US Companies, Acacia and USA Video, Claim to Own Patents Covering VOD
--Acacia CEO, Paul Ryan, Explains His Company's Position to [itvt]
--USA Video's Patent Counsel, Andrew Huffman, Explains Its Position
As [itvt] reported in 5.26 Part 1 11/26/03, Acacia Research Corporation, a US company that holds 5 US and 17 international patents which it claims cover video on demand (specifically, the on-demand transmission of compressed video and audio over the Internet, cable, wireless and other platforms), recently filed a patent-infringement lawsuit against Liberty Media-owned hospitality- industry VOD provider, On Command, in the District Court for the Central District of California. In May, On Command's largest US rival, LodgeNet, agreed to a licensing deal with Acacia, under which it will pay fees to the company on a quarterly basis until the latter's patents expire; and, over the past few weeks, Acacia has signed similar licensing deals with hospitality- industry VOD providers, NXTV and General Dynamics Interactive. Acacia has also sued a number of adult Web site operators, claiming that their streaming video services infringe upon its patents, and has subsequently reached licensing agreements with several of these, including Hustler and New Frontier Media. (Note: the company is also currently in licensing discussions with Playboy.) The company now has a total of 111 licensing agreements in place for its VOD patents.
[itvt] recently caught up with Acacia CEO, Paul Ryan, to find out more about the company and its patent claims. He told us that the patents in question have a priority date of 1991 and describe technologies developed in the early 90's by a "group of engineers, inventors and entrepreneurs" (note: the group--which was led by Paul Yurt, who now serves as a consultant to Acacia, and by Lee Browne, who, according to Ryan, is now "pursuing the development of other technologies"--later incorporated as Greenwich Information Technologies). According to Ryan, the significance of the patents was recognized as early as 1994 by telco, Bell Atlantic, which entered a licensing agreement with the group before conducting field trials of a prototype VOD service in Virginia: "When Bell Atlantic wanted to do their field trials," he said, "they did a 'freedom-to-operate' search and immediately came up with these pioneering patents. They realized that they would need a license if they were to become commercially viable, so they paid a considerable amount of money (it is confidential, but over $1 million) as an option, while they were doing their field trial, to enter into a per-subscriber, per-year licensing deal--which they did." Acacia, which also owns the (now- expired) rights to the controversial "V-chip" (note: the V-chip allows viewers to block TV programs based on ratings of their sex and violence content; its government-mandated incorporation into new TV sets has been opposed by First Amendment advocates, including the ACLU), acquired 33% ownership of the patents in 1996, and 100% ownership towards the end of 2001: the company's acquisition agreement with the patents' inventors provides the latter with 15% of any net revenues Acacia generates from licensing deals, Ryan said.
Ryan told us that, before Acacia began approaching the companies it believes are infringing on its VOD patents, it assembled an executive team, many of whose members had worked for Gemstar-TV Guide in the 1990's, and had been closely involved in the aggressive defense of its patents which the EPG developer mounted under former CEO, Henry Yuen. The team includes John Roop, former head of engineering at Starsight Telecast, an EPG company that was subsequently acquired by Gemstar; Roy Mankovitz, who had served as Gemstar's corporate counsel and head of intellectual property; Andrew Duncan, who had headed up Gemstar's European patent- licensing efforts; Lee Rahn, who, as a partner at law firm, Christy, Parker & Hale, had managed patent prosecutions for Gemstar; and Rod Dorman, who had served as Gemstar's chief outside counsel. (Note: the other members of Acacia's executive team are Rob Berman, who was previously responsible for licensing the company's V-chip technology, and Karlton Butts who specialized in patent-licensing at the law firms of Loeb & Loeb and Riordan & McKenzie.) The company also 1) put together an engineering team that includes (in addition to Roop) Jon Eastman, a founding engineer at satellite- TV provider, DirecTV, and Robert DePirro, former head of technology at now-defunct IP VOD company, Intertainer; and 2) hired a number of outside consultants, including Jim Newbrough, former head of the television and video groups at Philips Electronics, and Rolf Schering, former president of Gemstar Europe.
Ryan stressed that Acacia carried out extensive "due diligence" to determine the validity of its patents before it approached the alleged infringers: "We spent a year and a considerable amount of money doing prior art searches, and actually looking at the specific engineering of the online VOD systems, as well as cable and satellite systems. In some cases, we did reverse engineering to make sure we were on solid ground," he said. "We made a decision early on that we would never approach anyone, unless we had specifically looked at their systems in detail and had come to the conclusion that they infringed upon the specific claims of the issued patents." Once Acacia had completed its due diligence, Ryan said, it put together detailed presentations designed to convince prospective licensees of the validity of its claims: "We developed very specific engineering diagrams of our claims," he explained, "to help prospective licensees understand exactly what our claims were and how they applied to their technology--unlike many licensing efforts, in which people just assert that someone is using their technology, and then leave it up to them to figure out whether they are or they aren't." [itvt] asked Ryan how large a war chest Acacia has assembled to pursue its claims. He told us that the company currently has around $35 million in cash, of which approximately $26 million was generated by royalties from its V-chip technology.
According to Ryan, Acacia is targeting its patent-infringement claims at media companies that are offering VOD services, rather than at VOD software and equipment providers: "We made the decision that the appropriate place to license this was primarily to the media companies," he explained. "There are various companies--middleware, hardware, software and component manufacturers--that, in legal parlance, contribute to our infringers; but, in addition to our specific claims, the claims of our issued patents also cover the entire process. So we felt the appropriate licensing point was the companies that would be generating new, high- profit, incremental revenues from the use of our technology, rather than the hardware, software and middleware vendors who made the specific components of our technology." Ryan also stressed that Acacia believes it is offering companies that agree to license its technology "extremely reasonable royalty rates." The company, he said, generally asks for royalties in the 1% range: "There is a scaling of the royalty rate in some industries, based on size and volume and utilization," he explained. "But to give people a feel for where we are in the aggregate, it is around the 1% level. It could be slightly more, and, in some instances, slightly less: depending on the usage of the technology, in some cases the rate starts at 1.25%, and, as the volume of activity or dollar revenues go up, it scales below 1%."
