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Porn Kings Aflame Over Multimedia Patents
Inside Acacia's Patents
Acacia's licensing efforts are based on five patents, all of which cover basically the same thing: patents #5,253,275, #5,550,863 and #6,002,720 are "open continuations" of patent #5,132,992, an "Audio and Video Receiving and Transmission System," which was issued in July 1992. The fifth patent, #6,144, 702, is described as a "division" of the '992 patent and was approved in November of 2000.
The '992 patent abstract reads as follows: "A system of distributing video and/or audio information employs digital signal processing to achieve high rates of data compression. The compressed and encoded audio and/or video information is sent over standard telephone, cable or satellite broadcast channels to a receiver specified by a subscriber of the service, preferably in less than real time, for later playback and optional recording on standard audio and/or video tape."
The Internet as a transmission medium is not mentioned in the patents.
All five patents were assigned to H. Lee Browne and Paul Yurt; Browne later did business as Greenwich Information Technologies LLC, which Acacia first invested in and then bought outright in 2001.
In its complaint against content provider New Frontier Media, however, Acacia only mentions what it appears are the key patents, the '992 and '702 patents. Berman said Acacia has filed additional claims based on the Greenwich patents, which are still pending.
Acacia reportedly began laying out its intellectual-property strategy in May 2002, which appears remarkably similar to the path taken by memory technology company Rambus Inc., which convinced smaller memory firms to license its technology. Rambus' progress was essentially stopped short by larger firms, who exposed some of the company's legally questionable business practices and prompted an FTC investigation.
"What we did before we purchased the company (Greenwich) was to spend considerable time and resources evaluating this portfolio as to whether we think these patents are valid and whether they are enforceable," Berman said. "We did several prior art searches... It was important to go to the marketplace knowing what we had was valid."
Acacia also owns several patents related to the V-chip, a content-monitoring device once considered to be an integral part of the future of television. Acacia Research received $25.6 million in payments from television manufacturers that licensed its V-chip technology in 2001.
In August of 2002, Acacia sued 17 television manufacturers over the V-chip technology, which its Soundview subsidiary owns. Major television manufacturers such as Philips Electronics, Hitachi, Samsung Electronics, Funai Electric, Sanyo Manufacturing, LG Electronics, Daewoo, Thomson Multimedia, and Matsushita have already agreed to license Acacia's V-chip patent, the company said.
Other firms, backed by their own patent claims, have attempted to persuade Internet companies to pay them royalties. For example, Pangea Intellectual Properties (PanIP) LLC claims it owns patents covering the use of data processing systems in ecommerce, an action which has prompted a web site and a "group defense fund". USA Video was granted a patent five years ago for video on demand, and has begun approaching video-on-demand services for royalties.
Just the beginning
But Acacia executives say that the adult industry is but the tip of the iceberg as far as the company's patents are concerned. According to Berman, the patents cover industries such as online music streaming, potentially affecting Web radio operators and multi-company consortia such as Pressplay. The company believes content providers such as major studios and services that wish to provide them over the Internet could also be included. Even on-demand services in hotel rooms, such as OnCommand, have been contacted by Acacia. In fact, the on-demand movie industry was contacted even before adult webmasters, Berman said.
"The adult industry is under the mistaken impression that we singled them out," Berman said.
A selected group of content providers in California were contacted and notified beginning in July, Berman said, when the first letters went out. In total, about 100 adult providers were sent notices warning they could be in violation of Acacia's patents; Berman said about 500 informational packets were mailed.
Acacia then sent followup letters to the content providers in August, and filed the complaints in mid-November. Acacia will likely serve those complaints today, transforming them into full-fledged suits. The defendants will then have between 60 to 90 days to decide whether to challenge the patents in court, or license them from Acacia.
The terms
A licensee will have to pay Acacia royalties of about 2 percent of its gross annual income every 12 months, a fee Berman called fair. If a company licenses the patents, Acacia has promised to waive fees from previous years.
