Jaime Siegel is Executive Vice President of of Licensing and Litigation at Acacia Research. He joined Acacia in 2013, coming to the company after serving as Vice President and Senior IP Counsel for Sony Corporation. Siegel has extensive experience in international IP monetization, enforcement and strategic acquisitions, and he agreed to chat with me on the record. Our interview took place on Thursday, October 23, 2014.
Siegel will be attending the IP Dealmakers Forum in New York City from November 6-7, 2014. He will also be on a panel on Friday morning titled Evaluating Public Market IP Investment Opportunities, which will discuss how investors can measure market value and performance of public IP companies, as well as exploring the various business models and strategies currently seen in the marketplace.
My conversation with Siegel was for the purpose of discussing these topics. As you will read below, while our discussion starts there it became a far ranging discussion of the issues facing the industry more globally. If there is a theme that shines through from our discussion it is about the undeniable reality that early stage investors always want to see patents before investing.
Without further ado, here is my interview with Jamie Siegel.
QUINN: Thanks a lot, Jaime, for taking the time to chat with me today. I know you’re going to be speaking at the IP Forum in New York City, which is coming up quickly and the topic of the program is deal making, and I see a lot of topics dealing with patents as assets. So maybe we could start with just a real open-ended question and go from there. There’s a lot of turmoil in the industry now. There have been a number of cases from the Supreme Court, Federal Circuit and a lot of people are asking the question about where is the market for patents heading?
SIEGEL: Thanks for the question, Gene. It’s my pleasure to take some time to chat with you. The market seems to be headed towards quantity and quality in IP, that’s which is something that we at Acacia have made a move to over a year ago as we focus on bigger high value portfolios. The way that the current environment is in terms of legal and risk valuations it makes sense to have big portfolios, and it is even better to have big portfolios that have good quality continuing applications. That’s what you really need in this environment.
QUINN: So that doesn’t strike me as any different than what a sound foundation would have been prior to any of this – what I call turmoil. It’s always been to some extent a numbers game and it’s always been a quality game. I think some players, I wouldn’t put Acacia in this category, but some players did sort of move towards just buying up a handful of patents and weren’t really caring about quality. So do you sense that good business practices really are where you need to be, where you should have always been?
SIEGEL: Certainly good practice has always been to invest in good high quality assets. There’s where the best plays are. That said, the environment up until recently allowed for a segment of the market that focused on smaller portfolios, because the risk profile was just different. You could monetize assets that perhaps had smaller returns on them. But now given the time to money in the space and the investments that need to be made to get there, it’s a different business model if you don’t have quality assets behind you.
QUINN: So I think I know what you mean when you’re talking about the risk assessment. But could you go a little bit deeper and explain specifically what you mean there? Perhaps specifically relating to how the risk profile has changed.
SIEGEL: Sure. Well, obviously IPRs have had an impact on the business. It creates an alternative route towards fast tracking validity questions on patents. And what that’s done is it’s creating an environment where small patent portfolios are going to have a hard time justifying the investments to be made in a monetization program because of the potential outlay of capital that they’re going to have to make. But the real losers in all this are small inventors. Big companies that have IP portfolios and perhaps licensing departments, smart well-funded companies like Acacia and others in the patent licensing business that are well capitalized, they’re not really going to be affected as much as the small inventor who’s going to be closed out of the system because it’s going to be very difficult for them to find partners or people or entities to take on their assets in a licensing program if the returns aren’t high enough to justify the investment.
QUINN: Yes. I think that’s a good point to make. And I think a lot of these changes over time were aimed at addressing certain things and I don’t think anybody really tried to consciously put the independent inventor, the small startup company or someone at a University in the crosshairs, but it almost seems that that has been the net effect. Would you agree with that or am I overstating?
SIEGEL: No, I agree with you. I think the other effect which nobody has really talked about is when there is all this talk about how NPEs and patent licensing business quashes innovation. I think it’s the opposite. I think this effort to destroy the value of intellectual property is a bigger wet towel on innovation. When startup companies, after they get their angel investing, go out to try and raise funds on round Bs and round Cs, one of the things that investors look at is whether or not that company has an innovation that is different and protectable so that the investors know that number one there is something in there that’s protectable so that they can protect their investment. And when companies, small companies that make the investment into intellectual property portfolio development it sends a signal, two signals. It sends a signal that, number one, they’re progressive enough and smart enough to think about protecting their innovation. And, number two, it provides collateral for the investments that the investors are making into the company. So if the company were to not be successful in its business, they would have this asset of an IP portfolio sitting there that could still be sold or otherwise monetized to help the investors recoup their investments. With this movement to devalue intellectual property, the big victims are going to be these startup entities that are going to have a hard time justifying their valuations to investors.
