talking about the claims bit-by-bit.
` 12 But for now, imagine that there is a
` 13 traveler here in the lower right-hand side, a
` 14 businessman that looks like he's in a hurry. He has a
` 15 computer with him, and he wants to be able to
` 16 communicate with the home office, and he needs for this
` 17 to be a secure communication.
` 18 Well, as I've told you, in the old days,
` 19 before the invention, the business traveler would have
` 20 to get on a phone. He would have to call the home
` 21 office. He would have to get ahold of somebody that
` 22 knows how to set up the virtual private network. They
` 23 would have to do things on their end. He would have to
` 24 do things on his end.
` 25 And remember, he's got to be an expert in
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`New Bay Capital, LLC-EX.1013-Page 14 of 128
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)º –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:236)(cid:236)
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` 15
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` 1 this too, because it takes an expert on both ends to be
` 2 able to set up the virtual private network.
` 3 With the VirnetX's invention, none of
` 4 that is necessary. What happens is that the traveler
` 5 down in the hotel enters in the address he wants to
` 6 reach, in this case an imaginary mycompany.com.
` 7 Software on his computer will look for
` 8 that address to determine if it needs to be a secure
` 9 connection.
` 10 Now, you see this odd little logo that
` 11 looks sort of like a yellow or gold letter "G." That's
` 12 there because VirnetX has a product, a software product
` 13 that they named Gabriel that actually does this
` 14 invention, and that "G" stands for Gabriel. You will
` 15 hear about that later.
` 16 The software on the traveler's computer
` 17 looks to see if the address that he has entered is
` 18 supposed to be a virtual private network connection; if
` 19 it's not, if he's just trying to communicate with Google
` 20 or someone else that's not secure, then it just connects
` 21 as normal. But if the software determines that this is
` 22 supposed to be a secure connection, it communicates
` 23 automatically with the company office, and Gabriel
` 24 software that also is at the company office
` 25 automatically creates a virtual private network between
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`New Bay Capital, LLC-EX.1013-Page 15 of 128
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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)(cid:231) (cid:218)•·»… (cid:239)(cid:239)æ(cid:240)(cid:231)æ(cid:239)(cid:238) —¿„» (cid:239)Œ –” (cid:239)(cid:238)Ł —¿„»(cid:215)(cid:220) (cid:253)(cid:230) (cid:238)(cid:239)(cid:239)(cid:236)º
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` 16
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` 1 the office and the traveler.
` 2 Neither the office nor the traveler has
` 3 to do anything else than our traveler entering that
` 4 address and pushing one button on his or her computer.
` 5 This idea, which prevents the hacker from being able to
` 6 intercept that communication, was awarded two of the
` 7 patents you will hear a lot about in this lawsuit. They
` 8 will be called the '135 and the '151.
` 9 There's another form of secure
` 10 communication called a secure communication link. And
` 11 that's also part of the invention, but it works a little
` 12 bit differently.
` 13 Here the business traveler wants to set
` 14 up a communication with his daughter or someone at home.
` 15 Again, all he has to do is enter the right address,
` 16 myfamily.com, on his computer.
` 17 His computer then automatically
` 18 communicates with something you'll hear about called a
` 19 secure domain name server. That's a special computer
` 20 that exists somewhere out and is connected to the
` 21 Internet.
` 22