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Delwin Hinkle has an Acacia Research Corp. license, and he’s not happy about it. “You gotta do what you gotta do,” says Hinkle, founder of 247 University, a small online educational company. Hinkle was approached by Acacia in 2003, when the Newport, Calif.-based company started selling licenses for its digital media transmission patents. The patents cover audio- and video-on-demand technology used by Web sites to stream content online — from pornographic movies to basketball games. Hinkle’s company employs streaming audio and video feeds in its online classes. A court fight with Acacia would have been a bet-the-company proposition for Hinkle, so the choice was simple. He took a license. Although he declines to say how much it cost, it was almost certainly small change compared to a court fight. “When someone opens a conversation with ‘I’ve got 40 million bucks in the bank,’ sure you’re going to be intimidated,” he says. Acacia’s sole business practice is licensing IP that it didn’t invent. The company purchases someone else’s patents and enforces them by threatening litigation. Thanks to a public stock offering and a successful licensing program covering different patents, Acacia has money in the bank and a readiness to spend it on patent enforcement. Acacia isn’t the first company to make a business out of patent licensing. Controversial inventor Jerome Lemelson and his estate made nearly $1.5 billion licensing his patents. Qualcomm Inc. brings in hundreds of millions of dollars a year licensing its wireless communications technology to the cellular phone industry. And IBM Corp.’s licensing success is by now legendary. Acacia just happens to be this season’s controversial patent licensor. General Counsel Rob Berman, who is also vice president for business development, says Acacia tries not to be heavy-handed with enforcement. “We think we go about it in a professional, businesslike way,” he says. Acacia’s employees send glossy brochures to potential licensees. An Acacia engineer and lawyer will follow up with a visit. Cease-and-desist letters and litigation are last resorts. Since 2003, 123 adult entertainment, cable, and other companies that use streaming technology have taken a license for Acacia’s patents, including such big names as Disney Enterprises Inc., Radio Free Virgin, and Playboy Enterprises Inc. Other well-known licensees include CinemaNow, an online movie service, and LodgeNet Entertainment Corp., which provides on-demand movies, Internet services, and other types of entertainment to hotels. The streaming audio and video licenses have not yet been a huge moneymaker. In 2003 Acacia pulled in $692,000 in licensing fees. In the first quarter of 2004 it took in $599,000. Berman says that since then the company has brought in more licensees, and expects to make $2.5 million in fees this year. Acacia is not betting just on streaming licenses, Berman says, but plans on acquiring new patent portfolios in the technology sector. He would not, however, go into detail about new patents. Berman also would not comment on Acacia’s licensing rates. But in sample licensing contracts available on its Web site, Acacia’s royalty rates are listed at 4 percent for adult entertainment companies when annual sales are less than $1 million. Acacia’s patents are untested in court, but that may change. In February 2003 Los Angeles’ Hennigan, Bennett & Dorman filed suit in the Central District of California on Acacia’s behalf, claiming that 39 adult entertainment companies infringed two of Acacia’s five patents on the streaming technology. Many of the defendants had rebuffed Acacia’s initial licensing pitch. The litigation is noteworthy for the companies not named as defendants. Acacia has yet to go after RealNetworks Inc., and Microsoft Corp., the two biggest developers of audio- and video-streaming technology. Acacia’s critics suggest that Acacia is too timid to take on these leviathans. “If indeed you had a patent on streaming, why would you not be on Real’s doorstep saying, ‘The gear you are building is violating my patent, so everyone you license to has to license to me too?’” asks Hinkle. Berman has an answer, just as he has a smooth response for just about every criticism lobbed at Acacia. He says Acacia wants to develop recurring revenue streams from the users of its technology. (On the other hand, if Acacia collected a penny on every copy of Windows, it would bring in far more than it has to date.) After the suit was filed, 32 defendants took licenses, and eight more were added to the suit, including OnCommand, a Denver company that provides in-room digital entertainment services to hotels. OnCommand, represented by Baker Botts, was the only non-adult entertainment company involved in the suit, until it settled with Acacia in June. Foley & Lardner represents five defendants, and John Singer, a partner in the Minneapolis office of Fish & Richardson, represents nine, including Club Jenna Inc., New Destiny, and Cybernet Venture. Berman says that Acacia sued adult entertainment companies because these companies had been using the technology the