Acacia Research: Trump's Take On IP Theft

| About: Acacia Research (ACTG)

Summary

Acacia Research reported a second stunning quarterly earnings report for the third quarter on October 27th. But the November 8th election will likely have more impact long term.

President-elect Trump has not specifically stated a position on patent reform. But, there are indicators implying he will be patent-friendly.

Like almost every company in the country, Acacia's future will be impacted by Mr. Trump's ability to get legislation enacted or repealed.

Acacia Research (NASDAQ:ACTG) reported 2016 third quarter earnings on October 27th. The results stunned again. For the second quarter, Acacia's revenue beat (compared to analysts' average estimate) was 77% while the EPS beat was a whopping 667%. The third quarter's revenue beat was 149% at $64.66 million compared to analysts' average estimate of $26 million. Year over year, the revenue increase fell just short of 400%. Third quarter earnings per share in 2016 swung to profit as compared to the non-GAAP loss of $0.23 in the 2015 third quarter. Also, non-GAAP EPS of $0.31 were 417% better than analysts expected.

However, it is likely November 8th will ultimately prove more noteworthy for Acacia than beating quarterly estimates in the prior two quarters.

Though President-elect Donald Trump has not specifically addressed the subject of patent litigation, it is likely his leadership will work in favor of protecting patent rights. Mr. Trump has unceasingly protected his own brand and trademarks. During his campaign, he frequently voiced disdain over other countries, namely China, stealing American IP (intellectual property).

The President-elect's protective nature was likely nurtured by family. His uncle, John Trump, was a physicist and inventor. His scientific expertise garnered the attention of President Truman and President Reagan. He was honored with President Truman's Certificate of Merit and President Reagan's National Medal of Science.

His work with lasers was instrumental in treating deep cancerous tumors through rotational radiation therapy. During his 37-year tenure at Massachusetts Institute of Technology (MIT), he co-founded High Voltage Engineering Corporation. The National Academy of Engineering hailed Trump as "a pioneer in the scientific, engineering and medical applications of high voltage machinery."

Donald Trump is quite proficient in protecting his own intellectual assets. At one point, he had trademarked the phrase "You're fired!" coined during his Celebrity Apprentice series. In January 2015, Mr. Trump trademarked two terms based on his potential race for the Presidency - Trumpocrat and Trumpublican. His campaign slogan "Make America Great Again" is also trademarked.

According to the U.S. Patent and Trademarks Office, entities related to Mr. Trump, whether it be family or business, have filed over 800 trademarks. Even in China, Mr. Trump holds dozens of trademarks. A week after winning the presidential nomination, he was granted approval in China for a trademark he had been pursuing for a decade.

Patent protection advocates were less than pleased with the apparent lack of stance on the subject from Mr. Trump during the campaign. His verbal challenges to Mark Zuckerberg of Facebook (NASDAQ:FB), Tim Cook of Apple (NASDAQ:AAPL) and Jeff Bezos of Amazon (NASDAQ:AMZN) were seen as a signal he may not be favorable to technology entrepreneurs. He also stated outright his support of eminent domain laws. This was seen by some as a sign of disregard for property rights.

"Can the U.S. patent system withstand a President that views it as desirable to take property rights away in the name of private sector commercial gain?"

It was reported the most popular discussion at the recent IAM Patent Policy conference was Trump's likely position on patent rights.

Another angle on Trump's position may be evident in his choice of running partner. The vice-president-elect, Mike Pence, is considered by the American Conservative Union as "the most conservative vice presidential nominee the country has seen in 50 years." The ACU is against patent reform. Members of the Freedom Caucus also voted against patent reform. Mr. Pence has been considered successful at working with the Freedom Caucus.

In the past decade, the legislative system protecting patent rights has been considered uncertain, and frankly, uncertain to the point of crisis. The co-founder of the Center for the Protection of Intellectual Property, Adam Mossoff, warns the industry's instability has a cost.

"The legal uncertainty and the excessive kill rates of valid patents has made it very difficult for innovators in both the high-tech sector and the biotech sector of the innovation economy to justify investing billions in long-term R&D [research and development] to create the technological and medical miracles that too many people take for granted today."

In its simplest form, patent infringement involves using a patent without payment. It also loosely includes using the court system and the United States Patent and Trademark Office (USPTO) to delay payment or to attack a patent's validity.

On the subject of the USPTO, some believe it could easily be targeted by President-elect Trump. He has promised to hunt down and eliminate the "waste, fraud and abuse" that has long existed in governmental regulatory agencies. The performance and backlog at the USPTO is frequently questionable making it prime for reform.

But, the arguments about patent reform get complicated quickly as do most litigious subjects. By design, the United States patent system is built to protect innovators and inventors. With an approved patent, these individuals, companies, universities have the "right" to protect their products and IP in the courts. The epitome of confusion is chronicled by following the Jones patents.

