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Exhibit 10.1
 
 

  McKOOL SMITH     A PROFESSIONAL CORPORATION ▪ ATTORNEYS   Douglas A. Cawley 
300 Crescent Court, Suite 1500  Telephone: (214) 978-4000   Dallas, Texas 75201
Telephone: (214) 978-4044      

 
 
April 15, 2010
 
Kendall Larsen
Chief Executive Officer
VirnetX, Inc.
5615 Scotts Valley Drive
Suite 110
Scotts Valley, CA  95066
 

 
RE:
VirnetX Inc. v. Microsoft Corp.,
Civil Action No. 6:10-cv-00094-LED (E.D. Tex., Tyler Division)

 
Dear Kendall:
 
We are pleased to confirm McKool Smith’s (the “Firm’s”) representation of
VirnetX, Inc. (the “Client”) as counsel in the above-referenced matter. It is
the Firm’s policy to set forth at the beginning of our representation the scope
and terms of our representation and the manner in which we bill for our legal
services, related ancillary services and disbursements advanced by the firm. We
believe that a clear understanding of these matters is helpful in maintaining a
harmonious, professional relationship. I encourage you to consider carefully the
contents of this letter and to ask any questions that you have about the terms
of the letter.
 
Each of the lawyers in the Firm has, through experience and training, developed
certain expertise. In order to provide you with cost-effective legal service, it
is our practice, as time and work schedules permit, to refer matters internally
to those individuals who can perform the highest quality work at the lowest
cost. In addition, we employ staff members who are not licensed to practice law,
but who are capable of performing (under the supervision of a licensed attorney)
legally related tasks requiring a lower level of experience or expertise so as
to facilitate the most efficient rendering of services. As a result, in addition
to my services, VirnetX will find services being performed by other individuals
within the Firm. Although Luke McLeroy will handle the day-to-day
responsibilities on this case, I will ultimately be responsible for assuring
that the work performed on VirnetX’s behalf is performed to your satisfaction.
While I certainly do not expect that VirnetX will find the legal representation
of our firm unsatisfactory in any respect, I do encourage VirnetX to discuss any
problems that may arise so that we may resolve them promptly.
 
 
[CONFIDENTIAL TREATMENT REQUESTED]
 
 
 

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Kendall Larsen
April 15, 2010
Page 2
 
 
I presently charge for my services an hourly rate of $[***], and Luke McLeroy
charges an hourly rate of $[***] for his services. Currently other attorneys in
the firm have rates ranging from $[***] to $[***]. These rates are subject to
change with 30 days notice. Our statements for legal services will include the
current billing rates for all lawyers involved in the matter.
 
In addition to legal fees, we will bill you on a monthly basis for any ancillary
services such as messenger delivery, photocopying by us or outside copy
services, document imaging, computerized research, etc., if needed and used for
your matter. In the case of certain hearings, mediations, arbitrations and at
trial there will be charges for the preparation of graphics and multimedia
presentations. These charges can be significant. Invoices for out-of-pocket
expenses will be sent to you from time to time for payment direct to our
suppliers. All charges by outside suppliers will be billed to you at our cost.
If cost is not readily determinable from the invoice because of shared services
or other reasons, we will use reasonable methods to estimate or determine the
cost included in our bills.
 
We will bill you for our services on a monthly basis. Among other things, this
allows you to monitor both current and cumulative legal fees. If you dispute any
charge, please deduct the amount and pay the remainder of the invoice. The
billings are due within thirty days of when you receive them. Moreover, if,
during the course of our representation, billing disputes arise which remain
unresolved or if timely payment is not made, we reserve the right to withdraw
from further representation after appropriate notice in accordance with ethical
standards and court requirements.
 
Notwithstanding anything else herein to the contrary, the terms of the Term
Sheet attached hereto as Exhibit A shall be incorporated herein by this
reference and in the event of any conflict between this engagement letter and
the Term Sheet, the terms in the Term Sheet shall supersede the terms of this
engagement letter.
 
We understand that Kendall Larsen will be responsible for approval and
processing of all invoices in this matter. Accordingly, all original invoices
regarding this matter will be forwarded directly to Kendall Larsen for your
review, approval and transmittal to the appropriate company representative for
payment. I urge you and VirnetX to raise questions with me regarding our
invoices as soon as you have any questions, so that we can resolve any problems
promptly.
 
Client agrees that the Firm has not been retained to review or advise VirnetX
with respect to insurance coverage for the event or transaction in question. We
strongly recommend that VirnetX conduct a review of any potentially applicable
insurance coverage and place appropriate carriers on notice of any potential
claim. Should you desire additional advice in this area, we agree that you will
make such request in writing.
 
Client agrees that the Firm does not assume responsibility for advising Client
about community property issues, tax consequences or deductibility of any
recovery or expenses, or estate planning or investment issues with regard to the
payment of any claimed amount or recovery if any, or administrative benefits
and/or remedies available to Client due to disability. The attorneys make no
representations or guarantees regarding the tax consequences of any payment or
recovery obtained on behalf of the Client, and are offering no tax advice with
regard to these matters. Client agrees to rely on other advisers for advice on
those matters, and Client acknowledges that the Firm has informed the Client
that the Client should seek such advice in this case and that this case could
have unanticipated financial or tax consequences for the Client.
 
