If your Internet entertainment includes time spent viewing streaming video, you could be helping to make a pile of dollars for a small, somewhat obscure company located here. As one of its primary business models, Acacia Media Technologies purchases little-known but potentially lucrative patents and enforces them. In this case, Acacia has begun enforcing a group of patents that cover core streaming audio and video technologies, and that could mean fundamental changes in the way Websites conduct their business.
Late last year, Acacia began sending adult Website operators letters demanding that they license technology Acacia claims to own. The technology is wrapped up in patents issued between 1992 and 2000. Acacia calls the group, collectively, Digital Media Technology, and says its ownership of the patents continues through the year 2011.
Some of the adult Web companies entered into licensing negotiations with Acacia; others ignored the letters. Acacia subsequently sued 47 adult entertainment companies over their use of streaming technology. Eight adult companies - including Greywood Entertainment, Domain Girls/Eden Entertainment, Global Reach, and Soft Focus Productions - settled with Acacia and entered licensing deals before their cases went to court. So, apparently, have a number of recognizable mainstream Internet operations, including Radio Free Virgin, the online broadcast division of Virgin International.
But there are still some major players among the adult entertainment companies Acacia wants to bring to heel - including Homegrown, Vivid Video, Wicked Interactive, Larry Flynt Publications, Private Media Group, New Frontier, and Excalibur Entertainment, among others.
"We've served the complaints and we hope to get [them] before a judge as soon as possible," Acacia senior vice president and general counsel Rob Berman told AVN Online. "We still hope to settle with the companies we've sued." But he added he wasn't optimistic that such settlements could be made.
According to one of the formal complaints filed by Acacia in U.S. District Court, not only does Acacia own the entire group of patents pertaining to DMT, but the companies whose streaming video is covered by the patents "[have] infringed and continue to infringe, [have] induced and continue to induce others to infringe, and/or [have] committed and continue to commit acts of contributory infringement of one or more claims of the [patents] ... and ... that the foregoing acts of infringement were and continue to be willful."
The companies that did settle with Acacia, Berman continued, were offered a break on back royalties. "The original patent was issued in 1991," he said, "but what we offered companies that were interested was a waiver for past fees through December 2002. Royalties only started for [their] sales as of January 2003." Companies that either didn't settle before the end of December or are continuing the litigation process will not be offered the same waiver, even if they choose to settle now, Berman said.
Needless to say, adult entertainment companies of all stripes are more than a little concerned about Acacia and its patents. Many of those involved in the litigation declined to comment while the cases remain open. Homegrown Video, however, had plenty to say. Homegrown is leading a group of about 10 adult entertainment companies in a fight against Acacia’s patent-infringement lawsuits. They say this isn't just a question of fighting a court battle: It’s a question of fighting for the possible future of streaming video and audio and who gets to reap the major benefits, as well as who "owns" a large portion of the future of the Internet as a whole.
According to Homegrown's chief executive officer, Spike Goldberg, the companies have engaged a patent law firm that’s been in existence since the early days of electricity and flight patents - a firm Goldberg said doesn’t want to be revealed in the press for now, but one that has dealt with Acacia in the past.
"We're headlong into the action," Goldberg said. "We have been leading the charge in the fight from day one.... I wouldn't consider it someone being a savior for the industry. We all have a common reason to band together. It's going to cost us a lot of woe if we don't deal with it." That lot of woe doesn't just involve costly licensing deals. According to Homegrown, Acacia is trolling for bigger game: percentages of the gross of all business done by the companies it has targeted.
"If we were to license with them," Goldberg said, "they want a percentage of our gross. Not just the gross on video streaming, the gross of everything. It would make them a partner in [our] business, and I would rather not have Acacia as a partner." The percentage sought has been reported to be anywhere from two percent of revenues generated by streaming video alone to a percentage of the gross from all of a targeted company's business.
"They want this from the other companies, too," Goldberg continued. " If Acacia wins, then other companies could try to profit through similar methods."
DMT isn't the only technology by which Acacia has stepped toward what its critics call "profit by litigation." The company also acquired the V-Chip technology when it bought out SoundView Technologies. Almost immediately, Acacia launched similar patent-infringement claims involving the V-Chip, according to the Orange County Register. Those claims led to more than a dozen television manufacturers paying the one-time licensing fee, filling Acacia’s coffers with some $24.1 million in 2001 revenues, the Register said - a whopping jump from $100,000 in revenue the year before. Other television manufacturers went to court - and Acacia lost. The Register said in December that the company is working an antitrust case claiming the winning manufacturers "colluded" to duck V-Chip licensing fees.
Acacia's involvement with the patents began when the company was one-third owner of Greenwich Information Technologies, which developed the patents. Acacia bought the rest of the company in November 2001. At the time of the buyout, GIT owned a wide array of patents involving video- and audio-on-demand.
Acacia claims its DMT ownership doesn't necessarily mean that Internet companies that offer streaming video are without alternative resources. "[Ours] are not the only patents you need to stream," Berman said emphatically. "We're not taking the position that there are no other patents out there."
