Vringo's Kryptonite

Dec. 3.12 | About: FORM Holdings (FH)

More often than not, I am interested in hearing the thoughts of a short seller of a stock that I own, than those of one who is long. I know why I'm long. What I want to know is, why are you short?

Vringo (VRNG) is a stock that everyone and their grandmother has an opinion on. As a shareholder, I am constantly trying to understand why there exists a strong pocket of naysayers and short sellers. And should the day come that I agree with them, well, I'll sell my shares and look into buying puts just a minute later. There's no love lost and no loyalty in the stock market. As solo investors, we have to look out for ourselves, because the big boys sure aren't.

In the past few months, I have attempted to read every professional article, blog post, message board post, Twitter post, and news item that exists in regard to Vringo. In a noisy environment for a recent high volume stock, it is hard to locate the legitimate information apart from the speculation. And until now, nothing has truly worried me. Except for one small group: The Government.

I had heard about patent troll legislation this past summer, but it didn't seem to have legs. Like much legislation these days, I expected it to get bogged down in lawyerly congressional bi-partisan bickering, and never to be heard from or feared again.

Congressman Peter DeFazio first introduced the Saving High-Tech Innovators from Egregious Legal Disputes Act, which, conveniently enough, stands for the SHIELD act.

Now before I delve into Vringo's legislation weakness, let me explain the two reasons why I chose to invest in Vringo over the myriad of "patent trolls" that have active lawsuits against major companies.

1) The former assistant examiner of the US Patent and Trademark Office is Donald Stout, who now serves on Vringo's board and owns 225,000 shares. Whether it was his involvement in the USPTO or his defeating of Research in Motion (RIMM) for a $612 million lawsuit, I knew that this was a man I wanted on my side, if it came to patent disputes.

2) Another man involved who puts me at ease is Ken Lang, former CTO of Lycos, and founder of WiseWire, the company that Lycos bought many years ago before Google (NASDAQ:GOOG) was born. When I first stumbled onto the world of patent trolling, the idea of either a juror or a politician becoming turned off by the idea of a small, product-less company suing big companies employing thousands of people with the goal of a big settlement... kind of worried me. With Vringo, I felt differently. The fact that Lang, a man directly involved in Lycos' search development is the current CTO of Vringo offered legitimacy. Whether that means legitimacy in a courtroom before a juror, or legitimacy in the form of Lang deciding to use the patents and settlement money to build and develop in-house R&D projects--either way, the man brings legitimacy.

The question is whether or not this legitimacy could hold up in the face of the law. Listen to DeFazio's biting words:

"Patent trolls don't create new technology and they don't create American jobs. They pad their pockets by buying patents on products they didn't create and then suing the innovators who did the hard work and created the product. These egregious lawsuits hurt American innovation and small technology startups, and they cost jobs. My legislation would force patent trolls to take financial responsibility for their frivolous lawsuits."

Again, Lang's position of CTO of Vringo and former CTO of Lycos would seem to invalidate DeFazio's attack. Regardless of whether a lawsuit could cost jobs, "buying patents on products they didn't create," is irrelevant with Lang's position. Call it strategic or devious, but Lang's past and present positions give incredible weight to Vringo's current Google claim.

How about the actual wording of the SHIELD Act?

"Upon making a determination that the party alleging the infringement of the patent did not have a reasonable likelihood of succeeding, the court may award the recovery of full costs to the prevailing party."

In Vringo's case, I do not believe it would be accurate to say that Lycos did not have a reasonable likelihood of succeeding. They were sold for $5.4 billion in 2000, meaning they certainly had reasonable likelihood to succeed at that juncture. Though one could argue the inherent circular logic - why didn't Lycos succeed if they had the technology? Legally speaking, that logic is irrelevant, as patent infringement is against the law, regardless of the supposed incompetence of the Lycos team.

Additionally, more recent legislation, happened two months ago as Obama signed the America Invents Act, which aims to reduce patent legislation, as well as clarify and tighten standards for the issuance of patents.

Vringo already defeated Google, but with looming legislation, I did wonder about Vringo's future business model. Their next suit is aimed at ZTE, and the cards look good for anyone who chooses to stick around for it. As for legislation, it does not seem like the SHIELD act or the America Invents Act would hinder Vringo's upcoming battle with ZTE, as the suit has been filed outside of the US. It does not seem that US legislation could be applied internationally, at least not for a while.

I do wonder about future suits using Vringo's Nokia (NYSE:NOK) patent stash. The sheer number of patents relevant to a modern smartphone is an overwhelming 250,000. Check out the stats here (page 59). In the broad scheme of things, patent troll victories will certainly bring even more patent trolls out of the woodwork, which will probably force true legislation at some point.

However, like anything in Congress, I don't expect real reform for quite some time. And Vringo's current suits don't seem to be anywhere near the line of legislation fire, which is why I am remaining a confident, though open minded long.

Disclosure: I am long VRNG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.