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Patents are a big deal these days. Whether it's Advanced Micro Devices (AMD) looking to salvage itself through a patent sale; a turf war between Apple (AAPL) and Samsung (OTC:SSNLF); or the $12.5 billion purchase of Motorola Mobility by Google (GOOG), an acquisition driven in part due to Google's need for patent protection, the past few years have shown the importance -- and the value -- of patents in the tech industry.

One of the more interesting battles in the patent arena has taken place between upstart Vringo (VRNG) and Google. After merging with Innovate/Protect in May, Vringo won a $30 million judgment against Google and four other defendants earlier this month. VRNG stock has been on a roller-coaster ride, as investors digest the verdict and gauge what's next for the company.

For investors interested in the patent space -- and perhaps looking for less volatility than VRNG has offered -- there is an interesting small-cap play in Internet Patents Corporation (PTNT). IPC was formerly known as InsWeb until it sold essentially its entire business to Bankrate (RATE) for $65 million in October 2011. The company then paid a $5 per share special dividend in March, and began the process of becoming a patent licensing company. IPC holds six patents, two of which appear to have broad e-commerce applications. Patent 6,898,597 covers "Event Logs," while patent 7,707,505 refers to "dynamic tabs for a graphical user interface." (IPC's four other patents relate to online insurance activities.)

To be sure, IPC's upside is nowhere near as impressive as Vringo's. While Vringo is using legacy patents from the Lycos search engine to go after whales like Google, Internet Patents' targets have been far smaller. The company has initiated lawsuits against eBags and TellApart alleging infringement of the '597 patent, with subsequent '505 claims filed in the third quarter against The General Automobile Insurance Services and Active Network (ACTV).

IPC executives -- notably CEO Hussein Enan -- have not elaborated on their strategy, or their choice of smaller, mostly privately held companies as test cases for their patents. It may be that the company is deciding on smaller companies simply to establish early success in the field, or choosing targets where it feels it has a better chance of an out-of-court settlement. It may also be that the company is still feeling out its long-term strategy; after all, the transition to the patent licensing business model is still only a few months old.

What IPC lacks in upside potential, however, it supplies in downside protection. At Tuesday's close of $3.50 per share, PTNT has a market capitalization of $27.13 million. Yet the company had, as of September 30, $33.9 million in cash and investments (including $1 million in restricted cash). Even assuming that the 231,000 shares of stock represented by outstanding options are issued, the company has a cash cushion of nearly $6 million above its market capitalization.

The company seems unlikely to burn through that cash very quickly; in the Q3 release, CEO Enan reiterated a target for quarterly expenses of $0.5-$0.6 million, an annual run rate of $2-2.5 million. And Enan looks likely to protect the company's cash balance; he owns nearly 25% of the company's outstanding stock, meaning his interests as a shareholder -- where he is entitled to over $8 million of the company's cash -- would surely override his $300,000 annual salary. Indeed, the company has publicly mentioned the possibility of a second special distribution, in which PTNT shareholders might see a substantial return of their capital.

In short, PTNT looks to be a low-risk play on the patent sphere. It seems unlikely that Enan will allow the company's cash balance to be drained. If their patent litigation strategy becomes a success, licensing and/or litigation proceeds can create profits for shareholders. The company's substantial base of net operating loss carry forwards -- $140 million federal and $83 million at the state level, according to the most recent 10-Q -- might make the company an interesting acquisition. If the strategy fails, investors seem likely to see little, if any losses from the current share price, as IPC will liquidate and return its assets to shareholders.

It's very difficult to predict where exactly Internet Patents is headed, given the relatively short existence of its patent licensing business. But there is very little downside for investors here. The CEO's personal financial interest in maintaining the cash balance will limit downside risk; and the possibility of litigation wins or the sale of the business -- or just the patents -- provide several avenues for potential upside. Vringo's recent history shows just how volatile the patent business can be; the over $4 per share held by Internet Patents offers a nice cushion for investors willing to let the PTNT story play out.

Source: Following The Patent Wars? Check Out Internet Patents