Background
VirnetX held patents on secure network communication technology — specifically, methods for establishing secure, anonymous communication channels and virtual private networks (VPNs). VirnetX alleged that Apple’s FaceTime video calling feature and Cisco’s networking products infringed its patents. After a five-day jury trial in the Eastern District of Texas, the jury awarded VirnetX $368 million in reasonable royalty damages. Both Cisco and Apple appealed, challenging the validity of the damages methodology.
The damages dispute centered on two methodologies VirnetX’s expert had used to calculate a reasonable royalty: (1) the Nash Bargaining Solution, an economic theory suggesting that two equal-bargaining-power parties would split a transaction’s profit evenly (50/50); and (2) calculations based on the value of the entire accused devices rather than just the patented features. Both methods had been rejected in previous Federal Circuit cases, and the court used VirnetX to clarify and reinforce those limitations.
The Court’s Holding
Judge Taranto, writing for the panel, vacated the damages award and ordered a new trial on damages. The court held that VirnetX’s expert had improperly applied the Nash Bargaining Solution without showing that the specific facts of this case matched the theoretical premises of the Nash model — in particular, that the parties had equal bargaining power and were equally willing to walk away from a deal. The Nash Bargaining Solution, absent such a factual showing, was an arbitrary rule of thumb no different from the 25% Rule the Federal Circuit had struck down in Uniloc v. Microsoft (2011).
The court also held that VirnetX had not properly apportioned the royalty base to the patented features. Even when the smallest salable unit is the entire product (an iPhone or iPad), damages must still be tied to the incremental value of the patented feature to the product — not the product’s entire value. This refined the court’s prior guidance on the entire market value rule (EMVR): EMVR can apply when the patented feature drives consumer demand for the entire product, but otherwise the royalty base must be apportioned down to reflect the feature’s contribution.
Key Takeaways
- The Nash Bargaining Solution cannot be used as a reasonable royalty starting point without establishing that its theoretical premises — equal bargaining power and symmetric willingness to walk away — actually apply to the specific case.
- Apportionment is required even when the smallest salable unit is the accused product — the royalty base must reflect the patented feature’s incremental value to the product, not the product’s total value.
- The entire market value rule applies only when the patented feature is the primary driver of consumer demand for the whole product — a high bar that is rarely met in multi-featured consumer electronics.
- VirnetX’s years-long battle with Apple and Cisco continued through multiple retrials, ultimately producing further Federal Circuit decisions on damages methodology — making this one of the longest-running patent damages sagas in recent memory.
Why It Matters
VirnetX v. Cisco clarified two of the most important rules governing reasonable royalty calculations in patent cases. For patent plaintiffs: do not use Nash Bargaining or the 25% Rule as damages shortcuts; apportionment to the patented feature is mandatory even in single-product cases. For patent defendants: apportionment is an effective tool for reducing damages exposure when the accused product incorporates many features beyond the patented one.
The case also illustrates the enormous practical importance of damages methodology in complex patent litigation. VirnetX had won a $368 million verdict — only to have it vacated on expert methodology grounds. Getting the economics right matters as much as winning on infringement and validity. The case has been cited hundreds of times in subsequent damages disputes and remains essential reading for patent damages practitioners.