I previously commented on the fact that Lodsys contacted various iOS app developers with claims of patent infringement and published a rebuttal of Lodsys's defense of its business model. This issue is still making huge waves and everyone's waiting for Apple to come out with some kind of statement, or at least some guidance for the affected developers. In the meantime I'd like to provide this FAQ-style text to help app developers find quick answers.
Please note that this is not legal advice. If you have been contacted by Lodsys or believe this (or any other patent assertion) may still happen to you, you are advised to obtain professional legal advice based on a thorough analysis of your particular case. The answers below are only my opinion as a blogger, just like many other websites have already discussed this issue.
Table of contents5. Is Lodsys likely to sue or just bluffing?6. If Lodsys sues, how much will it cost to defend oneself?10. Should I just pay Lodsys its 0.575% royalty?
Here are my answers:
1. Has Apple commented yet?
I have read countless media reports on the Lodsys issue but as of now (approximately 9 AM Eastern Time on May 17, 2011), all of the journalists who asked Apple wrote that Apple did not reply, with one exception: The Guardian wrote that "Apple's legal department is understood to be 'actively investigating' [Lodsys's infringement claims]".
My personal opinion is that this situation is quite a tricky one for Apple. Apple will have to analyze to what extent the alleged infringement is an iOS issue or just the responsibility of app developers, and Apple will have to look at this as a potentially reoccurring problem since there are countless patents out there that could be asserted against app developers (some of them on a more meritorious basis than others). Presumably each and every app out there except for the simplest and smallest one could be accused of infringing hundreds or even thousands of existing patents, and some of those patents may be or end up in the hands of persons or entities targeting the mobile apps ecosystem with royalty demands and possible lawsuits.
It's possible (though unlikely) that Apple will continue to decline to comment. My guess is that Apple will, however, have to make a statement to its app developers at some point, especially with Apple's Worldwide Developer Conference (WWDC) coming up in a few weeks (June 6-10, 2011), where many app developers will be present and the Lodsys problem (as well as the wider ramifications of patent assertions against app developers) will be a hot topic. Lodsys gave the contacted app developers 21 days to respond, which constitutes a deadline expiring the week before WWDC.
In connection with a similar case, in which a company named MacroSolve is already suing ten relatively small iOS app developers over a patent, one of the defendants told me that he contacted Apple a few weeks ago and hasn't heard from them yet.
2. What could Apple do for app devs?
Apple has a high quantity and quality of internal and external resources when it comes to dealing with patent issues, and is embroiled in a variety of disputes as a plaintiff and, far more frequently, as a defendant. By contrast, app developers (with the exception of the likes of Amazon and eBay) tend to be completely inexperienced with patent assertions, and they don't have the resources to defend themselves in a U.S. patent lawsuit. Therefore, Apple's appearance on the scene would make a major difference.
provide and pay for professional legal advice,
cover the attacked app devs financially in order to enable them to keep their apps in Apple's app store (and to keep their in-app upgrade buttons) in defiance of Lodsys's thinly-veiled threat of filing lawsuits (which would be costly and could additionally result in damage awards),
file with the USPTO reexamination requests concerning Lodsys's patents, particularly the one asserted against in-app upgrade buttons,
seek a declaration of invalidity and non-infringement against Lodsys's patents, at least the one asserted against in-app upgrade buttons (if Apple's standing, i.e., its ability to sue, was in doubt, Apple could alternative finance such efforts to be formally made by app developers), and
possibly assert in a declaratory judgment action that its own license to the patent in question covers the way its app developers provide in-app upgrades.
The above items would be specific to the Lodsys issue, and all of them are conceivable. But Apple is unlikely to take more general patent reform initiatives aiming to provide its app developers with greater legal certainty. Apple has too much of a vested interest in software patents, although one blogger, Mike Lee, accurately noted that "[t]he same patent system that has completely failed to protect the iPhone from being copied wholesale is being used to extort its developers."
