Exclusive Interview: Paul Ryan, CEO of Acacia Research Part II

On December 20, 2012, I interviewed Paul Ryan. Not Congressman Paul Ryan, but rather the Paul Ryan that is the CEO of Acacia Research Corporation. See part 1 of my interview with Paul Ryan.

What you think of Ryan and Acacia is almost entirely dependent upon the side of the aisle on which you sit; namely whether you are an innovator or a practicing entity. Even more specifically, those who are innovators but don’t have a voice loud enough to be heard by practicing entities are likely to believe that Ryan and Acacia are the answer to their prayers. Those practicing companies that simply want to make a product and sell it without regard to the underlying patents that might be in place are likely to believe Ryan and Acacia are the poster children for everything wrong with the patent system.

My own opinion is this: independent inventors and small businesses that innovate get trampled. They are ignored by larger entities. Acacia Research is a publicly traded company and opens it books to the full extent required by the Securities and Exchange Commission. There is no mystery about their business model, and there is no doubt that when they partner with a patent owner that patent owner will have a voice that will be heard loud and clear by all those who might be infringing.

But you can decide for yourself. Without further ado, here is the culmination of the interview with Paul Ryan.

[Interviews]

QUINN: I want to jump back to what we were talking about there about the press and the message. Because it seems to me that there is an ideology that the press and many of the, maybe all of the patent critics fall into is they just fundamentally do not like the patent system. They are not even particularly enamored with a property rights system. So they are looking I think many of them for the anti-patent story. And in the media that we have today which increasingly because of maybe the internet and Twitter and cable news is done in sound bytes of 10 to 15 seconds long, or 140 characters long. People a lot of times don’t necessarily ask the critical questions of what they’re consuming. And to me the critical question in all of this is if you’re going to label non-practicing entities as bad actors do you really know what that means? Do you really know that means universities are included, that federal labs are included, that the research companies in the biotech sector that are looking for tomorrow’s lifesaving advances are included as well as the Thomas Edisons of today are all included in that group? Is that who you want to include? And I’m convinced that the answer is no, but how do you break through that to get to people?

RYAN: Well, when we have talked to the press we have tried to point out the fact that often times they are on the side of the group that is taking unfair advantage of inventors and we encourage them to call our partners, to call our inventors, to read the testimonials that our inventors are giving on how they’ve been treated in the market. We appeared at the FTC three years ago in the spring when they had a roundtable discussion about NPEs. We told them, it is not us saying this, but what inventors are telling us. There are restrainers right in this market if you want to be looking at anti-competitive issues. Here are all these inventors who are saying everyone refused to deal with them or even have discussions with them and they have been frozen out, and here are all the testimonials. So if there’s an issue, we think this is the issue you should be looking at. Our role in the ecosystem is simply to give those disenfranchised patent owners a level playing field by aggregating patents and get an audience with the users of these technologies. I think over time the users have come to respect the fact that Acacia has a very talented team who know how to do due diligence on these patents, know how to underwrite, and know how to price, and know whom to transact with. It’s taken us a very long period of time, a lot of capital, and we’ve had to earn our stripes. Believe me, nobody in the beginning wanted to see us be successful because so many companies were used to not paying anything. That was kind of the corporate behavior we encountered, and it’s begun to change a little bit I think for several reasons. One, you’ve got a lot of companies that are patent R&D centric. Not unlike biotech that’s a pipeline into pharma. Investors put money in the research and development at biotech and every biotech company doesn’t have to go out and duplicate worldwide distribution and marketing, they can’t, it’s just cost prohibitive. They’re able to structure good deals and get good compensation for their shareholders and royalties to the people who put it in the pipeline. Companies such as Qualcomm, Interdigital, and Tessera are good examples. There’s a growing recognition that there are a number of very high quality R&D groups who do provide a lot of invention and it gets licensed by a large company and there’s no reason why the smaller groups shouldn’t be getting the same treatment.

QUINN: The way that the market has evolved is that the smaller players are the ones who are out of luck unless they have somebody like you on their side.

RYAN: That’s certainly what they’re telling us.

QUINN: And it’s unfortunate. And I think it is interesting that you raise these points because that really is where the anti-competitive practices seem to be, if they are at all. Because I’ve been hearing the same things that you’ve been talking about. It almost seems like there is collusion out there, we’re not going to deal with these people, period. And maybe that’s an antitrust problem. Maybe it’s not an antitrust problem, but why don’t we look at that and investigate that because now as you know the FTC is starting a whole new round of raising questions which just started a couple weeks ago. And I believe you guys were not invited, is that correct?

RYAN: We were not, no. And, yeah, it seems the issue ought to be are patents valid and are they infringed. Not who owns them. Who owns them kind of sounds very political. All of a sudden economic rights are based on who owns them?

QUINN: You’re picking winners and losers at that point.

RYAN: In a democracy where you have rules of law and where you have a free enterprise system, and you have property rights, for that discussion of who owns the asset strikes me as being inappropriate, but that, in some ways, seems to be the focus. If you’re a large operating company and you do R&D you’re allowed to enjoy the fruits of your invention. If you’re a small company who may get obliterated by a large company with more capital who prices you out of a market, and destroys you, then the R&D that was invented by those shareholders and paid for all of a sudden becomes worthless or worth less? Certainly that would give an incentive to companies to try to practice unfair competitive practices to eliminate those competitors and thereby the patent rights that they originally held if that’s the case. So to me I think that’s a fundamental issue when you start going down that slippery slope of questioning who owns the patent. It seems to fly in the face of what the whole patent system is about.

