Acacia Research Corp. (ACTG), the patent licensing company run by interim CEO Marvin Key, and RPX Corp. (RPXC), the patent aggregator and litigation loss control company run by CEO John Amster, may have to recalibrate their business plans, exorbitant expense structures and return cash to shareholders if their CEOs want to survive.
Newport Beach, Calif.-based Acacia has done little to assuage concerns of its bitterly disappointed shareholder base since taking a $105 million charge to write down the value of its Adaptix portfolio following an adverse ruling in an enforcement action against Alcatel-Lucent and others.
The adverse ruling cost former CEO Matt Vella his job. Vella had been the architect of Acacia’s marquee portfolio strategy, which focused on portfolios it expected would lead to recoveries of a hundred million dollars plus each for Acacia.
The company now says it has been surprised by defendants unwillingness to negotiate settlements, after the America Invents Acts of 2011 gave them a cheap and easy way to invalidate weak patents through the inter partes review (IPR) and covered business method (CBM) review processes before the Patent Trial and Appeal Board.
Acacia and other patent monetizers also have faced increasing skepticism of software and business method patents after the U.S. Supreme Court’s Alice decision. Add to that, the Federal Circuit’s increasing skepticism for extremely large damage awards to NPEs and the beginnings of an understanding about an outdated business model emerge.
Shareholders have begged Acacia management to show they feel shareholders pain by returning some of the company’s cash to shareholders as a peace offering. So far, Acacia’s response is a statement by Key during a conference call that “cash is king,” followed by the disclosure that Vella and former Chairman Chip Harris would each be paid $840,000 under new consulting contracts to assist Key during the transition. The company also still hasn’t announced a formal search for a permanent CEO.
In addition, the company announced a new shareholder rights plan to preserve its $160.85 million and $55.2 federal and state net operating loss carry forward assets, which effectively will discourage a change in control.
Shares of Acacia touched a 5-year low of $2.82 after the Adaptix loss and the impairment charge. More recently, they have regained some of the lost ground after the company rejected as inadequate a $3.72 a share bid from ARC Acquisition LLC and Uniloc Luxembourg.
Key declined to be interviewed for this story.
Some patent market observers have said Acacia is probably worth more than $5 a share even if it simply fired everyone and hired third parties to handle ongoing enforcement actions.
The Uniloc offer “struck me as a bargain basement price,” said Sanjay Prasad, principal of Prasad IP PC in Los Altos, Calif. “Given where patent prices have been going, in six months time it may look pretty good.”
San Francisco, Calif.-based RPX is facing similar criticisms from an activist shareholder Mangrove Partners, the investment manager run by Nathaniel August.
August, who also is trying to invalidate patents owned by VirnetX Holding Corp. (VHC) which are at the center of the $625.6 million jury award it won from Apple Inc., declined to be interviewed for this story.
In a March 17 letter to shareholders, August expressed his deep dissatisfaction with among other things RPX’s business plan, the performance of its stock, its use of cash, its refusal to pay dividends and its excessive pay practices, which he noted were more generous on average than those of Goldman Sachs Group Inc.
August also nominated a slate of directors including himself, Gilbert Palter and Greg Share, to replace directors up for re-election including Amster.
RPX responded by informing investors that it was aware of August’s letter and would be carefully reviewing its contents and responding in due course.
Representatives of RPX declined to comment for this article.
“There’s been a lot of noise recently about Acacia, RPX, and others in the IP space,” said Mark Gober, a director at 3LP Advisors in Silicon Valley. “The IP ecosystem has been turned on its head by the America Invents Act of 2011 and by a slew of court decisions – taken together, these changes have transformed patents from property rights into probabilistic rights.”
While Acacia and RPX have business models that thrive when patents are predictably enforceable, their business models suffer when patent enforceability is uncertain, he said.
"Right now it’s nearly impossible to predict if any patent is enforceable and how much it’s worth, so the value of businesses like Acacia and RPX necessarily drop,” he said.
Acacia’s current licensing model “depends on repeated wins in court in order to induce substantial licensing revenue streams,” he said. “Absent wins in court, all they can do in the meantime is make sure costs are appropriately managed. Acacia’s performance in upcoming court cases will be watched extremely closely. Those results will be either positive or negative catalysts.”
RPX’s problem is it’s in the business of mitigating risk against patent litigation at a time when “the perceived risk in the marketplace has been significantly reduced because patents simply aren’t as scary as they used to be. With less risk in the marketplace, there is inherently less value in RPX’s risk mitigation offerings.”
An executive of a publicly traded licensing company who spoke on condition of anonymity said it can’t have been fun to receive the letter from Mangrove Partners, though "some of what they’re going after is probably pretty good. RPX needs a healthy NPE industry to be a healthy business. If things aren’t ominous, people won’t sign up for their offerings.”
While people aren’t currently scared of patent enforcement actions, the Unified Patent Court in Europe may soon give them something to be afraid of again, especially because of the European courts’ looser restrictions on injunctions, compared with the U.S. courts, he said.
The Unified Patent Court is expected to open in March 2017.
An executive from another publicly traded licensing company, who also spoke on condition of anonymity, said the irony of ironies about the situation, Acacia and RPX find themselves in, is that for years RPX has been under pressure from its members to take out Acacia.
He said there have been rumors that in the past the two companies have held some preliminary discussions during which time Acacia management let it be known it was not for sale. He said part of the problem may have been that RPX was trying to drive too hard of a bargain. With RPX, "it's always, 'We win, you get crushed,'" he said. "To get a deal, both sides have to get something."
To be sure, Acacia recently said after the Uniloc bid that it had been approached by several potential buyers about a possible sale and added that it is not for sale.
Lee Cheng, general counsel of Newegg LLC, the Los Angeles-based online computer retailer famous for fighting patent trolls to the mat, declined to comment specifically about RPX, saying “I consider a number of their people some of the best thinkers in the IP space.”
Cheng noted that Newegg has “never been an RPX subscriber but it's largely due to the fact that we got our troll problem managed pretty early.”
He asserted, however, that companies that went public claiming to be able to make money from patent assertion, like Acacia or Marathon Patent Group (MARA), generally only made money for the early investors and insiders.
“There was a perception that the gravy train of patent litigation would last forever and initial returns were so rich that insiders demanded and commanded exorbitant compensation packages and were allowed to run organizations with little concern for a rational cost structure.
“I totally agree with Mr. August that the cost structure of publicly traded companies in the IP monetization space (and even privately held ones like Intellectual Ventures) have been and are excessive. They could, all of them, be run a lot more leanly, even including a reasonable amount allocated for investing in new products.”
Cheng conceded, however, that he works “for a company whose global HQ is a converted warehouse. I get a glorious second floor view of my car from my cubicle as a 10th anniversary perk...not much use for overhead costs from me.”
“If Mr. August wants some ideas on how to cut cost in the companies in which he has invested and to otherwise increase profitability, I'd be happy to chat. A lot of low hanging fruit. Executive comp at publicly trade assertion entities remains ludicrous. Their boards are clearly insider captured.”
—To reach the reporter responsible for this story please contact Dan Lonkevich at 707 318-7899 or at firstname.lastname@example.org