3. Is Lodsys actually targeting Apple?
I remain convinced that Lodsys's preferred outcome would be for Apple to pay. However, Lodsys appears to have a pretty credible Plan B as well: if Apple doesn't step in, Lodsys appears to be fully prepared to shake many trees for money and collect small payments from a large number of app devs.
When I saw the first reports on this patent assertion spree, it seemed most probable to me that someone was just holding app developers hostage in order to get Apple to pay. The reason I thought so is that patent assertions against little app developers are highly unusual and, at least on this scale, probably unprecedented, although there's a significant risk that more of this will happen in the future. But generally, patent holders and licensing companies are attracted to deep-pocket targets.
While Lodsys sort of denies a plan to force Apple to pay and points to the fact that Apple already has a license for its own products and services, Lodsys also claims that "the scope of [Apple's] current licenses does not enable them to [cover third-party apps]." This is a pretty clear suggestion that Apple could take a new license that would take care of third-party apps.
There can be no doubt that faced with the choice of getting Apple to write one large check versus having to deal with a large number of little guys, Lodsys would prefer the former over the latter. Lodsys's denial doesn't mean much. They couldn't possibly say "yes, we just hold those app devs hostage" because that could be held against them in court in connection with patent misuse and/or other theories. But they didn't say that the door is closed for Apple to approach them. On the contrary, the word "current" before "licenses" is a hint that Apple would be welcome to pay more in order to get a broader license.
Like I said, Lodsys appears to be quite prepared to pursue, if Plan A as in Apple fails, a Plan B consisting of patent assertions against many little app developers. Lodsys's calculus in that scenario is that many app devs will ultimately take a license because
they don't have the resources to defend themselves in court and contest the validity of the patent as well as Lodsys's allegations that there is an infringement, and
the license fee Lodsys demands is less than the revenue opportunity the app devs might lose by removing their in-app upgrade buttons, so they will put their immediate revenue interests above other considerations (I will discuss separately what I think the app devs should do, and what they should consider in this regard).
If Plan B works, Lodsys can scale up that business by acquiring additional patents to be asserted against app devs and other little guys. Lodsys would position itself as a software patent scavenger feeding on the leftovers of those patent assertion entities who go after larger targets. (Since Lodsys would be unlikely to be granted a valid patent on that business model, others could then adopt the same scheme.)
Lodsys's Plan B may very well include that after getting a certain number of little guys to pay, Lodsys would go after many more app devs, large and small. Lodsys would then be in a better position to get others to pay or to present itself to a court as a licensing business that offers a patent that many others have already agreed to license. Also, any money that Lodsys may get from little guys would go toward funding further assertions and lawsuits.
4. Is Lodsys's scheme new?
This business model of targeting the defenseless is not completely new. Since the cost of successfully fending off patent assertions is high, many patent holders set their financial demands at a level below the cost of litigation. And unfortunately there's a whole lot of patent assertion happening all the time against the defenseless, i.e., those who wouldn't be able to afford a lawsuit due to the costs and risks involved.
The problem with assertions against the financially defenseless is that even if the patent is weak and the claimed infringement is spurious, those may still feel forced to pay for lack of an affordable better alternative.
I have heard stories of video streaming patents being asserted against small educational institutions that offer distance learning, and of farmers being forced to pay because of a patent allegedly infringed by those who cover their fields with a certain material during the winter.
The idea of asserting patents against app devs isn't new, either. Six weeks ago I already reported on H-W Technology LLC's lawsuit against some large app developers (such as Amazon and eBay) and warned that there would be more of this, and that this could possibly affect little app developers as well. Meanwhile I have found out that another company, MacroSolve, recently filed two lawsuits against relatively little app devs, one against four of them and then another one against six app devs. The difference is, however, that MacroSolve apparently sued without making any prior contact. I know from at one of the defendants that at least his company didn't have any communication from MacroSolve until the complaint was served.