Neither is Acacia making the path to redemption a smooth one, so far as DMT licensing is concerned. Amidst a packet of very glossy-looking literature Acacia distributed to companies it believed would license its technology, the company included a question-and-answer sheet that notes, among other things, that just because a Webmaster signs a license agreement doesn't mean his content providers are covered. And if someone is both a Webmaster and a content provider, he or she has to sign separate licensing agreements for both roles, Acacia says.
A licensing agreement covers all Websites owned by a single license agreement holder, as long as they or their legitimate affiliates are the recognized legal owners of the Websites in question and as long as they're all listed on the agreement, according to Acacia.
The initial prepaid royalty for Acacia-licensed DMT is based on gross sales, Acacia literature says. "[T]he royalty Acacia is seeking is based on our gross income and not necessarily income derived exclusively from online content delivery," Goldberg said. Acacia wants a licensee to determine the proper royalty level based on a combination of the licensee's prior twelve months' sales plus reasonable estimates for the coming twelve months - including expected price changes, new Websites, planned advertising, and possible acquisitions.
Should a company end up underestimating its gross sales "to the extent that [its] actual gross sales qualify [it] for a higher royalty category than [it] selected, [the company] will owe Acacia an additional royalty." According to Goldberg, Acacia would like its licensees to owe a little something more: a list of all clients, the better to help Acacia bid to get royalties from them individually, too.
The Homegrown contingent isn't alone in battling back. Mainstream Website Radioio.com has said it is willing to partner with the Homegrown-led phalanx - and Goldberg said the Homegrown brigade isn't exactly uncomfortable with the prospect. "We have spoken with Radioio.com," he said, "and are currently trying to decide what's the best approach to deal with the situation."
Radioio.com has the proverbial dog in this hunt: It was contacted by Acacia in late January with a none-too-subtle request to pony up. "We appreciate your efforts to legitimately bring music and videos to the online community while respecting the intellectual property rights of artists, composers, and publishers," Acacia said in the letter, a copy of which was made available to AVN Online. "...Our engineers and lawyers have reviewed the streaming services made available at the radioio.com Website, and have determined that these activities are covered by our DMT patents.... We hope that you will give our intellectual property the same respect as you give to the intellectual property of the creators and publishers of the music and video content that you promote and sell."
Interestingly, in its letter to Radioio.com, Acacia referred to DMT as standing for Digital Music Transmission, not Digital Media Technology.
The language of Acacia's licensing agreement indicates the company expects royalties on all revenue related to a licensed user's streaming video or audio, "including without limitation one time or recurring subscription fees, connect time charges, access fees, download charges, and other transactional charges; all payments made on behalf of sponsors, advertisers, program suppliers, content providers, or others, including without limitation advertising embedded in audio or audio/visual programming, 'hot links,' the provision of time or space on any Web site, and banner ads [minus] actual advertising commissions paid by licensed user to an unaffiliated agency not to exceed 15 percent."
The licensing agreement also places Acacia in a kind of supervisory role concerning a licensed DMT user's record-keeping for at least five years, "unless in dispute, in which event they shall be kept until the later of when said dispute is settled and such five year period."
The deal also allows Acacia to audit the licensed user's books at will with 10 days' written notice, and if Acacia determines any royalty underpayment of more than five percent, the licensed user would be required to pay for the "reasonable costs" of the audit, as well as make up the underpayment.
The agreement also includes an opt-out clause: Either Acacia or the licensed user can end the licensing deal on 30 days' notice, if either side suspects the other has breached the contract.
Acacia all but admits it found the e-porn community a particularly succulent target - or "low hanging fruit," as Goldberg quoted the company as saying. It’s a term Berman himself used in previously published reports about the DMT litigation. "When you say 'low hanging fruit,' yes, it makes business sense for us to pursue an industry that's making money," Berman was quoted in one previously published report. "They've been doing it for years."
Yet Berman denied elsewhere that Acacia singled out adult entertainment. "They just happen to be the biggest users of video streaming technology on the Internet," he told the Register, "and have been doing it for several years and making money."
One of the primary alarms sounded by the Acacia DMT litigation seems to be the question of whether or not "business sense," in this case, doesn't equal a legal but somewhat unethical technique: one company buying up ancient or obscure patents, and then strong-arming anyone and everyone within reach whose products or services might encompass operating systems covered by the patents and making them pay considerably to continue those products or services.
Is patent enforcement Acacia's all-but-sole means of revenue generation? A two percent royalty on revenue generated from DMT could mean as much as $9 million for Acacia, the Register reported - a sizeable booster shot considering Acacia reportedly lost $37 million against $800,000 in revenues for the first nine months of 2002. And the company appears to have very little if any record of independent, self-generated technological development.
The adult Internet may be low hanging fruit to Berman, but to Goldberg and others the Acacia situation represents a case of trying to poach the tree - and it isn't just adult entertainment or such major league mainstreamers as Radio Free Virgin or Radioio.com dangling from the branches.
"The entire online community needs to band together to defend themselves from companies like Acacia," Goldberg said, "a company that has not developed or invented anything except another problem for a clogged judicial system. This is not about erotic content. This is about a company that is trying to take a toll from every person who enjoys multimedia in any form."
