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So What Is A Troll Anyways?

|Includes:AAPL, FORM Holdings Corp. (FH), GOOG, VHC

For the majority of my investing life, I did not have even the slightest interest in patents or patent companies and couldn't have cared less about infringement lawsuits.

But I must admit that I chuckled whenever I heard the phrase "patent troll". I couldn't help but envision an office full of de-humanized "Gollum-esque" creatures.

And then I realized the power of words.

There are two sides to every story, and it is quite evident that those on the side claiming infringement did not bestow the name "patent troll" upon themselves.

Compartmentalizing demographic subsets into categories and then slapping labels on them has a long history -- most of it which society would not place on its list of proud moments.

Take for example the "bum" label that has become common vernacular with respect to how many people refer to those who are homeless. Without knowing the individual circumstances as to why a particular person may be down on his/her luck and out on the streets, describing a homeless person as a "bum" immediately implies a negative connotation and the brain processes this connotation and slowly but surely begins to rationalize to its owner that this "bum" must have made a bunch of poor decisions and is the only one to blame for being homeless and doesn't deserve our help. Clearly, we know that this is a gross mis-characterization and unfairly paints everyone with a broad brush.

But let's get back to the more entertaining subject of trolls, shall we?

So why are patent trolls so despised? Well, from what I have gathered, the bulk of the disgust that I hear seems to revolve around two primary tenets:


"They buy up patents that they don't even use themselves for pennies on the dollar and extort legitimate businesses for what is tantamount to protection money!"

Sounds like a noble protestation, and it is usually expressed with such passion and anger that even I get swept up in the emotion and want to immediately go buy my "Legolas-Bow-And-Never-Ending-Supply-Of-Arrows-In-A-Quiver-Kit" and go troll huntin'.

However, riddle me this (and answer honestly): How likely is it that a company the size of GOOG or AAPL or MSFT, with the monetary resources at their disposal and legions of attorneys at their beck and call, could not invest a modest amount of effort to not only find out if patents exist related to technology they are deploying, and if so, to reach out to the patent owners to negotiate a license up-front?

The fact that a patent company did not invent the patent, is not using the patent, and may have only paid a nominal sum for the patent is not truly relevant to the core issues here.

If an original patent holder has limited resources and recognizes that he/she cannot fight an infringer who has deep pockets, what is wrong with this patent holder striking a deal with a patent company who has the resources to fight the fight?

Similarly, if an original patent holder does not realize (or care) that his patent has significant future applications and value, but someone else does, what is wrong with the person who has the grand vision to legally purchase this asset at a price agreeable to the seller? Upon acquisition, why is the new patent holder viewed as having less of a right to generate a return off of his asset than anyone else with any other asset?

But let's not let the cart lead the horse here. Let's think about what must logically have occurred FIRST before a "troll" even thinks about acquiring an asset: The "troll" most likely has become aware of another company using a patent that does not belong to them. Or, a "troll" is making a speculative bet that certain patents have significant future value and is willing to make the financial investment to acquire them with the hopes that some of them will become critical components of future inventions.

In any event, it seems that an owner of a patent only morphs into a "troll" if he dares try to enforce his ownership rights.

But what about the company that uses patents that don't belong to them to make money for themselves? How are they the innocent victims here? If patent owners are going to be called "patent trolls" then wouldn't the corollary be true then that companies like GOOG, AAPL (who recently got waxed poetic by VHC as you likely know already), and others of their ilk should be aptly categorized as "patent squatters"???

Is this not what they are doing? If I have a vacation home in the Swiss Alps that is clearly not my primary residence (I suppose I could be referred to as an NRE -- a Non Residing Entity), and is one I don't use because I realized too late that I detest Switzerland, mountains, and snow, does this mean I have no rights if squatters come in and make themselves at home in a house that I paid value for and legally own? "Oh, I didn't know who owned this place" says the squatter. Well, it's clearly listed in the County records if you took the time to look. Name and contact info, it's all there. It is clear that squatters intentionally try to quietly sneak their way into a property and make little to no effort to try to negotiate a rental agreement. This happens all the time in nearly every city in every state in America. And we revile squatters.

Now imagine that the squatter living it up in your house is not some poor family who moved into your house as a desperate attempt to survive, but is none other than Donald Trump. Any last drop of sympathy immediately evaporates, no? And why is this? Well, I know why. And you know why too. Here's a hint if you are still in denial: $$$.

Now go back and read the parable of the squatter again but this time everywhere you see the word "house" replace it with "intellectual property", and replace "Donald Trump" with "GOOG" (or "AAPL" if you're so inclined).

So why is it that house squatters are viewed as thieving perpetrators while patent squatters are deemed to be victims? I don't know. Really, I don't know.

Perhaps it may have a bit to do with tenet #2:


"They stifle technological advancement and invention by making companies that actually want to use the patent to create something useful unable to do so!"

Hmmm. Interesting. Completely laughable, but interesting nonetheless.

Raw materials such as metals are necessary to create important and useful things such as automobiles, but does that mean that GM or Chrysler is justified to say that "hey, we shouldn't have to pay for this steel because we are trying to make something useful for society!" and then proceed to sneak into somebody's steel mill under cover of darkness and take their steel? Of course not.

And should GM or Chrysler or any company be able to say, "Gosh, if we actually have to pay people to help us build this widget, we won't be profitable; let's try to find a way to get people to work for free." Uh, no thank you. We tried that before in our history -- it was called slavery, and the word out on the street is that this little experiment didn't end well.

The bottom line is that paying a license to use something that you don't own is a standard everyday cost of doing business. There is nothing unusual or nefarious about it. It is categorically no different than any other cost of goods. There is no such thing as a free lunch. Sorry.

Companies like GOOG and AAPL are simply reacting because now they are being asked to pay for technological raw materials that they used to get for free -- and they don't like the impact it will have on their margins. Well, I have news for you: It is no different than any other business whose costs increase -- such as labor costs when the minimum wage is increased, or to a food company when commodity prices for ingredients like flour or corn spike up due to drought... ...or to a company like AAPL when Samsung will inevitably raise their prices for critical parts that AAPL needs for their i-everything line of products (so when this happens, will Samsung be called a "supply troll"?).

It's called evolution. Barnes & Noble evolved; Borders didn't. Canon evolved; Polaroid didn't. Best Buy evolved (so far anyways!); Circuit City didn't. If your business model can't survive a 3.5% increase in cost of goods (in GOOG's case, only 3-1/2 tenths of 1 percent, which is the 3.5% of the roughly 20% of the roughly 50% that we all know about) or if you can't figure out a way to re-tool your processes in order to offset this increase without becoming insolvent, well then you deserve to become extinct. If what you produce truly is critical to society, history has shown over and over again that there is always someone else who is willing and ready to fill your shoes. Like they say, there is always a better mousetrap -- but necessity is the mother of invention.


Disclosure: I am long VRNG, VHC, GOOG, AAPL.