5. Is Lodsys likely to sue or just bluffing?
In February, Lodsys filed a lawsuit against Brother, Hewlett-Packard, Lexmark, Samsung, Motorola Mobility, Novell and other companies. In light of that, I think it would be very risky to just "call the bluff", assuming they wouldn't sue. If they sue a group of little app developers, the damages and possible future royalties they can collect from them may not be worth the effort, but they would have to go through this exercise once in order to prove that even little guys could be sued by them if they don't pay.
Of course, if Lodsys does indeed sue some little guys, there will be outrage and lots of negative publicity. But Lodsys itself has no reputation to lose. Intellectual Ventures, who used to own the patent in question, would probably be concerned about the questions such action would raise about their business, but that's a different subject.
6. If Lodsys sues, how much will it cost to defend oneself?
I recently published some data points on U.S. patent litigation that I gleaned from RPX Corp.'s IPO prospectus. That prospectus says the following about the cost of patent defense:
"The costs to defend and resolve a patent litigation claim can vary widely. The costs can range from modest, such as $50,000 for nuisance suits, to substantial, such as tens of millions of dollars or more in the most complex cases. Based on these metrics, we estimate that litigation-related expenses in the patent market totaled tens of billions of dollars in the United States from 2005 to 2010."
Theoretically, it's possible that a low-budget defense effort against Lodsys would succeed. But it could get very costly, and if Lodsys does go to court, it will presumably seek damages and other compensation, further increasing defendants' potential exposure.
7. Would Lodsys have a strong case in court?
There's certainly a possibility that Lodsys might win. But there is also reasonable doubt.
The patent Lodsys asserts against those in-app upgrade buttons could possibly be invalidated. There might be prior art; it might be possible to prove that it fails to meet the non-obviousness criterion; one could also argue that it's not patentable subject matter because it's too abstract. There could be other arguments for invalidity. And even if the patent survived those challenges, Lodsys may interpret it too broadly and a jury might find that in-app upgrade buttons don't fall within the scope of that patent.
But the outcome of all of this would be uncertain.
For the app devs who can't afford to defend themselves, it ultimately doesn't matter what the most likely result of litigation would be because they will have to avoid that this ever goes to court.
8. How can an app dev be liable for just implementing Apple's in-app purchase API?
Some developers have pointed out that basically they just implement Apple's in-app purchase API. So they wonder whether this can expose them to liability for patent infringement or is actually something Apple needs to take care of.
This is a difficult legal and technical question. Lodsys's position is that Apple's license does not cover what the targeted app devs do. I have looked at the patent and I guess that the alleged infringement really relates to the commands executed by the apps themselves. I don't know whether implementing Apple's API inevitably leads to what the alleged infringement is about. My feeling is it's probably not inevitable: I guess there are ways to make use of Apple's in-app purchase API that don't result in the fact pattern that Lodsys claims to be an infringement.
9. Can litigation be avoided by removing the in-app upgrade button from one's apps?
Lodsys makes very broad assertions. Contrary to popular misbelief, its patents are not specific to in-app purchasing. Even the '078 patent (which is only one of four Lodsys patents) is interpreted so broadly by Lodsys that it's asserted it connection with not only in-app upgraded but also mere links to an app store. Lodsys even brings patent infringement allegations against operators of websites with ad click tracking, questionnaires, live chat, and possibly other functionalities.
If you managed to throw out all functionality against whcih Lodsys makes assertions, Lodsys would no longer have the incentive to sue in order to be paid for future use but could still sue for past damages that it would claim to have suffered. If you take a license from them, they also want you to pay for alleged past use.
If many app developers remove the button from their app and refuse to pay (which is quite likely to happen unless Apple provides the kind of coverage that will encourage app devs to keep their upgrade buttons), Lodsys will have to decide whether it sues only the ones who continue to provide an upgrade button without paying, or also the ones who removed it in response to Lodsys's assertion. The more app devs decide not to pay, the more likely it is that Lodsys will also sue some or all of those who removed the button in order to force them to take a license at least on a retroactive basis.
That's the problem here: by removing the upgrade button you can't make undone whatever happened in the past. If Lodsys wants to sue, it can still do so anyway.
