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There's controversy aplenty over an entire sub-sector of the market that controls patents, particularly technology-related patents.

And depending upon which side of the fence you're sitting, these companies are either a formidable impediment to the material advancement of mankind, or an essential corporate watchdog, protecting the rights and wealth of inventors and businesses, which might otherwise be robbed by unscrupulous commercial adversaries.

Without delving too deeply into the jurisprudence of it all, these aforementioned patent holding companies seek to collect either licensing fees or damages from companies that either a) intend to use an already patented technology or technique, or b) have already infringed on a patent they (the holding company) possess.

The trouble, for some, arises from the fact that these holding companies conduct no other business than that outlined above. They do not have an interest in the manufacture of the product they control, nor in many cases are they related to any entity that does.

If that's the case, these same troubled folk argue, then get them out of the way, stop holding up the wheels of commerce, quit threatening litigation and 'let 'em build'.

Furthermore, they point to statistics that show that $20 billion was spent on patent litigation and purchases in the last two years in the smartphone industry alone according to a Stanford University study. They also note that Apple and Google spent more last year on patent-related issues than on new product development for the first time in both companies' history.

All in all, say the critics, patent holding companies - or as they're sometimes disparagingly referred, 'patent trolls' - are stifling enterprise, as budgets now have to be formulated that include a 'patent tax', as it were, that contributes on average as much as 20% to technology R&D costs, according to Boston University Study cited in a recent New York Times Stanford University study.

Not so fast, counter the patent holding firms. The law is the law. If Joe Inventor spends half his life and a few million dollars inventing two or three processes that everyone now wants to copy because they look obvious and make sense, and the tools and expertise are readily available to recreate them, then too bad. Joe Inventor paved the way, making it easier for everyone, and he therefore deserves his compensation.

And furthermore, if he wants to sell his patent to the highest bidder, or license the know-how to one or more firms for an annual fee, that's also his prerogative. And that, say the holding companies, is their business.

Incidentally, government officials have been sufficiently convinced of the gravity of the issue of late to take a closer look. According to the Wall Street Journal, the Justice Department's antitrust office is now devoting "huge energy… at the senior level" to addressing the issue of potential disruption to competition from patent holding firms.

Expecting New Laws?

Until the current law is changed, however, there will be companies scrupulous and otherwise making profits from the license and litigate game. Here are four such firms, some of whom recently gained notoriety with big scores against outsized rivals.

1. Vringo (NASDAQ:VRNG)

Vringo bills itself as a development stage company that develops software for mobile phones. Indeed, the company produces an application that allows smartphone users to download music video ringtones direct to their mobile devices.

But more to the point, the company's corporate website also proclaims that "Vringo, Inc. is engaged in the innovation, development and monetization of mobile technologies and intellectual property." In fact, they possess over 500 patents pertaining to telecom infrastructure, mobile and internet search technologies that they're more than capable of 'monetizing'.

One month ago Vringo got a positive verdict from a jury in a case against Google and co-defendants AOL, IAC, Gannett and Target. They were awarded roughly $30 million for infringements on 14 patents they hold.

They wasted no time in filing another suit against ZTE Corporation of Britain just one week later, demanding the company pay licensing fees for patents they claim have also been infringed upon.

Patently Profitable or a Manufacturing Menace?

As far as Vringo, the actual software development company goes, there's not much of an investment here. For the 3rd quarter, 2012, the company reported an operating loss of $10 million on revenues of $266,000. In 2011, they reported zero revenue.

As for the company's intellectual assets, we believe the success they achieved against monster adversaries Google et. al will send a chill through the industry and obviate the need for Vringo to litigate excessively going forward. Many companies will consent to pay the licensing fees Vringo is demanding, and that should bolster Vringo's cash flows.

We also expect the company to be very active in pursuing such fees in the face of their Google victory. For it could well be that Google successfully argues an annulment of the ruling - or a drastically reduced settlement on appeal. It's equally plausible that Google develops its own technological end-run around Vringo's patent by the time the appeal is heard and a final ruling is made.

Vringo stock popped on news of the victory in court and subsequently gave it all back. It's hard to believe we'll see a sustained rise in the stock if or until the actual product the company sells catches on.

2. VirnetX (NYSEMKT:VHC)

VirnetX is another firm having success in court. The company won a vast settlement against an equally oversized adversary, Apple Inc., to the tune of $368 million in early November. The following day it launched another suit against Apple.

VirnetX stock is more volatile than Vringo's and spiked by nearly 50% to over $37 after news of the Apple settlement was announced, only to give back roughly 15% of the move since then. In the end however, the prospect of an additional third of a billion dollars in VirnetX's coffers did not help lift the stock back to its summertime highs of $42.

SEC filings in the latest quarter show an operating loss of $9.3 million for the company versus revenues of $368,000. But that may not matter. VirnetX has a record of success in court. They managed to extract over $100 million from Microsoft in 2010 and are now engaged with both Cisco and Avaya over similar claims.

3. Internet Patents Corp (NASDAQ:PTNT)

There are a number of people blowing wind about a company called Internet Patents Corp of late, but we recommend investors steer clear of this one until average daily trading volumes on this $4.00 stock outgrow their current 15,000 or so shares. Though they may have some success in court before too long, we ask why you would buy a stock with a potential liquidity problem.

4. Worlds Inc. (OTCQB:WDDD)

Finally, another small company in the patent holding game that claims to have an ace up their sleeve is Worlds Inc.

This outfit is taking Activision Blizzard (NASDAQ:ATVI) to court over alleged patent infringement found in Activision's World of Warcraft and Call of Duty online video games. If the figure of $200 million in damages that's being tossed around is correct, and the company succeeds in its litigation, there will most certainly be a quick uptick in the stock. WDDD now has a market cap of less than $11 million.

But again, we point here to the dangers. This is a company that trades on the OTC market and barely sees $15,000 worth of stock trade on any given day. Unless you're absolutely confident of a tight spread and sufficient trading volume on the days you plan to get in and out, best to avoid.

Summary Judgment

The very business model of these companies is problematic in the extreme, and, in my opinion, is begging government intervention. There's no long term holds here.

That said, so long as the current rules stand, there's good money to be made on a trade on any of these numbers. Play it with options if you can, or with stops to limit any downside, and initiate your moves near the time of court judgments. And remember too, that time may be running short on these companies, as their very legality may soon be thrown into question.

Source: How To Invest In Patent Holding Companies