Don't Count Your Patent Chickens

by: Dana Blankenhorn

Both Vringo (VRNG) and VirnetX (NYSEMKT:VHC) represent a great trade today.

But please don't invest in either. Trade them if you want, but if you've made gains here it's time to sell. And if you're looking at a longer time horizon it may even be time to sell short.

Both companies have won patent cases at trial against Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL), respectively. This has patent bulls claiming that a new era has begun, that the mighty will be laid low, and that whoever gets to the patent office first will win every future industry.


What juries can do, appeals courts can undo. Most of the past record on cases like these are bad for the patent holders. Everyone remembers how Research in Motion (RIMM) was eventually forced to turn over $612 million to NTP, a patent holding company, in 2006. But a later verdict against it, on behalf of Mformation, was overturned on appeal.

When Judge Richard Posner spiked Apple's case against Google this summer and called the present patent system absurd it was a true turning point. Posner just happens to be one of the most important jurists of the last century. Other judges listen to him. Thus Apple's injunction against the Samsung Galaxy Nexus was quickly tossed on appeal.

The clear legal trend is going against huge patent awards in technology cases. The fact that the Federal Circuit Court of Appeals has agreed to hear a direct challenge to its State Street holding of 1997, which made software and business method patents valid in the first place, is the real story.

I don't expect State Street to be overturned. Things are seldom so black-and-white. But I do believe that, in light of the Supreme Court's ruling in Bilski vs. Kappos, there is room for that decision to be tweaked in a way that won't be friendly toward patent plaintiffs.

The District Court for the Eastern District of Texas in Tyler, which made the VirnetX ruling, is losing its power over patent cases under the 2011 America Invents Act, as the blog Patentlyo notes. The trend in patent cases seems clear.

It's true that trends move slowly in the law. But trends are real, and investors should be aware of them. Don't mentally pocket huge gains on VRNG and VHC. Don't think the patent trolls have won the war.

They haven't.

Disclosure: I am long AAPL, GOOG. 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.