The Curious Case of New Bay Capital LLC and VirnetX Inc.

Authored by Michelle Carniaux and Michael E.Sander

In June 2013, a newly formed company called New Bay Capital, LLC (“New Bay”) filed four petitions for inter partes review of patents owned by a publicly traded patent licensing entity VirnetX Holding Corporation (“VirnetX”). See IPR2013-00375, 00376, 00377, and 00378. VirnetX had recently won a jury verdict against Apple Inc. (“Apple”) on the same patents for hundreds of millions of dollars and was proceeding through the appeals process against Apple. Neither New Bay nor its parent company, Eastern Shore Capital, LLC, were involved in the VirnetX litigation, nor does is appear that New Bay made or sold anything related to the technologies covered by the patents, so New Bay’s motive for filing four IPR petitions was unclear.

Meanwhile, Apple, who was still actively engaged in litigation with VirnetX, and who had a clear interest in challenging VirnetX’s patents, filed its own petitions for inter partes review. See IPR2013-00354, 00348, 00349, 00393, 00394, 00397, 00398. Apparently because there was some uncertainty as to whether Apple’s petitions were filed within the one-year statutory time limit of 35 U.S.C. 35 U.S.C. § 315(b), Apple subsequently filed motions to join its IPR proceedings to the New Bay IPR proceedings. The one year statutory time limit does not apply to requests for joinder. See 37 C.F.R. § 42.122(b).

Shortly after New Bay filed their four IPR petitions, VirnetX served New Bay and their attorneys with numerous third party subpoenas. Both New Bay and their attorneys responded with motions to quash. In the motion briefings, possible motivating factors for filing the New Bay IPR petitions came to light. In one of its papers, VirnetX alleged that the “Vice President of New Bay, reached out to VirnetX to request ten percent of that final judgment in return for dropping the petition for inter partes review.” VirnetX also speculated that Apple was somehow involved in the New Bay IPR petitions. In addition, one financial reporter speculated that New Bay might be a hedge fund with a short position on VirnetX stock, and filed the four IPRs only to adversely affect VirnetX’s stock price. See http://seekingalpha.com/article/1772542-virnetx-new-bay-capital-llcs-and-apples-contrived-iprs-part-2-new-bay-retraces. According to that reporter, shares of VirnetX dropped nearly 25 percent (about $250M in market capitalization) in the days after the New Bay IPR requests were filed.

Perhaps in response to the threat of the subpoenas, New Bay filed motions to terminate its four IPR proceedings. Apple, who was relying on New Bay’s IPRs to support its motions for joinder, attempted to oppose New Bay’s motion to terminate. However, the Board held that “Apple, as a third party, is not authorized to file an opposition to [New Bay’s] motions to terminate.” The Board subsequently terminated New Bay’s IPR petitions, but has not yet substantively acted on Apple’s petitions for IPR nor its joinder motions.

On November 20, 2013, adding yet another twist to the story, RPX Corporation (“RPX”) filed seven petitions for inter partes review against the same patents. See IPR2014-00171 to 00177. RPX is a defensive patent licensing company and their motivation for filing the IPRs may be to protect their clients from any potential new patent suits brought by VirnetX. However, RPX did not identify any other company as the “real party in interest,” instead stating in their petition that:

RPX has solicited contributions from its clients to help fund its RPX R&D service[.] . . . [However,] RPX has sole discretion over and controls the decision of which patents to contest through PTO post-issuance proceedings . . . RPX alone is responsible for paying the costs of preparing and filing this petition . . . RPX, thus, is the sole real party in interest of the present petition and is not in privity with any other entity in connection with this petition.

The RPX petitions may provide Apple with another opportunity to join IPR proceedings.