QUINN: Yes. Because it strikes me that the financing market is hyper reactive to changes in a way where a higher level end of the industry doesn’t even seem to care about the patents, they’re really only looking at your financials. But at the very beginning the Angel and early stage VCs, they really do look at the patents.
SIEGEL: They sure do. And when I have advised on startup companies before I always advise that they need to make intelligent investments in their intellectual property portfolio to send that message to the early investors that there is something that is protectable here. One of the questions investors always ask is, why can’t someone, somebody big just come along and take your idea? Unless you could tell me that you have a protectable idea and that there’s something innovative there it’s going to be a very difficult sale. Otherwise you need to focus on the branding of companies such as, I think Groupon’s a good example of that, where it was a repeatable model but all they really had was their brand rather than protectable technology.
QUINN: And I think you can look at some other issues. I think when Zynga was going public there were some real questions about this is a company that’s completely dependent on Facebook and they don’t have any real patent assets of their own. Those types of companies can really get squeezed very easily.
SIEGEL: I agree, I agree. And so that comes back to the same theme that it’s the small guy that’s really getting pressed by this, the environment of some big tech companies trying to influence the system through special interests. And unfortunately, they’ve gotten a lot of traction and things have changed but, ultimately the entities that are positioned and well capitalized and focused on this high quality asset class, and there’s certainly a lot of assets out there that fall in that category, they are going to survive and thrive in the environment because the industry is going to be streamlined.
QUINN: And it’s interesting that you talk about thriving because I believe that, too, and I’ve talked to some people I know, big patent broker folks, and when I was worried that after some of these decisions and the trend that things were just going to hell in a hand basket, the only thing that kept me from really believing that too much is that the patent system is always been in pendulum, it always swings back and forth. I am alarmed at how far it has swung this time away from the patent owner and away from property rights. But this patent broker friend of mine said to me, he said, “You know, the smart people right now are going become the next generation of super trolls because all these good assets are on sale for practically nothing and the patent system will not always be against the innovator.” Do you sense that this is a real opportunity for some forward thinking companies that are sitting on some money to really get into this space? Or to ask it a different way perhaps, do you sense Acacia is really going to take this to the next level?
SIEGEL: Well, certainly I could speak from our perspective. So as we talked about in our earnings call yesterday it was only about two years ago that we had one what we call marquee portfolio, a high value portfolio with significant assets and very, very significant revenue potential. And we now have already committed eleven marquee portfolios and we are expected to hit twelve to fifteen by year end. That’s a huge fundamental change in how we’ve been conducting business. We’re able to get those marquees because companies see through the media hype of the mythical troll and the evil doers out thereand see it for the hype that it is. The smart companies that are looking to monetize their assets and view outsourcing of that function as a viable way, are going to keep looking to organizations that are staffed with really bright experienced people and are well funded to get results and that’s where we come in.
QUINN: Yes. And one of the things that I’ve been hearing lately that has kind of caught my attention, and that I agree with, is that long term the legacy of patent trolls, whoever they are, however you want to define them, but the long term view of that group is going to be they woke up corporate America to realize that patents are a meaningful asset that can and should be monetized. Would you agree with that?
SIEGEL: I don’t know that the two are necessarily connected as much as circumstantially crossing in time. There is a recent case out of the Chancery Court in Delaware, and the case name slips my mind, but the judge essentially said that it was the fiduciary obligation of corporate boards to monetize their intellectual property assets otherwise these are stale assets sitting there not having any value extracted. As the economy has suffered over the years, as industry has suffered over the years, certain companies and, well, you know, I was with Sony for fifteen and a half years as their in-house IP guy, they were always very progressive in thinking about patent licensing and there are certain other companies, the IBM’s, the TI’s that were always very progressive about licensing attitudes. Those companies got it a long time ago that there’s a lot of value in intellectual property. Everybody else, the other industries that have been sitting on the sidelines watching, are finally starting to wake up and understand the business, and part of that is on us to make sure we educate our customers as to why these assets should be monetized and how they should be monetized intelligently.
QUINN: I would agree with everything you just said, that it really is a fiduciary obligation and they do need to be monetized with a strategy and a plan. But it has become almost a four letter word, that “monetization” word. I don’t get how things have gotten so out of control. I think you referred to them earlier as the “mythical troll.” You look at what the data in the Government Accountability Office says and there is no patent troll litigation explosion. The latest data from Lex Machina says that there’s no explosion and, in fact, shows that 2014 is quite a bit less in terms of patent litigation than 2013. So how is it that that “monetization” has become a four letter word?
SIEGEL: Well, there are a couple main parties whose names I don’t think I have to mention specifically, who have been drivers in this whole hysteria. And if you look at those companies, and I’ve spoken publically about this point, companies that are behind this push – patents to them are an expense. One particular company I have in mind, their real intellectual property is in trade secrets. It’s in how they process data faster than anybody else. And you’ll never see a patent on that because they keep it behind locked doors.
