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Chronicling the Slide of Acacia

Acacia Research Corp.’s prolonged downward spiral on Wall Street has been propelled by recent changes in intellectual property rights and litigation.

Steep losses led to an investor exodus the past few years and zapped more than $1.7 billion, or 90%, from its market value to about $168 million, with shares trading at near-record lows in the $3 range.

The company’s second-quarter earnings report brought the latest bad news, as revenue plummeted 60% to $16.4 million compared to a year earlier.

Acacia, since it was established in 1993, has primarily licensed technology from its portfolios and for other companies. It generates revenue when it finds companies infringing on patents and strikes a licensing deal or sues.

It splits sales, licensing fees and court settlements with patent holders it represents. In some cases, Acacia works with companies it has sued or settled with on behalf of other clients.

Beyond an unfavorable macro environment, the company is facing several internal challenges, including a dearth of owned and available quality patent portfolios, a shrinking window to monetize them, and underperforming IP assets.

Acacia continues to write down the value of its IP portfolio—projecting charges of $32.5 million by the end of next year.

Halcyon Days

Its $160 million purchase in 2012 of Adaptix Inc. in the Dallas area brought key 4G technology implemented in the 1990s, well before the widespread rollout of the latest generation mobile devices. Investors cheered the buy at the time, and so did analysts, with one pegging the total licensing opportunity at $300 million or more from smartphones alone, considering Microsoft and Samsung licensed some technology in the Adaptix portfolio.

The buy, which included about 230 issued and pending patents in 13 countries, came during a particularly lucrative era in patent licensing as companies wringed revenue from research and development legacies, evident in several big deals at the time, including Apple, Microsoft and Research In Motion’s $4.5 billion joint purchase of a patent portfolio from bankrupt Canadian telecom Nortel Networks Corp.; and Google ponying up $12.5 billion for Libertyville, Ill.-based Motorola Mobility Holdings Inc.

Acacia was on its way to dispelling critics’ pejorative image of a “patent troll” or “nonpracticing entity,” as its market value eclipsed $1.9 billion in the heady days of September 2011.

Those days are long gone, according to patent litigator Christopher Bright.

“In the last 10 years or so, and particularly more recently, the pendulum has swung decidedly against patent enforcement companies due to court decisions and legislation,” said Bright, a partner in the Irvine office of McDermott Will & Emery LLP.

He cited a series of decisions beginning in early 2011 by the U.S. Court of Appeals for the Federal Circuit—which hears all patent appeals—that made it more difficult to prove damages from patent infringement.

The history of U.S. patents dates back to the country’s founding fathers, who set a foundation in 1787 for granting patent rights in Article I of the U.S. Constitution. The first Patent Act was established three years later.

The idea of intellectual property was formed centuries earlier, around 600 B.C., when a patent was documented for “some kind of newfangled loaf” of bread.

The America Invents Act, which took effect in 2012, provided new avenues for the U.S. Patent and Trademark Office to challenge the validity of patents.

The Supreme Court two years later in Alice Corp. v. CLS Bank International established a new way to invalidate patents, particularly in software computing, ruling that the litigated patent is an “abstract idea.”

The high court’s most recent ruling, in May in TC Heartland v. Kraft Foods, substantially restricted the locations where a patent enforcement company may file a patent lawsuit, preventing in many cases the patent enforcement company from filing in locations perceived as patent owner-friendly.

The decision primarily affects the U.S. District Court for the Eastern District of Texas, a hotspot of patent litigation in recent years, and to a lesser extent, the Central District of California in Santa Ana.

“The cumulative effect of all of this has driven down the apparent value of patent portfolios owned by patent enforcement companies,” Bright said.

The unfavorable mix has led Acacia to tweek its business model a few times in the past several years.

A move into medical technology portfolio purchases was part of a larger acquisition strategy that included pouring $328.3 million into patent buys in 2012, up 2,133% over 2011. That number plummeted to $25.1 million in 2013.

Its 2012 deal with Massachusetts-based Boston Scientific Corp. added more than 1,900 patents and applications alone.

The big bets on medical didn’t pay off and failed to lead to early license agreements, former Chief Executive Matthew Vella told the Business Journal in late 2013.

Changing Tactics

Last year in a new twist Acacia took a minority stake in Veritone Inc. that included two convertible $10 million loans and $30 million in warrants that were unlocked in May when the Newport Beach startup went public, raising $37.5 million in an initial public offering.

Acacia, which owns about 31% of Veritone, reported a $5.4 million loss on the investment in the second quarter, according to a regulatory filing. Veritone’s stock has rallied about 45% this summer, so Acacia’s investment could yield fruit in the third quarter.

It followed that deal with a $2.2 million June investment in Miso Robotics Inc., acquiring a 22.6% ownership stake in the Pasadena developer of a robotic kitchen assistant named Flippy. It posted an equity loss of $14,000 from the deal in the most recent quarter.

The transactions underscore another big strategic shift under way at Acacia, which has posted losses of $280 million in the past three calendar years.

“While patent licensing will continue to be an important part of our business, we feel this is a small subset of the entire patent and IP environment in which we are immersed,” said Rob Stewart, who was named president in April after the abrupt resignation of interim Chief Executive Marvin Key.

The comments came on an analyst call following second quarter financials, but Stewart didn’t field questions from analysts, a deviation from traditional exchanges.

Despite the headwinds, Stewart is still bullish on patent opportunities and monetizing IP.

“Patents continue to and will always be a very important fundamental part of the U.S. and world economies,” he told analysts.

Dean Zipser, an IP expert and partner at Irvine-based Umberg Zipser LLP, agrees.

“IP litigation and patent litigation never goes out of vogue,” he said. “It continues to be a big source of litigated matters.”

But the clock is ticking when it comes to monetizing patents, from one year in some cases to seven in others.

Acacia, which is entangled in several ongoing and upcoming trials in the U.S. and Europe against some of the world’s largest technology companies, including Apple, Motorola, HTC and ZTE, estimates the “economic useful life” of its patents at roughly four years.

“Many patents from the 1990s, which led the technology boom in that timeframe, have expired or are expiring, making it harder to identify pioneering technology patents,” Bright said. “The patent-enforcement company business model is not what it used to be.”

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