longest and making the most money from it. Singer says that Acacia simply saw “these businesses as easy targets.” Adult entertainment companies would be unlikely to receive help or support from other potential defendants that did not want to be sullied by association. Singer also says that Acacia’s patents are “of questionable validity. Streaming has been prevalent for a long time. It’s easy to allege something infringes and a lot harder to prove it.” Acacia’s streaming technology was developed by a group of engineers, inventors, and entrepreneurs led by Lee Browne and Paul Yurt, founders of Greenwich Information Technologies, in the early 1990s (the last patent was written in 1998). Bell Atlantic licensed the patents from Browne and Yurt briefly in 1994, before conducting field trials of a prototype video-on-demand service, but for most of the decade the patents weren’t enforced. Acacia acquired the patents through Browne, eventually buying his company in 2001, and Browne and Yurt still have a financial interest in the patents. To critics who point out that Acacia didn’t invent anything, Berman says, “So what? Patents award inventors a limited monopoly for inventing something, to spur innovation. It’s no different as long as the inventor gets part of the proceeds.” He says that some of his licensees have approached him with new patents for Acacia to buy. “If we were bullies or unethical, those types of things wouldn’t happen,” Berman says. Acacia acquired another subsidiary, Soundview Technologies, from Carl Elam and Dale Levy, inventors of the V-chip, a device that screens television content. Between 2001 and 2002, Acacia earned $26 million in onetime licensing fees for the patent. But that licensing stream has dried up. In September 2002 a judge in the district court of Connecticut ruled summarily that Sony Corp. of America, Philips Electronics North America Corp., and others did not infringe the V-chip patent. (Acacia has appealed the case to the U.S. Court of Appeals for the Federal Circuit.) The patent expired in July 2003. Acacia started out as a venture capital fund. It was founded in the mid-1990s by entrepreneur Bruce Stewart to provide funding for tech startups. Two-and-a-half years ago, the management team, which included Berman, looked at their portfolio of companies and found that the most successful ones were IP-based. So the managers increased their ownership in those companies and sold the others. Berman acquired patents, made deals, and managed litigation. Berman has both a business and legal background: a B.S. in economics from the Wharton School of the University of Pennsylvania and a J.D. from Northwestern Law School. Berman worked at Blank Rome as an associate for three years and at QVC Inc., doing licensing and merchandising deals before coming to Acacia. When it was time to bring in more employees, Berman started looking for lawyers like him. Today five of Acacia’s 25 employees are lawyers. A lawyer runs each of the company’s three departments: business development, licensing, and engineering and litigation. They all report to Berman. “Some lawyers like saying no, no, no. They like the support role,” Berman says. “We are always looking for patent-savvy lawyers who have the personality to do licensing.” Much of Acacia’s management team learned the licensing ropes at Gemstar (acquired in 2000 by TV Guide International Inc.), which licenses interactive program guide services to such companies as AOL Time Warner. Gemstar had a strong IP portfolio, but lost several patent suits in 2002 and was forced to pay a penalty of $5.7 million as part of a settlement for an investigation by the U.S. Department of Justice. Acacia’s opponents are an active group. Brandon Shalton operates FightThePatent.com, a site devoted to combating Acacia and two similar companies — SightSound Technologies Inc. and USA Video — that own patents in the audio and video space and are enforcing them with litigation threats. Shalton has been posting prior art on his Web site to help defense lawyers fighting Acacia. Michael Goldberg, chief executive at HomeGrownVideo, a defendant in Acacia’s litigation, has spearheaded a trade association, Internet Media Protective Association, to help litigate the suit. The Electronic Frontier Foundation named one of Acacia’s streaming patents in its Patent Busting project. Anna Vrandenburgh, a former senior counsel at Foley & Lardner who represented International Web Innovations, another defendant, says that she believes there are arguments for noninfringement of some of the claims, but that invalidating the patents will be hard. “I don’t think this case is a slam dunk on either side,” she says. “Unless something happened recently with prior art, [invalidation] is a difficult way to go. I haven’t seen anything out there.” Vrandenburgh is now senior counsel at Thousand Oaks, Calif.-based Koppel, Jacobs, Patrick & Heybl and is no longer involved in the case. If licensing the streaming patents turns out like the V-chip program, Acacia may not need a slam dunk — just time to sign up more licensees who don’t want to litigate.

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