EXHIBIT 10.1

 
Samuel F. Baxter
Direct Dial:  (214) 978-4016
sbaxter@mckoolsmith.com
McKool Smith

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A PROFESSIONAL CORPORATION • ATTORNEYS
300 Crescent Court, Suite 1500
Dallas, Texas  75201
Telephone: (214) 978-4000
Telecopier: (214) 978-4044

 
 
June 8, 2009
 
 
Kendall Larsen
Chief Executive Officer
VirnetX, Inc.
5615 Scotts Valley Drive, Suite 110
Scotts Valley, CA  95066

 RE:
Microsoft Litigation

 
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.
 
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.
 

Confidential Treatment Requested
 
 

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Kendall Larsen
VirnetX, Inc.
June 8, 2009
Page 2

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 significant
out-of-pocket expenses, in excess of $______ may 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
VirnetX, Inc.
June 8, 2009
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.
 

Confidential Treatment Requested
 
 

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Kendall Larsen
VirnetX, Inc.
June 8, 2009
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/ Sam Baxter                                                            
Samuel F. Baxter

 
 
 
 
 

Confidential Treatment Requested
 
 

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Kendall Larsen
VirnetX, Inc.
June 8, 2009
Page 5

 

 
AGREED AND APPROVED:

VIRNETX, INC.

By:   /s/ Kendall Larsen                                                      
Kendall Larsen
Chief Executive Officer
 

Confidential Treatment Requested
 
 

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EXHIBIT A
 
TERM SHEET
 
 
Terms of engagement of McKool Smith by VirnetX, Inc. for the Microsoft case,
including appeal, if any:
 
·       
Engagement letter to be signed ASAP in June with no contingencies to engagement

 
·       
VirnetX will seek transitional support from Chris Bright at McDermott for a few
weeks while McKool is getting up to speed, but McKool will take over the lead on
the case immediately (responses to expert reports are due June 19th)

 
·       
Although not a contingency to the engagement, both parties think it’s a good
idea to move the trial date out a couple months if the judge permits, which is
reasonably likely

 
·       
McKool’s fee will be fixed at $3M (the fixed amount) plus 8% of case proceeds
(the contingency fee) unless the case proceeds are [***] or less, in which case,
McKool’s fee will be their actual time (up to the fixed amount) plus 8% of case
proceeds

 
·       
Expenses are not capped, but are estimated to be approximately $1M

 
·       
McKool will bill for actual time (up to the fixed amount) and expenses, with the
first bill to be sent out after the first full month of the engagement (i.e., in
August covering the month of July as well as the June stub time), and any fixed
amount remaining unbilled as well as the contingency fee will be assessed and
billed upon final resolution of the case (i.e., after trial and any appeal or
settlement)

 
 
 
 
A-1
Confidential Treatment Requested 
 
 

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