Joff Wild

Acacia’s share price is heading north so far today after the NPE revealed its second quarter results yesterday and talked through them during a conference call with analysts. They showed the firm enjoying one of its best ever quarterly performances; one that, said CEO Matt Vella “bears testament to the high return on investment potential, time- and risk-adjusted, of Marquee portfolios”, before adding that there is more to come. You can read the full transcript of the call via Seeking Alpha and it is well worth a perusal – not just for Acacia shareholders, but for anyone who is interested in the way that the US IP market is heading from the perspective of a large NPE.

Something else along similar lines that deserves a few minutes of your time is a presentation that Acacia has put together to coincide with the Q2 results. Not surprisingly, it tells you why Acacia believes Acacia is such a great prospect, but in doing so it reveals a lot about the wider NPE landscape; in particular with regard to diversified portfolio holdings, attitudes to reform and licensees. Let’s take each in turn.

One of the issues that NPEs have faced is what to do about hedging risk. They understand that not every patent they own is going to reap rewards, that some – perhaps most – will end up valueless. Therefore, the trick is not to put all your eggs in one basket: you need plenty of high-quality portfolios that read across a number of technologies, so that one reversal can be offset against a positive outcome elsewhere. Acacia, like other big NPEs, has that. It draws attention to what it considers to be key holdings covering mobile technology, medical devices, automobiles and energy. They are all sectors that come up time and again when you look at which NPE owns what – watch out for more licensing activity in the latter three, as well as for more disputes.

On patent reform, Acacia – again, like almost every other large NPE you could name – is broadly supportive. As this blog has pointed out, the legislative changes that have been proposed in Congress are good news for any entity with ready access to large amounts of cash because they would give the little guys much less leverage. For deep pocket defendants they would provide a strong disincentive for any SME to assert, while for NPEs they will help to deliver partners and sellers. For the wealthy, expensive US patent litigation is a cost of doing business; for the cash-strapped plaintiff or defendant it is a matter of life and death. All of which explains why you’ll see this in the Acacia presentation:

The Future of Invention: IP Legislation Patent Reform is Fundamentally Good for Acacia’s Business

The Goodlatte Innovation Act Overview

Proposed Reforms  

#1 – Reduce abusive litigation, costs and time—Acacia agrees

#2 – Mandatory disclosure of patent holdings for NPEs—Acacia agrees

#3 - Core discovery expenses are born by each party but each party must pay the other for excessive discovery requests—Acacia agrees

#4 – Protect end user—Acacia agrees

#5 – Loser pays—Acacia agrees if mutually applicable  

Then there’s the matter of what kind of entity Acacia gets its money from. That is dealt with very succinctly in a couple of lines on the final page: “95% of Licensing Revenue from Companies Generating $100 Million Annually”, which means that “Large Licensees Drive Acacia’s Business”. But then, as anyone who knows anything about the market could tell you, Acacia has spent hundreds of millions of dollars analysing, acquiring and licensing-in patents, why on earth would it bother seeking to extract four and five figure royalties from corner stores and start-ups? It makes no economic sense. Once again, the same applies to the vast majority of other big NPEs. Is that really too hard for proponents of reform to understand when they throw around accusations of patent trolling?

Finally, let’s go back to that Q2 investor call published by Seeking Alpha. One of the questions that Vella was asked came from David Hoff, a private investor and PIPCO commentator who writes the IP Hawk blog. It had to do with the much-maligned inter partes review (IPR) proceedings at the USPTO that were significantly expanded by the America Invents Act. The feeling among many in the market is that these have been a catastrophic, value-destroying development, particularly because so many go against the patent owner. But while recognising the extra uncertainty and complexity they introduce to the patent licensing business model, Vella was actually pretty upbeat about them, saying they have “driven higher quality portfolios, customers with higher quality portfolios through our doors”; something that is only good news: “The increase in benefit from having those higher quality portfolios, in our opinion, more than offsets that increased cost risk, et cetera …” What’s more:

… There'll be patents taken out with IPRs, but we're going to win a lot of these IPRs. And when we win a lot of these IPRs, we expect, and we're pretty sure the valuation of those patents is going to soar. And we say this because, one, the law's pretty clear. Once you win an IPR, all those defenses, those pieces of prior art that you would have normally used in the trial are now not going to be in play. And so, you're effectively making someone fight at trial without an invalidity play, and that is a much, much harder proposition than people would think. That doesn't mean that the odds drop by 50% in terms of a successful defense. They drop by more, in my opinion.

The second thing is, when, again, you come out with these IPRs and you come out with increased odds in terms of winning the trial, or in terms of how people assess the trial and giving you a good deal … When someone wins a trial, courts are awarding an amount for past infringing activity, and then they're also saying, going forward, here's the royalty rate. And if that' royalty rate's not paid, treble damages might be in play.

Thus, IPRs are just another cost of doing business, but are also a value-creating validation process. Should your patents get through them – and if you invest in, and work with holders of, quality patents you will significantly increase your chances – then the strategic and monetary benefits are likely to be significant. That seems absolutely right to me. It also explains why the next move in patent prices (at least at the top end) could be upwards rather than downwards.