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Only three years ago it looked as if Acacia Research, the largest publicly traded patent-holding company, was no hot prospect for investors, even as its litigation-heavy style of patent enforcement—sometimes derided as “patent trolling”—was being embraced by legions of newcomers to the field. At that point, the company had just tried its first infringement case in front of a jury, winding up on the wrong end of a rare defense win as a panel of East Texas citizens invalidated the patent Acacia had asserted. (In 2007, defense wins in East Texas were still a rare occurrence.) This week, though, Acacia is flying high, releasing new financial-performance figures that suggest the company isn’t headed for the dustbin of history anytime soon. After not having been profitable since it went public in 2002, Acacia crossed that barrier earlier this year. Now, its just-published results for the third quarter of 2010 prove two things—first, pure patent enforcement can be a moneymaking business for investors as well as for lawyers, and second, that business can scale up into something big. In the third quarter, Acacia earned close to $64 million in revenue, compared to $16.2 million during the same quarter last year. That gave the company a profit of $26.7 million for the quarter, compared to the $3.4 million loss it suffered during the third quarter of 2009. Looking at the first three quarters of this year combined, the company has taken in about $119 million. That’s more than double its revenue for the first three quarters of 2009. One key to Acacia’s newfound success, which far surpassed Wall Street analysts’ expectations: licensing large corporate patent portfolios. Most recently, Acacia took charge of a large portfolio owned by Japanese software company Access Co. Ltd. The portfolio includes patents that originated at Bell Labs, as well as patents acquired by Access when it purchased Palmsource, a Palm Inc. spinoff, in 2005. The biggest driver behind Acacia’s third quarter windfall was when it licensed that Access portfolio to Microsoft—a huge licensing deal that didn’t even require the filing of a lawsuit. (The sum is confidential, but an analyst with Craig Hallum Capital Group estimates that the deal involved Microsoft paying around $37 million.) By acquiring and asserting big chunks of patents developed in corporate research labs, Acacia is following the same model as ex-Kirkland & Ellis litigator John Desmarais, who left Kirkland to open his own firm—and launch his own patent-holding company—after taking control of thousands of patents from Idaho-based semiconductor manufacturer Micron. “We believe it’s a foundational portfolio in the smartphone market,” Acacia CEO Paul Ryan says of the Access patents. It’s the kind of deal that will almost certainly lead to more deals for Acacia, with many big tech companies now embroiled in patent battles over smartphones. In another large deal, Acacia has taken charge of licensing more than 40,000 patents owned by Renesas, the world’s third-largest semiconductor company. (Renesas is an entity formed by the merging of the semiconductor businesses of three Japanese companies—Hitachi, Mitsubishi, and NEC.) Acacia and Renesas are working together, Ryan says , to select specific patents from that large group that are ripe for either being licensed to, or asserted against, other companies. And by enforcing the patents in its signature style—by creating a small patent-holding subsidiary—Acacia creates a second layer that further insulates the original patent owner from litigation counter-attacks. It also maximizes the value of each patent because defendants are less likely to demand an all-inclusive licensing deal. Acacia, Ryan says, has also reached deals to license the patents of “several major tech companies,” as well as a major energy company and another Fortune 100 company. Ryan declines to identify the U.S. companies among that group because, he says, at this point they don’t want Acacia using their names on press releases—possibly because they still perceive heavy patent enforcement, sometimes called “patent trolling,” to be viewed negatively. But Ryan believes that taint will soon fade. “Being in the epicenter of this, the transformation of companies—compared to two years ago or even one year ago—is incredible,” Ryan says. “They’re seeing other companies doing [large-scale patent licensing] and it’s becoming more acceptable.” What’s driving the shift in attitude? Corporate boards and CEOs, Ryan says, see that there is money to be made from patent licensing. “A couple of years ago, most companies said, ‘We just hold our patents defensively,” says Ryan. But that’s not the case today. The smartphone industry is a perfect example of a sector where the upside of patent licensing is becoming clear, he said: “A smartphone is a combination of IP—from computers, from wireless. They combine the results of R&D from lots of companies. And more companies realize, why should we not get anything out of the evolution of this technology?” Remarkably, Acacia’s most successful quarter yet didn’t entail a much in the way of new legal expenses. More patent licensing has actually driven its legal spend down. The company incurred $1 million less in legal expenses during the third quarter of 2010 than it did during the same period last year. “We’re getting more and more deals done without litigation, or at very early stages of litigation,” said Ryan. “Instead of making us sue them on each and every matter—we enter into [non-disclosure agreements], and then we can get things licensed without a lot of added expense. Many more companies are interested in simultaneously negotiating different portfolios.” Acacia’s latest earnings report may be the best evidence yet that corporate America has decided that if it can’t beat the “patent trolls,” it might as well go ahead and join them. And while that attitude could lead to a barrage of patent battles that, in turn, increase the price of new products in the marketplace, Ryan justifies such price increases by noting that they would translate into greater rewards for the inventors who thought up the technology.

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