September 16, 2014 / 4:44 PM / in 3 years

U.S. court throws out VirnetX $368 million patent award vs Apple

The Apple logo is pictured inside the newly opened Omotesando Apple store at a shopping district in Tokyo June 26, 2014.Yuya Shino

(Reuters) - A federal appeals court on Tuesday threw out a jury order requiring Apple Inc to pay VirnetX Holding Corp $368.2 million in damages for infringing four patents concerning technology for providing security over the Internet.

Shares of VirnetX plunged as much as 59.8 percent after the U.S. Federal Circuit Court of Appeals in Washington ordered a new trial, and said the damages award was based on defective jury instructions.

VirnetX derives most of its revenue from patent licensing.

Apple had been appealing a November 2012 jury finding that it infringed VirnetX's patents for virtual private network, or VPN, technology through the FaceTime feature on its iPhone, iPod Touch and iPad products, as well as on its Mac computers.

While finding that the patents were valid and that Apple had infringed two of them, the appeals court said the trial judge instructed jurors incorrectly on how to calculate damages, and that the error was not harmless.

It also said testimony from a VirnetX expert over how to calculate royalties should have been excluded, saying it did not reflect the extent to which the patented features were a factor in product sales.

"The law requires patentees to apportion the royalty down to a reasonable estimate of the value of its claimed technology, or else establish that its patented technology drove demand for the entire product," Chief Judge Sharon Prost wrote for a two-judge panel. A third judge resigned before the decision was issued.

The appeals court returned the case to the U.S. District Court in Tyler, Texas, for further proceedings.

Kendall Larsen, VirnetX's chief executive officer, said he is disappointed with the outcome. "We look forward to readdressing the FaceTime infringement and damages issues as soon as possible," he said in a statement.

Kristin Huguet, a spokeswoman for Cupertino, California-based Apple, declined to comment.

VirnetX is based in Zephyr Cove, Nevada. It was assigned the four patents at issue by Science Applications International Corp in 2006, court papers show.

In May 2010, VirnetX won a $200 million settlement from Microsoft Corp over the VPN technology.

In afternoon trading, VirnetX shares were down 47.1 percent at $7.90 on the American Stock Exchange, after falling as low as $6.00 earlier in the session. Apple shares were down 1.2 percent at $100.41 on the Nasdaq.

The case is Apple Inc v VirnetX Inc et al, U.S. Federal Circuit Court of Appeals, No. 2013-1489.

Reporting by Jonathan Stempel in New York; Additional reporting by Dan Levine in San Francisco; editing by Jonathan Oatis and Matthew Lewis

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