[itvt] asked Ryan about Acacia's plans for the coming year. He told us that, among other things, the company will continue ongoing discussions with cable operators that are offering VOD (those discussions began about 6 months ago, he said), and that it intends to pursue its patent claims internationally: "We just recently started discussions with some companies in Europe, and we will be rolling out a European licensing program after the first of the year," he said. "Certainly there are cable and online companies over there that are using the technology, and our patents do cover all of the major European companies, as well as companies in Japan and South Korea." In addition, Acacia is seeking to expand its VOD patent portfolio by building upon its existing patents: "We have got about 500 additional pending claims that we have worked on over the past 2 1/2 years, and that will hopefully result in new claims issued under additional patents. They have all been done under what is known in the patent field as 'open continuation,'" he explained. "As long as the new claims fall within the scope of the original patented area, then the new claims go back to the original priority date. However, you don't get a full life for a new patent on those additional claims: it doesn't go out for another 20 years, it only goes out for 7 years," he added. Acacia has also acquired the rights to 2 additional patent portfolios owned by small public companies (Ryan told us he was not at liberty to identify them), and is apparently positioning itself as a champion of the intellectual property rights of smaller enterprises: "You have got NASDAQ smaller-cap and mid-cap companies spending $20 billion or $30 billion a year on research and development," Ryan said. "A lot of it is patented, but they simply never collect any royalties from people using their technology. So our broader business plan is to have our team partner with other companies and appropriately license their technologies, because many of those companies are too small to do it themselves."
Acacia, of course, is not the only company that claims to hold a patent covering VOD. Last April, USA Video Technology, a subsidiary of USA Video Interactive (specializes in providing Internet media delivery systems and services), filed a lawsuit in the US District Court for the District of Delaware against Hollywood studio-backed IP VOD provider, Movielink (see [itvt] Issue xxx). The company claims that Movielink's service violates US patent #5,130,792 (entitled "Store and Forward Video System"), which USA Video filed in 1990 and was awarded in 1992. (Note: the company has since succeeded in getting the patent approved in the UK, France, Germany, Italy, Spain and Canada, and approval in Japan is pending.) It says that it is seeking "declaratory judgment of both infringement and willful infringement, permanent injunctive relief, compensatory and treble damages, interest, legal costs, as well as a jury trial on all appropriate issues."
[itvt] recently asked USA Video's patent counsel, Andrew Huffman, how his company's patent claims differ from those of Acacia. Huffman told us that the primary difference in the content of the claims made by the companies is that "Acacia's patents also describe an audio transmission implementation" whereas USA Video's patent is "directly for video content." While Huffman told us that USA Video does not "have at this point any beef with Acacia," he was at pains to point out that his company had been awarded its patent for technologies it had actually developed itself, and that its patent rights predate Acacia's: "In our minds," he said, "the main difference [between the 2 companies' claims] is that we were not only the first to apply for and receive a patent here, but also the first to commercially demonstrate the feasibility of these inventions that we originated back in the late 80's and early 90's." (Note: [itvt] asked Acacia's Ryan about his company's view of USA Video's patent claims, but he told us that "we do not comment about other patents.") According to Huffman, the feasibility of USA Video's patented technology was proven via a successful VOD trial deployment the company carried out in the early 90's in partnership with Rochester Telephone Corporation: "We were the first company to demonstrate that VOD was not just a pipe dream, when we demonstrated it in a live test bed in Rochester, New York," he said. (Note: although the companies judged the trial a success, they subsequently decided that "the market was not yet ready for a widescale deployment," Huffman said.) Huffman also told us that USA Video has "not ruled out" seeking licensing fees from companies that have already reached settlements with Acacia, and predicted that his company's claims may eventually become an issue in the lawsuits that Acacia has filed on behalf of its patents: "I would not be surprised if someone who is being sued by Acacia were to claim that Acacia's patents are not valid," he said. "One of the things they might do, when arguing that Acacia's patents are not valid, is citing prior art--including our patents--which precludes their patents and contains all of the elements they are asserting."
[itvt] asked Huffman why USA Video had chosen Movielink as the first company to approach about licensing its patents: "We felt we should go after this company that is a joint venture financed by 5 of the largest players in the industry," he explained. "That shows that we are serious, that we are willing to go to the mat, that we will litigate it all the way to the end. It is a signal that we are interested in enforcing our rights." (Note: Movielink is backed by Metro-Goldwyn-Mayer, Paramount Pictures, Sony Pictures Entertainment, Universal and Warner Bros.) Unlike Acacia, he said, USA Video may pursue licensing agreements not only with VOD service providers, but with the companies whose equipment and software enables VOD: "This is not a one-shot expedition for us, and we haven't ruled out approaching other companies later on, whether they be hardware providers, software providers, or content providers," he explained. "While it is the content providers that are really driving the whole distribution model, and while I think it is important that they be brought to the table, in legal terms, there is no reason to say that someone higher up or lower down in the chain is not the best target to go after. Anyone who makes a contribution to the breach is liable."
(Note: Acacia's US patents are numbers 5,132,992; 5,253,275; 5,550,863; 6,002,702; and 6,144,702. USA Video's US patent is number 5,130,792. Additional information on the patents can be found on the US Patent Office's Web site and on the 2 companies' Web sites.) |
