The 2012 patent trial that grabbed the most headlines was Apple's $1 billion win (since reduced) against Samsung. But Apple also suffered a major patent setback of its own last year when a patent-holding company called VirnetX won a $368 million verdict against the tech giant.
The consequences of Apple's loss are now starting to become clear. This month, testimony in a court hearing showed that not only is Apple facing royalty payments that could cost it many millions more, but it has already made changes to one of its premiere products, FaceTime—changes that reportedly have degraded the service's quality.
Apple was found to have infringed four VirnetX patents that cover various aspects of the FaceTime video chat system. VirnetX wasn't able to get an injunction blocking the use of FaceTime altogether, but the judge overseeing the case has been receptive to the argument that Apple should pay an ongoing royalty for infringement.
Now, reports have emerged from a key hearing earlier this month indicating that Apple is logging vast numbers of complaints about FaceTime after a re-design of the service's backend architecture. It's important to note that these reports have emerged mainly from discussion groups of VirnetX investors; no media organizations have published reports from the royalty hearing, which occurred on August 15. The documents related to the royalty litigation are almost entirely sealed.
Bearing those caveats in mind, Ars spoke with Jeff Lease, a VirnetX investor. Lease runs his own lawn sprinkler installation business and owns VirnetX stock, which trades as VHC on the New York Stock Exchange. Lease has a clear stake in this dispute; the better VirnetX does in court, the better its stock may do. But he has impressively detailed knowledge of the case, having shown up both to last year's jury trial and post-trial hearings. Lease's statements to me were based off his extensive note-taking in court. I have no reason not to believe that his statements are accurate, but at this time his statements are the only source for this report.
Neither Apple nor the attorney who represented Apple at the August hearing responded to requests for comment. A VirnetX lawyer also did not respond to a request for comment.
Apple: We’re not infringing, but we re-designed anyhow
Before the VirnetX case, nearly all FaceTime calls were done through a system of direct communication. Essentially, Apple would verify that both parties had valid FaceTime accounts and then allow their two devices to speak directly to each other over the Internet, without any intermediary or "relay" servers. However, a small number of calls—5 to 10 percent, according to an Apple engineer who testified at trial—were routed through "relay servers."
Both sides in the litigation admit that if Apple routes its FaceTime calls through relay servers, it will avoid infringing the VirnetX patents. Once Apple was found to be infringing—and realized it could end up paying an ongoing royalty for using FaceTime—the company redesigned the system so that all FaceTime calls would rely on relay servers. Lease believes the switch happened in April.
"The judge kept telling them, you need to consider yourself 'adjudicated infringers,'" said Lease. "Apple said, we don't think we're infringing, but we switched to 100 percent relay servers [anyhow]."
Higher costs and more complaints
At trial, Apple engineer Patrick Gates testified about how FaceTime works. He downplayed the impact that changing the system would have on FaceTime quality—presumably to show how unimportant the VirnetX patents were. He estimated the cost of running all FaceTime calls through relay servers at $3.6 million total. As for call quality, he said that it wouldn't be affected negatively at all—if anything, it might actually improve.
But according to Lease, it has now been revealed that Apple is actually paying $2.4 million per month to run FaceTime calls through relay servers. The payments are mainly to Internet content distribution companies like Akamai, which are transmitting vastly more FaceTime calls.
Meanwhile, Apple has handed over its customer service logs from April through mid-August to VirnetX's attorneys. At the August 15 hearing, a VirnetX lawyer stated that Apple had logged "over half a million calls" complaining about the quality of FaceTime, according to Lease.
If that's accurate, the data will bolster VirnetX's arguments that its patents are technologically significant, hard to work around, and deserve a high royalty rate. The judge and lawyers present at the hearing didn't discuss numbers regarding what a reasonable ongoing royalty might be, but VirnetX is asking for royalty payments of more than $700 million for the ongoing use of FaceTime, according to Lease.
In addition to doing a patent design-around with FaceTime, Apple also announced back in April that it would be doing a similar design-around of its VPN on Demand service for iOS—also to avoid VirnetX patents. However, Apple backtracked on those statements a few weeks later.
As to what the judge in the royalty case might do, Lease said there was no clear indication in the hearing he observed.
"He's hard to read," said Lease. "I'd hate to play poker against him."
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