QUINN: It does. And also what America’s really built on, right, is that if you work hard you can come from nothing to be somebody.

RYAN: Exactly. Otherwise take the asset and let’s say somebody deems that if you’re a nonpracticing asset your asset is worth less or it’s more difficult to get paid for and the legal system is going to be more difficult for you to have your own rights. If you were to sell that asset to a large operating company then the instant they take ownership of it they have unfettered rights that you didn’t have. That seems to be inappropriate.

QUINN: Yeah, I agree with that. I want to go back to the FTC discussion, or maybe not directly back to it because I’m really concerned by the FTC looking into this for many reasons. Now maybe it was just totally an accident, but the FTC scheduled this particular round of hearings or workshops, I think they call it a workshop on a day when the entirety of the patent folks in the country, that’s an overstatement, not the entire, but a major, major patent conference was going on at the same time and had been scheduled well in advance. And they hold this hearing at the same time. And it almost felt to me when I looked at that and I said, I wonder if that is really intentional? Do they really not want to know the pro patent side so they’re scheduling it opposite the IPO PTO days which is a huge event every year, year after year. That jumped into my mind. It also bothers me that you guys weren’t invited. And I tell you it bothers me because you guys are a publicly traded company, right?

RYAN: Yes.

QUINN: So everything that you are doing is out there to be looked at whether it be through SEC filings or you’re giving information to your shareholders, et cetera, et cetera. It’s not like you guys are operating behind closed doors like some players are.

RYAN: That is true. We’re very transparent in our transactions. But I don’t know, I read about it and I’m not in depth on it, it’s kind of an opening discussion of other issues that need to be addressed. I don’t think anybody there is even saying there is an issue. They’re saying they’re just looking for potential issues.

QUINN: I’ll just throw this out there and we can move on. I don’t necessarily expect you to comment. But how can they not invite Acacia? You’re transparent, you’re a publicly traded company, you’re partnering with inventors. And if there is an issue there you guys have got an important voice. And unlike many of the other folks, and there are some bad actors in the industry who do this stuff behind closed doors but don’t let anybody see what’s going on. If the FTC wants to find out whether there are any issues, I don’t know how they can ever attempt to do that without talking to people like you. And I’ll throw that out there.

RYAN: Well, we’ll see how it progresses. It’s going to be a continuing dialog and our goal is to work for our partners, our inventors and our shareholders, and to the degree that we can be helpful on the issue we certainly will, but we’re not going to get proactively involved in it.

QUINN: Right, right. Now I know we’re starting to bump up against the time that you had available. So there’s one thing that I definitely would like to throw out there and get to. One of the things that comes up in the industry in criticism I’ve heard specifically about Acacia is that a lot of times you guys are settling, or granting licenses for well less than the cost of what the AIPLA would say is the average to litigate. And then the next step is, well, therefore you guys are a patent troll and a bad actor because you’re just using your size to get people to pay. And the term “extortion” gets thrown around. And I understand what they’re saying because there are certain bad actors out there as you know that will bring these lawsuits and then try and settle them for nominal amounts. And that to me just feels like a shakedown. But that’s not what I understand you guys are doing. And I was wondering if you could comment on that whole area?

RYAN: Yes. We need to on behalf of our IP partners license the entire market. We’re licensing non-exclusively. If anything, we’ve been accused of being too fair on our royalty rates. We think we price very appropriately. We understand royalty stacking issues. We think we know the marketplace for fair and reasonable deals and we transact that way. What people get confused about is if there’s a market and there’s 20 companies that need a license and seven of them are large companies that pay us $2, $3, $4, $10, $15 whatever their user rate is per unit, we then can’t disadvantage them and let smaller players not pay anything. So oftentimes in markets there will be a number of smaller players and we prorate the licensing fees to the scope and size of their sales of the related products. In some cases it may wind up to be a very modest amount of money. I think if you look at any licensing programs that we’ve had in the last few years they certainly don’t fall in the category that people accuse us of being in, which is kind of sub $100,000 deals across the board which then people could say, you know, , that’s a cost against litigation, and it doesn’t make any sense. We’re a billion dollar plus public company, for us to even engage in that or even be interested in that market, doesn’t make any sense. I think if you look at our licensing rates and you look at our revenues, we’ve generated $184 million through the first nine months and we’ve done, perhaps 90 transactions. So that certainly doesn’t indicate that all we’re doing is these very low dollar deals. Occasionally we will do low dollar deals, but it’s a function of the appropriate licensing rate for a smaller company in an industry where we’re licensing everyone.

QUINN: Okay. Well, that’s probably a really good place to wrap things up because I do know you have limited time today. I really appreciate you taking the time to answer our questions and give us a look inside of Acacia and some of the issues in the industry.

RYAN: Sure. If you want to follow up at some point, Gene, we’d be glad to. We, as you said, are a transparent public company. We love what we do. We think we’re serving a great need. We know our partners think we’re doing a great job for them. You can read the testimonials. On some of these key issues we think there is a lot of misinformation out there and if groups like yours could help clarify that I think that’s good for inventors.

QUINN: Okay, great. I look forward to following up. Thanks for the interview.