Prepaid royalties for content providers will start at $1,500 for a company making less than $100,000, on up to $170,000 for companies making between $7 million and $10 million. Webmasters will be assessed a bit more, with royalties ranging from $1,500 for sales of $50,000 and below, and $200,000 for annual sales of $10 million. In cases where annual revenue exceeds $10 million, licensees are required to contact Acacia for special terms.
According to the license, estimating revenues will be based on the "honor system" but will be subjected to Acacia audits and possible penalties; for example, a $10 million company underreporting its income would have to pay an additional $230,000 in royalties. Those webmasters who tried to differentiate themselves by providing unique content will instead pay double; Acacia requires those companies to sign both a webmaster and content license.
Berman said the license accommodated companies who were willing to establish partnerships with Acacia.
"We're not willing to put anyone out of business; we're not looking to change anyone's behavior," Berman said. "If people feel that this is something they need to challenge in court, fine. But if they challenge this in court, 75 percent of the people will likely spend more in court fees than they'll spend in royalties to us. If they're successful, they'll recoup those fees. If they're not successful…" Berman shrugged.
"We feel we are discounting the royalty by waiving past infringement," Berman added. Content providers who fight Acacia and lose will likely pay higher royalties in the future, he added, in addition to the "treble damages" that patent infringement complaints usually request.
Adult webmasters responded a bit more coarsely, demanding on industry bulletin boards that Acacia executives perform acts which might frustrate even the most limber members of the adult industry.
Others said the industry would not go down without a fight. "If we paid Acacia, it would be rolling over," said one adult webmistress in an interview, who asked not to be named. "It would be like saying 'Screw me,' even though that's (what) my business is about."
After weeks of debate, the adult industry gathered in a Los Angeles suburb on Dec. 4 to plan a battle strategy. David Koenig, the president of one of the top adult content providers, Holio.net, posted word of a conference call on a public Web site. Saul Reiss, an attorney working with Holio; Koenig; and John Bauersfeld, a partner with Kelly Bauersfeld Lowry & Kelley, LLP hosted the meeting, which attracted about 50 participants.
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Reiss opened the meeting by calling the agreement "the most burdensome licensing agreement anybody's ever seen". "It's an invitation to litigation," he said. "If there's going to be a war, let it start here."
During the call, however, Bauersfeld expressed optimism that the patents could be defeated. "The key thing is the fact that they are incredibly broad, and issued at a time when the patent office didn't know what to do with patents of this type," he said. "On the other hand, the patents…once the patents have issued, they have the status of a presumption of validity."
John Hangartner of Sheppard, Mullin, Richter & Hampton, which defended some of the PanIP defendants, said a typical patent case costs approximately $1 million to $2 million to defend, with a wide degree of variation. Although the Acacia filings ask for an injunction, he called the possibility "extremely remote".
Hangartner advised the adult industry to enlist the court of public opinion with a web site similar to the youmaybenext.com site the firm commissioned for the PanIP suit, However, Koenig, Bauersfeld and many of the lawyers present at the meeting did not respond to requests for comment. In a posting to an adult web site, one webmaster said that the industry was hammering out a PR strategy.
"As I said, we want to move on this level and we will have an established spokesperson to lead that effort... we just need to be very careful about what is said so that nothing is misconstrued," the webmaster wrote.
During the meeting, several of the adult industry's representatives expressed concern that the industry's smutty reputation could work against them. Hangartner admitted the possibility, but noted the importance of communicating the message that the patents could be applied to a wide variety of businesses, including individuals. That, more than anything else, could help the porn industry overcome the "tar baby" tarnish attached to its image, he said.
"First they came for the Jews, and we said nothing," Reiss added.
While Acacia may have correctly anticipated the adult industry's need to keep a low profile, it may have underestimated its sheer orneriness.
A fellowship is formed - but at what cost?
Following a second organizational meeting, the collection of adult defendants agreed to form the "Internet Media Protective Association" (IMPA), currently an unincorporated association of firms allied to fight Acacia.
