The Privateer IP Business Model: If You Can’t Beat Them, Join Them!

It has been three years since I co-authored the article “Meet the Middlemen” with Ron Laurie, which was published in the February/March 2008 issue of Intellectual Asset Management (IAM) Magazine.  In that often-cited article, Ron and I presented a new taxonomy comprised of seventeen IP business models in the U.S. IP marketplace.  Although, admittedly, the taxonomy we presented was not perfect, we did feel that it adequately described what we observed as the rise of many intermediary business models in the marketplace.

One of the IP intermediary models we discussed were Patent Licensing and Enforcement Companies (or “PLECs”), which are popularly referred today as Non-Practicing Entities (or “NPEs”).  These are entities that own one or more patent portfolios, attempt to license them through targeted letter-writing campaigns, and then file patent infringement suits against those letter recipients who refuse to enter into non-exclusive licenses.  In some cases, due the U.S. Court of Appeals for the Federal Circuit’s 2007 ruling in Sandisk Corporation v. STMicroelectronics Inc. (relaxing the rules under which potential patent infringers can file Declaratory Judgment actions against a patentee who has contacted them and identified certain ongoing or planned activity), PLECs file law suits first and then attempt to negotiate a license with the accused infringer/defendant.

Those that practice this business model are often called (rightly or wrongly) “patent trolls.”  This term was coined by Peter Detkin, then a VP and Assistant General Counsel of Intel.  Mr. Detkin – who interestingly enough is now a founder and vice-chairman of Intellectual Ventures – defined the term “patent troll” as “somebody who tries to make a lot of money off a patent that they are not practicing and have no intention of practicing and in most cases never practiced.”  In some cases, the PLECs have purchased the patents they are asserting and, in other cases, the PLEC entity is actually founded by the inventor(s) of the asserted patent portfolio.  (Although in the latter case, such entities are not technically “intermediaries”.)

While PLECs have existed since the nineteenth century in the U.S., this IP business model exploded in the early part of the new millennium.  This explosion coincided with Internet bubble burst where the IP assets of many failed Internet-based start-ups were the only assets left behind.  The PLEC industry then matured from solo inventors teamed with their contingency lawyers to more sophisticated companies with hedge fund and institutional investor backers.

Some PLECs are evolving into becoming “privateers.” That is, operating companies have begun spinning groups of patents to PLECs to generate additional revenue.  This is essentially outsourcing an operating company’s patent monetization function to an entity that already has perfected the model – a PLEC.  Apart from the tremendous cost savings, the operating companies shield themselves from cross license and counter-claim exposure, as well as avoiding anti-competitive regulations, bad publicity, etc. This is essentially a “if you can’t beat them, join them” approach.  This new licensing strategy is named after the sixteenth to nineteenth century practice where one government would authorize private parties to conduct acts of war against another government, especially on the high seas. This saved the authorizing government from the expense of building navies for the same purpose.

While PLECs are typically private companies who do not publically report their revenues, Acacia Technologies is a PLEC which happens to be a publically-traded company (NASDAQ: ACTG).  With over 536 U.S. published patent applications and over 330 families of issued U.S. patents, Acacia reported 2010 licensing revenues of $132 million, compared to $67 million in the prior year, an increase of 96%. In 2009, Acacia enjoyed a profit margin of 25%.  As of March 2011, Acacia’s stock price has had a 52-week range of US$10.06 – US$36.44, and a market capitalization of US$1.2 billion.

Acacia’s recent success – 2010 marks its first year being profitable since going public in 2002 – is being attributed to the privateer business model explained above.  For example, Acacia has entered into privateer deals with the Japanese software company Access Co. Ltd. (including a portfolio that originated at Bell Labs, as well as patents acquired by Access when it purchased Palmsource, a Palm Inc. spinoff, in 2005), and  a portfolio of 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.)

I will continue to follow the U.S. IP marketplace and update the taxonomy as the marketplace (and my understanding of it) evolves.