10. Should I just pay Lodsys its 0.575% royalty?
Lodsys demands 0.575% of every allegedly infringing app's US sales until the expiration of the patent in question including backroyalties for any past use. There are really three kinds of considerations here:
Paying up is your best shot at avoiding litigation, and it means you can continue to sell your app with an in-app purchasing mechanism that makes you money. So looking at it exclusively from that angle, paying up would be the smart thing to do no matter how fundamentally unfair you find software patents in general and this patent infringement assertion in particular.
But the 0.575% deal covers you only for that one patent in connection with only the scenario of an in-application upgrade. Lodsys could charge you even more if you are alleged to infringe the same patent in other ways than just an in-app upgrade button. Lodsys also owns three more patents already (and maybe more in the future) that wouldn't be part of the deal. Others may require you to pay for other functionality, such as distribution of electronic forms to a mobile device. Once Lodsys and others know that you paid for this patent, you're even more likely to be contacted by Lodsys and other patent holders. (Third parties can find out if your deal with Lodsys is announced in any way, or they can figure if they know that you were contacted and at some point they see that you still have the in-app upgrade button but weren't sued.)
Looking at it from an even broader perspective, by paying up you make this scheme work, which will inevitably exacerbate the situation with Lodsys and others scaling up this kind of business. So for the app dev community at large it would be best if no one paid and all of them took their chances of being sued. That would be a clear signal to Lodsys and all other patent holders that app devs just aren't the best trees to shake for money. But you have a kind of prisoner's dilemma here because you can't count on others really doing so: they might secretly agree to pay and then you get sued while they don't.
So I'm not recommending anything here. I'm just trying to explain the pro's and con's of different options, and a lot depends on what kind of support Apple may ultimately decide to lend to the app devs.
11. Will Lodsys send another letter to those who don't pay within 21 days of receiving the first one?
They might, but they don't have to. They could also sue right away.
It might make business sense for Lodsys to send another round of letters if a certain number of app devs agree to pay based on the first letter. Lodsys might then tell everyone else that X number of other app devs already agreed to pay, and combine this information with an even clearer threat of litigation.
But Lodsys doesn't have to. Keep in mind that another company, MacroSolve, sued ten relatively little app devs and at least one of the defendants was sued right away without any previous correspondence at all (also called the sue-first-ask-questions-later approach).
12. Can't the developer community pressure Lodsys with an email campaign?
Lodsys claims to have received an "amazing amount of spam (death threats, hateful bile)". I don't know if this is true. Lodsys may vastly overstate the content and the seriousness of those emails. I saw at least one call (on Slashdot, I believe) for sending email to Lodsys, but that doesn't mean that people really sent "death threats."
If anyone really did send them death threats, that's totally unacceptable and counterproductive. It allows Lodsys to portray itself as a victim and use this to its advantage in different ways. It's also stupid to do because of the consequences this could have under criminal law, while Lodsys's business of asserting patents is legal.
I strongly discourage any of those efforts. While the flood of email Lodsys received resulted in some blog posts on their website, those guys are not going to be convinced that what they do is wrong. They may even know that it's ethically wrong, but they want the money. Insulting or threatening them won't change that.
13. Shouldn't patent holders be required to build actual products?
I've seen various suggestions of the above kind on discussion boards and on Twitter. The short version is: forget it.
In connection with requests for injunctions or ITC complaints, patent holders who actually practice their claimed inventions are already in a much stronger position than those who don't. But all patent holders have a right to be paid if their patents are valid and infringed.
If there ever was a requirement for patent holders to build actual products, they could probably meet that requirement on a pro-forma basis quite easily. But the requirement won't ever be imposed by law anyway. There are very legitimate inventors, such as biotech companies or academic institutions, who seek patent protection and make meaningful contributions to innovation without ever releasing a product. There are many non-practicing entities that are very legitimate and reasonable -- not "trolls". Politicians won't deprive all of that kind of innovation of patent protection.
There are other angles from which the situation could be improved: increasing patent quality, discouraging frivolous litigation, strengthening the rights of defendants. Admittedly, those improvements wouldn't really help little app developers who don't have the money to defend themselves in court.
