Acacia Shares Drop 37% on Judge’s Ruling

A federal judge this week weakened the patent-infringement lawsuit filed against adult websites by a Newport Beach company that claims to control key patents for on-demand entertainment.

The ruling by U.S. District Judge James Ware sent shares in Acacia Research Corp.’s technology group down 37%, from $6.25 to $3.91, Tuesday on Nasdaq.

Acacia argues that five of the patents it acquired in 2001 apply to a variety of video-on-demand, online jukebox, distance learning and downloadable entertainment services. It collects licensing fees from more than 150 companies, including Walt Disney Co. and Playboy Enterprises Inc., for the use of technologies it claims are covered by the patents.

The firm is trying to collect fees from an array of other Internet, satellite and cable-TV companies and universities.

When more than a dozen adult websites refused to pay Acacia a portion of their revenue, the company sued them in federal court in Los Angeles for allegedly infringing two patents.

But in a preliminary order issued Monday, Ware ruled that several key terms in the patents were indefinite, potentially eliminating most of the claims Acacia brought against the adult sites.

Acacia Chairman Paul Ryan stressed that at least six of the company’s claims remain valid, and more could be restored after Ware hears from expert witnesses. Even if the company winds up with only one valid claim, he said, that’s still enough to win the lawsuit.

“This is one step in what is typically a long process,” Ryan told financial analysts on a conference call Tuesday. “We continue to believe that we have strong arguments of infringement against Internet, cable and satellite providers of digital content.”

Acacia’s opponents praised the ruling, saying it would make it significantly harder for Acacia to enforce the patents.

“We’re pleased that the court saw, frankly, a lot of it our way,” said Jonathan Singer, an attorney for nine of the adult sites.

Staff attorney Jason Schultz of the Electronic Frontier Foundation, a group that advocates online civil liberties and technology, said Ware “has taken out some of the big weapons” in Acacia’s arsenal.

“The judge has shown skepticism as to the quality of Acacia’s patents. And secondly, the cost of defeating these patents has dropped dramatically,” he said.

Acacia executives said the ruling wouldn’t hurt their recent lawsuit against the nation’s largest cable-TV and satellite operators, which is based on all five patents.

But Schultz disagreed, saying the two patents involved in the website case were “the foundation of their portfolio.”