 
[CONFIDENTIAL TREATMENT REQUESTED]
 
 
 

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Kendall Larsen
April 15, 2010
Page 3
 
 
If it becomes necessary or advisable to secure the services of others in
connection with our representation of you, such as expert witnesses, jury
consultants, accountants or attorneys to represent you in other localities, we
will normally discuss these needs with you prior to retaining outside persons.
These persons typically determine their own fees, and will ordinarily provide a
separate engagement letter with either you or the Firm. We will provide you with
a copy of such engagement letter. We normally ask that these types of outside
professionals bill you directly. Whether you are billed directly or receive bill
forwarded from the Firm, you will be ultimately responsible for paying the
amounts billed.
 
It is expressly understood and agreed that this Agreement shall be governed by,
construed, interpreted, and enforced in accordance with the laws of the State of
Texas and shall be performable in Dallas County, Texas. All claims, disputes, or
other differences between Client and the Firm or any of its attorneys regarding
the above-referenced litigation, our engagement or services related thereto, or
this Agreement shall first be referred to a business person selected jointly by
you and the Firm. The parties shall explain their respective claims, disputes,
or differences to the business person selected who shall render a non-binding
recommendation to them for resolving such claims, disputes, or differences. If
the parties are unable to agree on a business person, or if, at least, one of
the parties is unwilling to accept and abide by the non-binding recommendation
of the business person, then any and all such claims, disputes, or differences
shall be exclusively resolved by binding arbitration pursuant to the Federal
Arbitration Act and the Commercial Arbitration Rules of the American Arbitration
Association (“AAA”), with arbitration to occur at Dallas, Texas, The arbitration
shall be before a single arbitrator selected from the complex business or
commercial cases panel of the AAA, and each party shall bear its own attorney
fees and costs in connection with the arbitration, including the costs of the
AAA and the arbitrator, which shall be equally divided. The AAA shall, promptly
after receipt of a demand for arbitration from one of the parties, proceed to
select the arbitrator. In doing so, the AAA shall submit a list of 5 potential
arbitrators to the parties who, within five days thereafter, shall be entitled
to strike two names and rank the remaining names. You acknowledge that you have
been advised by independent counsel that submission to binding arbitration
typically results in the waiver of significant rights, including the waiver of
the right to file a lawsuit in a different venue, waiver of the right to a jury
trial, the possible waiver of broad discovery, and the loss of the right to
appeal. In the event that, for any reason, the arbitration provision set forth
in this paragraph is deemed to be unenforceable, such unenforceability shall
have no effect on any other provision of this Agreement and the parties in such
event shall be free to pursue whatever other remedies are otherwise available to
them.
 
Because we are a party to this Agreement and have a material economic interest
in it, we have a conflict of interest and cannot give you any advice with
respect to it. We therefore strongly advise you to seek independent legal
representation regarding this Agreement and the arbitration provision contained
in it.
 
 
 

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Kendall Larsen
April 15, 2010
Page 4
 
 
If, after review of this letter, you find the foregoing to be acceptable, I
request that you sign and return the original to me, which, when executed, will
indicate VirnetX’s agreement to this fee arrangement and will authorize us to
undertake legal services on the terms set forth herein.
 
 

  Sincerely,        McKOOL SMITH, P.C.            By:  /s/ Douglas A.
Cawley                                       Douglas A. Cawley 

 
 

AGREED AND APPROVED:         VIRNETX, INC.            By:  /s/ Kendall
Larsen                                                 Kendall Larsen   
Chief Executive Officer 
4/27/2010
 

 
 
 
 
 
 

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Exhibit A
 
As we discussed earlier, our best estimate for the cost of this litigation
through trial is $7.5 million in fees and $1.5 million in costs. This estimate
is based on our preliminary investigation into the facts of this case, as well
as our previous experience in this Court. This estimate covers our fees through
appeal.
 
The firm will bill you monthly at our standard hourly fees for the actual work
performed. The total fees, however, would be capped at a maximum of $7.5
million.
 
Should this new matter be resolved separately from the previous matter, (i.e.,
as a separate settlement or through trial), we would receive 8% of the total
proceeds from that resolution.
 
Should this new matter be resolved as part of the settlement of the initial case
against Microsoft (cause no. 6:07-cv-00080-LED; VirnetX Inc. v. Microsoft
Corporation), we would receive an additional 2% of the total proceeds of that
settlement above and beyond any amount to which we are entitled under our
current arrangement (i.e. a total of 10%).
 
You will pay actual expenses, which we will bill monthly. Expenses are not
capped, but we would expect them to be $1.5 million for this case.
 
As used in this Exhibit A, the term “proceeds” shall mean a sum of money or
other valuable consideration equal in amount to the gross recovery, including
the full fair market value of all relief obtained and received directly or
indirectly by VirnetX from Microsoft, measured by the amount of recovery
collected from Microsoft, either through settlement, compromise or judgment,
including, but not limited to, compensatory damages, exemplary or enhanced
damages, attorney's fees, prejudgment interest, costs and post judgment interest
(whether through trial or settlement of any lawsuit). Proceeds shall not be
reduced by the value of any counterclaim, judgment or settlement inuring to the
benefit of Microsoft against VirnetX, which shall be the sole responsibility of
VirnetX. Such things of value include, but are not limited to, the full fair
market value of any business deal or transaction entered into by VirnetX and
Microsoft relating to the patents. For example, if there is any type of
agreement or settlement whereby Microsoft instead of, or in addition to, paying
money or property, makes an agreement with VirnetX to provide something of
benefit, then McKool Smith shall be entitled to its percentage of the full fair
market value of the business deal or other consideration received by VirnetX.
 
 
 
 
 
A-1

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