QUINN: Yes, but it it’s the company I’m thinking about they did start with a very important foundational patent.
SIEGEL: They did.
QUINN: And they wouldn’t have dominated the industry but for that patent.
SIEGEL: They did. But now they have to keep the competitors from coming into the space. And they could do that by devaluing intellectual property so startups can’t get the funding that is needed to come up with that one algorithm that changes the marketplace again. Throughout history people forget their humble beginnings and where they come from, right?
SIEGEL: And right now patents are viewed as an expense in a lot of businesses that are behind this whole environment of fear mongering in the patent world. But, there is a silent, or perhaps less vocal majority that’s out there. Cleary there’s plenty of industries who rely heavily on the protections of intellectual property yet they don’t quite get the headlines of the handful of companies who have very good PR departments and marketing groups that are able to influence a situation, let’s say.
QUINN: Yes, and that’s always struck me as odd because I’ve said for a very long time that I think if you were to add up the money being made, the money being made is overwhelmingly by those companies that have strong patent portfolios, need patents, need protection and that are innovators and that group has just been slow to the debate and I think that’s a big part of the problem. So what advice would you give if somebody said, I’m an independent inventor, I’m a University, I’m a startup that really is trying to get involved to make a difference or to turn the debate? What can those people do?
SIEGEL: They could talk to their politicians to let them know that innovation is key to their survival. And that the patent system is not something to be discarded with the winds of loud voices for the moment. Because unless the pace at which change is coming changes, and I do think the pace has slowed down a bit now, but unless that pace were to change, the biggest victims here are the small inventors, the small startup companies but, surely large companies are ultimately going to feel the effect. I mean look back twenty something years ago when the value of companies were 80% tangible assets. 80% company valuations were tangible assets and 20% were intangible, right? That whole paradigm completely flipped on its head to the extreme. Now you have companies that have almost no tangible assets and all intangibles and that’s the entire value of the company. And those companies are getting valuations that are beyond anyone’s wildest imagination. But, there’s going to eventually be blow back to that whole model. You can’t destroy, have an effort, an organized effort to destroy value of intangible assets and not expect that that’s ultimately going to filter down to the entity that really benefit the most, which is industry.
QUINN: Right. And you know, Jim Greenwood who is the CEO of BIO, has said that for most of these biotech companies the only thing they own is maybe a microscope and a folder to hold their patents. And that’s the sum extent of what they tangibly own and it’s all about the IP. And you see these cases coming out and it’s just taken whole industries out and I think the reason people haven’t focused in on this more yet is that there really is not a lot of places on the financial books for the accountants to take into account the fact that the patent portfolio is now at least worth less if not completely worthless.
SIEGEL: I don’t know about completely worthless. If there’s a quality asset there people are going to look more quickly at a bigger portfolio but that’s not to say that there aren’t going to be single assets out there that are very valuable. It just is going to require more searching and more diligence to make sure that you get that asset. And it’s going to necessarily require risk takers to take that leap of faith. The key is to be able to intelligently measure that risk.
QUINN: Would you characterize yourself at the moment as risk takers looking forward into the future? Or at least the short term future?
SIEGEL: No. I wouldn’t describe us as risk takers. I would describe us as prudent, intelligent, patient business folks that are IP specialists and we have the infrastructure here in order to do the due diligence that’s necessary to make sure that we’re deploying our shareholders’ capital in the best possible way. It doesn’t mean that we’re never wrong. It doesn’t mean we’re always right. But what it means is that we think that we can take a better look at assets to identify the best ones and come up with a strategy on how to monetize them for the best returns.
QUINN: I think you guys have been successful at this for a very long time which is partly one of the reasons that your company gets thrown around as being I think the bad guy in this climate is because you have been very good with that.
SIEGEL: Sure. I mean, look, my first—like I said, I’ve been at Acacia now for about sixteen months and my first exposure with Acacia was leading the defense killing Acacia’s first patent on the V-chip. I’ve had a long relationship with Acacia, although I have generally been on the other side of Acacia. So I jumped in here with eyes wide open. I came here because I wanted to come here not because I had to come here. I obviously saw tremendous opportunity here with the team that was in place and the changes that were envisioned and our CEO, Matt Vella, has really done a fantastic job leading a somewhat drastic change of course in how we do business. And we run it like a business. It’s not just a group of individuals, it’s a cohesive team that moves together from initial due diligence all the way through litigation or licensing.
QUINN: I really appreciate you taking the time to chat with me, but before I let you go, do you have any final thoughts on the market for patents moving forward?
SIEGEL: I think the message is that IP continues to be a good investment. The move is clearly towards quality assets and entities that are well capitalized. Those with top tier teams to strategize on how to get the best returns on investments are going to be positioned to succeed in this market.
QUINN: Okay. Thanks a lot, I really appreciate you taking the time to chat.
SIEGEL: Sure, Gene. Any time.