Martin Kelly Jones patented a method of notification for tracking and communicating the arrival of vehicles and brought a product to market in the 90s. Through the years, he sought licensing arrangements with shippers, municipalities and retailers. Eventually, he ran out of large targets and began targeting smaller businesses. In 2013, the company owning the Jones patents was considered the "nation's most litigious patent troll." Mr. Jones stance is he spent millions to develop his property and anyone employing technology to notify customers of a shipment's arrival owes him a license fee.

"Issues" first arose in the industry when the "little fish" patent owner tried to defend against the "big fish" IP user/infringer. The process to prove infringement was either too complicated or the costs to file suit too exorbitant. These inequities gave rise to a "middleman" industry - non-practicing entities (NPE).

An NPE is typically well-versed in patent protection and has the funding to pursue protection. An NPE also facilitates right-to-use licensing between patent owners and patent users. Ideologically, an NPE allows innovators and inventors to continue to innovate and invent without being distracted and burdened by patent protection. An NPE can partner with the original innovator or inventor and proceed to defend it. They may also purchase the patent outright.

Some NPEs have aggressively pursued litigation against any possible infringer. After all, the more you produce, the more you earn. These NPEs have earned the moniker patent trolls. Patent trolls are accused of creating a huge drain on the industry with unsubstantiated and unnecessary litigation. Similar to "ambulance-chasers," trolls are accused of quickly showing up in "hot" markets looking to reap from the excitement. Ironically, trolls have been accused of turning on the very entities creating their existence - the little fish.

"Because the cost of litigation is so high, those accused of patent infringement are forced to pay the patent owners not based on the merits of the patent but rather to avoid expensive litigation that would run their companies into the ground. Typically, abusive practice by patent trolls target innovators and small businesses."

Patent reform advocates primarily target patent trolls. Reform advocates accuse trolls of:

  • sending abusive, deceptive and vague letters demanding unjustified payment,

  • not identifying or explaining the infringement,

  • initiating false or weak claims, and

  • running up discovery costs.

But, not every party defending a patent is a troll. Not every NPE is a troll. The opposition to patent reform sarcastically counters that reform advocates believe "vast new patent reform measures are desperately necessary to save America from the evils of innovators hell bent on innovating."

Patent reform advocates assert there is also abuse on the front end. They believe the U.S. Patent and Trademark Office has recklessly issued unnecessary patents. They argue the owners of such patents should not be able to file suit for protection. These so-called "junk" patents are considered fodder for patent trolls.

But, not all views on patent reform are equal. In 2011, Congress passed the America Invents Act. The legislation was considered patent reform. The coalition, American Innovators for Patent Reform, purports the legislation was disguised as reform but was actually detrimental to innovation.

"Not only does the America Invents Act weaken the value of patents, but it also:

* Makes it harder for individual inventors and small businesses to receive patents for their inventions

* Makes it more expensive and time-consuming to defend a patent

* Makes it more expensive to enforce a patent

* Reduces compensation for patent infringement."

The coalition proposes the legislation was driven by "Big Tech" lobbyists who would prefer the bigger technology companies not have to license patents for use.

Acacia Research's interim CEO, Marvin Key, has been quite vocal in 2016 about the impact of the changes in the litigation environment in the past three to four years. Avoiding litigation has become quite attractive. After losing what was considered a slam-dunk case in December 2015, the company ousted its CEO and did an about-face on its business strategy of amassing marquee portfolios.

"It will make more financial sense for them to settle smaller opportunities rather than litigate every single line. And that's what we expect - modifying the kind of patent we bring in will help smooth out quarterly results."

"A soft license is significant for our company, because it means the license agreement was reached with no litigation of any kind. Management is hopeful we can negotiate additional soft license agreements with other infringing companies."

Having the right to litigate is a critical tool in Acacia Research's tool belt. Being able to use the tool would be an asset. A different approach from the country's highest level could definitely put the tool back in Acacia's hands.

President-elect Trump has stated patents are private property. It is easy to project a real estate mogul would vehemently protect private property. He also views the theft of American IP as a national security issue.

There are two bills stalled in the legislature now. The Innovation Act is stalled in the House and the Patent Reform Act of 2007 is stalled in the Senate. Both of these bills build on the America Invents Act (AIA) passed in 2011. Yet, there are patent rights advocates calling for the repeal of the AIA. The primary argument is the act weakened patent rights. They also accuse the act of stripping the checks and balance from the validation/invalidation procedures with the creation of the Patent Trial and Appeal Board.

So, the lingering question is how effective President-elect Trump will be in getting legislation enacted or even repealed. Like practically every other company in the country, Acacia waits.

Disclosure: I am/we are long ACTG.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I belong to an investment club that owns shares in ACTG and AAPL.