But what was formed to fight Acacia may have the net effect of starting a bidding war. That's because IMPA's structure is set up exactly like the tiered structure of the Acacia royalty hierarchy, with the added bonus of a vote in the association's direction. For example, a content provider with between $1 million and $3 million in revenue could choose to pay either IMPA or Acacia $40,000 in fees. Because of the slightly different structure of the webmaster agreement, a webmaster in the same category would either have to pay $40,000 or $100,000 in licensing fees to Acacia, or $40,000 to IMPA.
"Amazing, looks like you'd have to pay somebody no matter what!" noted Jamie Wilson, who runs JTW Internet services, a content provider based in Florida, in an email to ExtremeTech.
Every $1,500 that a webmaster or content provider sends to IMPA buys that company a vote: for example, the $40,000 paid to IMPA by a content provider or webmaster would also buy 27 votes, with the amount of voting power varying from a single vote to a maximum of 113.
Defendants in the Acacia lawsuit who submit IMPA fees are accorded "class I" status. "Class II" members can elect not to pay the full IMPA fees, but may be allowed only limited access to the IMPA lawyers, according to an email sent by Saul Reiss, an attorney representing Holio.net. "Class III" members "will be members of the general public… who desire to assist financially in the accomplishment of the goals of the association," according to the email.
Many smaller webmasters and content providers expressed frustration at having to write another check. Some simply hoped the legal typhoon would blow itself out before it reached them.
"So far, I (have) only advised my lawyer and we do not intend to reply and 'waste' time on this," wrote Claude Hyppolite, who runs the Canadian adultcontent.ca website. "They sent a letter to many people, even those that don't have any streaming video on their site, so I am really not sure if they are serious in business."
Another foreign webmaster said he would adopt a wait-and-see attitude, hoping that he might be able to find a loophole within his country's intellectual property laws.
JTW's Wilson removed what he said was a small amount of video on his site, and said he hopes that will be enough. "I'm a small player," he said. "When they found me, it was impressive. I mean, if they found even me, I must be somebody."
Adult webmasters also reportedly suffered another financial blow, when Visa started charging an additional $750 annual fee for credit-card validation. Too many customers were registering at porn sites using Visa cards, then apparently claiming they had been the victim of fraudulent charges.
"It's a double whammy," Wilson said. Visa representatives did not return repeated calls for comment.
The tip of the iceberg?
To date, Acacia doesn't seem to have targeted the most well-known players in the industry, including companies like Playboy.com and Hustler.com, owned by notorious First Amendement supporter and pornographer Larry Flynt. When contacted late on Friday, representatives at both firms said they were unaware of any communication from Acacia.
"This is national news," Wilson said. "It could affect any Internet site."
Wilson said he hopes that a media giant like AOL Time Warner might jump in, and that Acacia is likely trying to build a "war chest" to take on the largest Internet companies. During the adult industry's conference call, lawyers expressed hope that these media giants might provide "back channel" support, such as the results of previous "prior art" searches in an attempt to defeat the Acacia patents.
According to Acacia executives, the company has $65 million in cash in the bank, which the company is willing to risk to prosecute the suits, if necessary. Berman said the company has signed some licenses with adult companies, but not a materially significant amount, and that Acacia would rather sign licenses than prosecute court cases.
On Dec. 11, Acacia shareholders also agreed to split its common stock into two tracking stocks, one following Acacia Research and the other tracking CombiMatrix, a biotechnology subsidiary.
Acacia's Berman questioned the motives of the adult industry's counsel. "They don't get paid for letting their clients into patent agreements," he said.
Time will tell whether Acacia's lawsuits against the adult industry represent the tip of the iceberg, or just an ice cube. While the patents held by Rambus were found to be essentially sound, the company's licensing strategy was essentially derailed by its methods. Robert L. "Chip" Harris II, Acacia's president, warned that there's no sure way to tell which side will win.
"It's hard to handicap the American legal system," Harris said. "A lot of people didn't think O.J. Simpson would be out walking around."
Clarification: Some comments in the story were erroneously attributed to David Koenig, according to Saul Reiss, who claimed he made the statements but did not return calls for confirmation during the writing of this story. For clarification purposes, the abstract describing the '992 patent has also been added to the story. |
