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How to Spot Winners as Facebook (Nasdaq: FB) and Friends Fight Patent Wars

For big players like Facebook Inc. (Nasdaq: FB) and Apple Inc. (Nasdaq: AAPL), last summer marked a dramatic turn toward patent warfare in the world of technology.

Microsoft Corp. (Nasdaq: MSFT) and Apple in July 2011 spent over $4.5 billion at an auction on a portfolio of 6,000 patents.

Then in August, Google Inc. (Nasdaq: GOOG) purchased Motorola Mobility for $12.5 billion, gaining over 17,000 patents.

Facebook and Yahoo! Inc. (Nasdaq: YHOO) currently headline the battlefield. This spring, Facebook spent a whopping $550 billion on patents. Then Yahoo sued Facebook for patent infringement.

You should expect more lawsuits as many of the tech giants have a similar wartime strategy: The best defense is a good offense.

The plan is to snatch up as many patents as possible, then defend their plunder. The strategy effectively chokes out the competition, preventing the other guy from developing or implementing new technology because doing so infringes on patents.

But aggressive patent warfare leads to a big casualty: innovation. Technology investment buzzwords like creativity, growth, research and development take a sideline while companies lock each other up with litigation.

In fact, companies heavily participating in patent warfare doom themselves to fail. That's why investors should steer clear of the patent trolls.

Becoming a Monster: Patent Trolls

Patent trolls buy patents specifically to extort money from innovators. They are akin to a modern day mafia, according to the The Washington Post.

Patent trolls take advantage of the fact that litigation in any arena is typically a war of resources.

They sit atop their pile of patents, waiting to have a tenable enough argument that a company has been infringed upon. Then they sue.

The result? A patent troll suit can easily annihilate tech startups that simply don't have the resources to outlast a larger company in litigation.

Any tech company putting major effort into aggressive patent litigation should raise a red flag to investors. It is evidence of mixed-up priorities that scream failure.

For example, let's take a look at Yahoo.

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