How Much Longer Will Patent Trolls Take Their Tolls?

It's been a weird week for investors with a yen for patent-based business models.

First, video ringtone vendor and occasional search patent wrangler Vringo (NYSEMKT: VRNG  ) scored a patent infringement victory against AOL (NYSE: AOL  ) and Google (Nasdaq: GOOG  ) . But share prices fell on the verdict because the $30 million up-front damages were far smaller than the $493 million the company originally sought. Vringo shares are still down 19% from pre-verdict highs as investors fret over the judge's final say on damages, licensing, and potential injunctions. But the early enthusiasm changes the picture a good deal -- the stock is up 27% from last Friday's closing prices.

Then mobile security expert VirnetX (NYSEMKT: VHC  ) landed a much larger win against Apple (Nasdaq: AAPL  ) . Cupertino was ordered to pay VirnetX $370 million to make up for misuse of the company's patents in the FaceTime video chat app. Sure, investors were hoping for more, but this is still a potential lifesaver for a company with less than $40,000 in trailing revenue. The company recorded a $200 million payment from Microsoft (Nasdaq: MSFT  ) two years ago in a case based on many of the same communication patents, but that windfall never led to any significant license royalties.

Unlike Vringo, VirnetX jumped sky-high on the news. Then again, investors didn't build up expectations to the moon before the court order came down. This stock is also up 25% this week.

So far, so good. The weird part? These victories had absolutely no effect on fellow patent managers such as InterDigital (Nasdaq: IDCC  ) or TiVo (Nasdaq: TIVO  ) . Both of these stocks tend to rise and fall with major developments in patent sales and lawsuits because InterDigital is a patent-licensing specialist and TiVo is moving in that direction. But the stocks have been trading sideways all week long.

And let's not forget about Universal Display (Nasdaq: PANL  ) . The OLED technology researcher also makes a pretty penny from patent license sales, though it's augmented by selling the materials that go along with the licenses. That stock crashed hard today and is down 29% for the week. Last night's earnings report was a huge disappointment because the OLED market isn't developing quite as fast as Universal's management and investors had hoped.

VRNG Chart

VRNG data by YCharts.

The upshot of all this is very simple. The formerly monolithic patent licensing sector is separating. Investors are paying less attention to broad licensing trends while focusing more on each company's prospects and fundamentals. This is good. It's healthy.

I'd still worry about Google and Apple filing appeals on this week's legal losses, making it a little early for Vringo and VirnetX shareholders to pop the champagne. Likewise, I think it would be a mistake to panic over Universal Display's soft quarter. But that's kind of the point -- it's getting easier and safer to evaluate these companies on their own merits nowadays, like any good investor should. The patent sector effect is fading fast.

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Comments from our Foolish Readers

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  • Report this Comment On November 08, 2012, at 4:30 PM, SDTrond wrote:

    Anders, "patent troll" wrt VHC might be a bit of a stretch.

    The company was founded by the folks who originally worked on these patents while at SAIC.

    And they continue to file new patents - NOT go around buying other companies' patents.

    They needed to prosecute this case in order to obtain ongoing royalties vs. Apple.

    No mention of the case vs. AAPL in front of the ITC?

    No mention of the settlements with Aasta, NEC, etc? No mention of the outstanding case vs. CSCO, in front of the same judge that presided over the wins vs. MSFT and now AAPL?

    This article is sadly lacking in DD.

  • Report this Comment On November 08, 2012, at 4:33 PM, itzscott1 wrote:

    How Much Longer Will Patent Trolls Take Their Tolls?.....

    Probably as long as Patent Pirates continue to steal the Troll's booty, make billions of dollars as a result of their work and not have the decency to compensate them in the least.

    That's how long.

  • Report this Comment On November 08, 2012, at 4:49 PM, PrincetonAtty44 wrote:

    The question assumes prejiduce. The legal system of Justice was created just for this purpose. To offer a level playing field for the small and the big. When we lose that we lose our system of justice. Everything that follows is typically of a society heading into the abyss..

  • Report this Comment On November 08, 2012, at 5:48 PM, sidneyleejohnson wrote:

    Anders Bylund,

    it took me awhile to uncover the Anders we knew to love in his coverage of UDC.."Likewise, I think it would be a mistake to panic over Universal Display's soft quarter. "... otherwise I would have said you had really been at odds with your past coverage. Hidden nearly in between the lines of this piece is the long time supporter of the oled technology diffusion story.

  • Report this Comment On November 09, 2012, at 6:28 AM, hashhampton wrote:

    Patent trolls? What good is a patent if you don't stop or prevent others from stealing from you? Is the purpose of a patent to protect what yours legally? Stop defending big thieves like Google. Steve Jobs was so upset about Samsung stealing Apple's patents that he went to his grave vowing to recovering all that they took. In Vringo's case, they got the patents fair and square, Google could have gotten them too, but they were late to the party and should pay. It doesn't matter who owns the patents or when, if you got you got em. Patent trolls? Give me a break, the only guilty trolls are those who stole the patented technology.

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