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Digital Media Patents for Profit

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Acacia’s revenue has continued to grow since 2002, the year that it completed a secondary offering on the NASDAQ. Between 2002 and 2005, Acacia Technologies Group’s revenues increased 455%. In addition, Acacia has secured at least 11 licenses since 2005 and has licensing deals involving internet advertising (Priceline.com), bar code reading (Nokia), credit card fraud protection (RadioShack), and network data storage (IBM). Although its portfolio includes patents representing multiple industries, one technology in particular—digital transmission of audio and video media—has emerged as a major component of Acacia’s litigation and licensing strategy.

In 1995, Acacia purchased a number of patents related to networked digital media from inventors Paul Yurt and Lee Browne. These patents, as well as patents it has subsequently acquired in this area, have since been bundled into a collection termed the Digital Media Transmission (which it has trademarked as "DMT") patents. One school of thought, promoted by Acacia, holds that the DMT patents are central to interrelated system operations. Amid growing public acceptance of that perception, DMT has become Acacia Research Corporation’s primary weapon in attempting to secure dominance in the sector.

Acacia pursues a single-minded business strategy: targeting infringers of technology patents that it owns and seeking compensation through licensing agreements or litigation. Acacia has filed 39 infringement lawsuits since January 2004, two-thirds of them in the U.S. District Court for the Northern District of California. This litigation spans the company’s technology portfolios.

The Role of Digital Media Technology
Three primary methods exist for delivering media over the internet: downloading, in which consumers wait for the file to be transferred to their own computer before viewing/listening; progressive downloading, which enables users to access sequential portions of the file as it downloads; and streaming, which allows users to immediately access any segment of the file by maintaining the content on a centralized server. Over the last two decades, various commercial and proprietary systems have been developed to take advantage of each of these transmission protocols, and technologies and services dedicated to specific products and types of media have been adopted: music purchases on the web (such as iTunes), video-on-demand for watching news and sports programming, distance learning (from college programs to online seminars or "webinars"), and security systems.

What makes digital media services over the internet such a target of patent troll infringement litigation? First, the complexities of audio and video technology preclude the dominance of a single standard protocol for the digital transmission and storage of such media. Second, existing technologies involve various network systems, software, and hardware, which provides numerous targets for patent litigation, including many companies with deep pockets. Third, the complexity of the systems and the broad claims set forth in many relevant patents issued in the 1990s make it difficult to quickly determine liability or patent validity. For example, some of the claims may refer to "transmission" in general terms without specifying whether the transmission should be relevant only to the internet. (Some of the patents purchased and executed by Acacia are written very broadly.)

Amid these complexities, the courts are starting to recognize the challenges raised by recently issued business and method patents and the resulting patent disputes. For example, in the May 2006 Supreme Court eBay decision, the court was split between those judges stating that the traditional test to evaluate injunctive relief is sufficient and those who suggested that these patent conflicts require new considerations, such as whether the patent "(a) is a business method patent; (b) is just a small component of a much larger product that the defendant manufactures; and (c) is owned by an entity that ‘use[s] patents not as basis for producing and selling goods but, instead, primarily for obtaining licensing fees.’"

DMT and Acacia’s Business Model
Although Acacia has approached companies in an array of industries—including MasterCard, Microsoft, Toshiba, and Staples—digital media transmission firms have been at the center of many of the company’s claims. Acacia has asserted claims that the accepted streaming media technologies owned or utilized by large digital media companies today are founded on Acacia’s DMT technology. Acacia acquired its DMT patents in 1995 and began making claims of patent infringement in November 2002, yet these patents have never been legally judged essential to the transmission of digital media over networks, nor has their validity been determined. To date, only one case has been brought testing the validity of the DMT patents. In December 2005, judges in the U.S. District Court for the Northern District of California found, in response to Acacia litigation against alleged infringers, that three of the 22 patents owned by the company are "indefinite" and thus potentially invalid. Although some companies have had marginal success contesting Acacia’s infringement claims, others have simply signed licenses or settled litigations funding Acacia’s additional patent purchases.

By asserting the widespread application of patented DMT technology to all digital audio and video transmissions, Acacia, like others, has established a powerful business strategy, using the threat of infringement litigation to induce digital media content providers, hardware manufacturers, and end users (including educational institutions) to sign licensing agreements with the company. Income from those agreements provides Acacia with its primary source of revenue and capital and funds its patent acquisition strategy. Targets include virtually any media, broadcast, enterprise, or satellite company that transmits audio or video, including video-on-demand, as well as colleges and universities that use video on the web for distance learning and online courses. On its website, Acacia boasts more than 500 licensees, covering an array of industries and involving a number of patented technologies in the company’s portfolio. DMT licensees include The Walt Disney Company, Bloomberg, Xerox, Wachovia, and 108 cable TV companies.

If it does not secure licensing agreements from its targets, Acacia litigates aggressively. Peter Detkin (now an executive with Intellectual Ventures, a company many regard as itself a patent troll) estimates that Acacia has filed half of all infringement litigations brought in the past five years by companies that own patents but don’t produce products.

It is not easy to gauge the success of Acacia’s DMT licensing/litigation model. In the first half of 2006, the company lost $12.4 million on $16 million in revenue but had assets of $108 million, including $17 million in cash and equivalents. Until recently, however, most of Acacia’s litigation has settled in Acacia’s favor, and as noted earlier, no court has yet ruled on whether DMT is essential to streaming media.

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