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  1. Home
  2. / Investing
  3. / Technology

Why Playing the Patent Game Is Dangerous

Case in point: VirnetX.
By HERB GREENBERG Sep 19, 2014 | 08:45 AM EDT
Stocks quotes in this article: VHC, MSFT, CSCO, AAPL, QCOM

When I first chatted about VirnetX (VHC) on CNBC in July 2011, when the stock was around $23 and on its way up to $40, I said this would become the next big battleground stock. 

Indeed it was. Investors piled in amid the hope and hype that VirnetX, a 2007 reverse merger, would file and win a bunch of patent suits against the big-tech guns such as Microsoft (MSFT), Cisco (CSCO) and Apple (AAPL). It actually won a suit in 2010 against Microsoft. 

As I wrote in 2012: 

"The bulls believe VirnetX is setting itself up to be the next Qualcomm [(QCOM)] with patents, acquired from SAIC, which control secure communications between 4G mobile devices. An analyst at Cowen is in print saying he believes the patents could be valued more than $3 billion. 

"Bears, meanwhile, believe that based on almost any other patent case, in any settlement VirnetX is likely to get a fraction of what the bulls expect -- assuming it wins any or all of its suits." 

As it turns out, VirnetX had some impressive victories. But, as the bears predicted, the company snared a fraction of what the bulls expected. Apple was supposed to be the big win, and a jury awarded the company $368 million. But, earlier this week, an appeals court threw out that award -- or, as VirnetX put it, "remanded the damages award . . . for further proceedings." 

In other words, it's back to the drawing boards.

Reality: Betting on patent fights is like betting on biotech, and the verdict of an appeals court is like getting the results of a phase III trial. For almost everybody involved, including the supposedly smart people, it's a crapshoot.

Want more from Herb Greenberg? Sign up for Reality Check, his institutional research product, and get the watch list of all the companies on his radar with detailed analysis.

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At the time of publication, Greenberg had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Technology

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