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Why Tech Giants Should Be Wary of Patent Trolls

- By Nicholas Kitonyi

At the start of October, Apple (AAPL) lost another patent lawsuit retrial against Internet security software and technology company VirnetX Holdings (VHC). The jury ruled that the iPhone maker should pay $302.4 million to VirnetX for infringing two patents connected to its FaceTime video-conferencing feature.


Giant technology companies including Apple, Alphabet (GOOG) (GOOGL), Microsoft (MSFT) and Samsung Electronics (SSNLF), among others, have been the subject of several patent lawsuits as foundation companies continue to explore avenues for making money without having to develop any product.

Patent troll companies research on new technologies, license them, then sell them to tech giants to use in their products for a royalty fee. Ceding the rights to use a given technology to develop various products can be tricky especially when it comes to interpreting the details of the agreement. The slightest deviation from agreed upon details of the contract can result in major patent infringements thereby leading to lawsuits.

As per this intellectual property lawyer, one of the main reasons why many tech giants end up infringing patents is down to misinterpretation of the contents of a patent. Just like the law, patents are subject to different interpretations (in terms of application and concept), and this is what often leads to lawsuits.

This is what patent trolls prey on. With lawsuits, they often receive more than what is worth the patent that has been infringed. In intellectual property, every piece of technology can have its own patent, which makes the situation even tougher for giant tech companies. This is because a single product could be composed of several technologies thereby requiring the permission to use an array of patents.

Take for example Apple's iPhone, which uses several technologies in design, features, storage, security and durability among others. While Apple may own the rights to some of the technologies involved in making the iPhone, it must pay royalties to other technology companies to use some of their technologies in its products.

Now that's just for the iPhone; Apple is both a device maker and a service company. Its line of devices includes iMac computers, Mac laptops and the iPad. Its services include iTunes, Apple Music and Apple Pay. Each of these products requires several technologies to run efficiently, and that's why Apple continues to be hit with lawsuits even when many see it as one of the biggest innovators in tech.

VirnetX is not a typical patent troll because other than licensing various technologies related to Internet security and secure communication including 4GE, the company is also one of the leading security software providers for the U.S. government. It has established itself as a leading player in the security software market and already has a patent portfolio of over 112 U.S. and international patents and over 75 pending applications.

Most patent troll companies are established with the intention of never developing any product from the technologies they license, and this makes them easy targets for acquisition by the giant tech companies. The larger the portfolio of patents they license, the higher the fees they are likely to command whenever an acquisition proposal comes through the door.

As such, large technology companies find themselves fighting wars on two fronts - against their major rivals in the industry and the patent trolls. The best way to deal with companies focused only on licensing patents for the purposes of leasing them for royalty payments is through acquisition.

Apple, Alphabet, Facebook (FB), Oracle (ORCL) and others have made several acquisitions over the last few years to try to hold as many patents as possible for technologies they are likely to use now and in the future.

At the time when most of these acquisitions are completed, some of them do not appear to make sense, but after seeing the number of lawsuits related to intellectual property, you begin to understand why it's so important to purchase the patent trolls early before some of their patents become applicable.

Conclusion

Tech giants should be wary of patent trolls because some of these companies are formed for one purpose - to extort money from companies that use their technologies as much as possible through different channels. A lawsuit is one of the most common after royalties.

Disclosure: I have no position in any stock mentioned in this article.

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This article first appeared on GuruFocus.