14. Will Lodsys also assert its patent against apps running on other platforms than iOS, such as Android, BlackBerry, Symbian or Windows Phone?
On its blog, Lodsys raises this question but doesn't provide a clear yes-or-no answer.
Lodsys says that Google and Microsoft are "licensed for their nameplate products and services." However, Lodsys also says the same about Apple, and nevertheless demands royalties from iOS app devs.
Until Lodsys says affirmatively that the scope of the license other platform makers have goes beyond the scope of Apple's license, all app devs are at risk, and Lodsys may just have made a tactical decision to start with iOS apps and subsequently expand its activities to other platforms.
[Update] On May 26, 2011, a posting to a Google Groups discussion board stated that an Android app developer also received a letter from Lodsys. More details here. [/Update]
15. How much does it mean that Apple, Google, Microsoft and other large companies are claimed to have taken a license to Lodsys's patents?
If those companies had thoroughly evaluated the patents in question and decided to pay a significant amount of money (significant relative to their revenue base) for a license, that would be an indication of the patent likely being strong. But I doubt that that's the case here.
In its FAQ, Lodsys points out that these patents were temporarily owned by Intellectual Ventures, which according to Lodsys "then licensed these patents to additional companies."
In all likelihood, that's how Apple, Google and Microsoft were licensed. They are all investors in Intellectual Ventures and licensees of IV's patents. IV owns about 30,000 patents, and those companies pay for access to the entire portfolio. I doubt that they evaluate each and every one of those patents: they just get a license to the whole package. Most probably, that's how they were licensed, and those licenses are still valid if IV limited the right of later acquirers to assert those patents against IV's licensees.
16. Is it credible that Intellectual Ventures isn't behind Lodsys's assertions?
Lodsys only says that Intellectual Ventures acquired those patents from the original "inventor" and later sold all rights -- except for licenses that were already in force, such as presumably the ones that Apple, Google and Microsoft have -- "to a private rights ownership group, which then setup independent companies, with sufficient capital and talented staff to focus on licensing the patent rights broadly to the marketplace." By that group, Lodsys apparently means Webventions, a company that has already started several lawsuits.
WirelessGoodness did some research on how the patents changed hands. A different website, GeekWire, later contacted Intellectual Ventures and was told that "IV sold the patent and has no ownership interest in Lodsys LLC."
Patent transfer are not only legal; they are also perfectly legitimate. Even companies that have actual products on the market sometimes divest patents they no longer consider essential.
Ideally, companies would impose requirements in such situations that limit the way those patents are asserted against others. In a perfect world, IV would have ensured that any subsequent owner of those patents would not assert them against, for instance, little 'indie' app devs. But no one does that because any limitation of this kind reduces the value of a patent that is sold.
I don't see any evidence that IV orchestrated all of this just to go after little app devs and hide behind a different, formally independent, entity. There's a large number of possibilities here in terms of how much IV knew or encouraged what is happening now. It could be that IV sold those patents and assumed that the new owner would assert them the way most non-practicing entities operate, i.e., against reasonably large companies. In that case, Lodsys's modus operandi would have been unforeseeable from IV's perspective.
Without knowing the content of the transfer agreement (such as whether there was a one-off purchase price or part or all of the consideration comes down to revenue-sharing with future owners) as well as the conversations that were held in connection with the transfer, it's impossible to tell whether IV had any way of knowing what was going to happen with those patents.
That said, I believe it's in IV's own best interest to limit the number of instances in which it will be suspected of an involvement with the kinds of things Lodsys is doing. This isn't the first time that IV sells patents that are then asserted by other parties, but IV itself filed its first three lawsuits only in December 2010 against companies including McAfee, Symantec and Hynix.
In my opinion, talking too much about IV in this context is a distraction from the real issue, which is what patent assertions against little app devs by companies like Lodsys and MacroSolve may ultimately mean for the mobile apps economy, and how Apple should respond (if Apple will respond at all). But it is ironic that Apple once invested in IV, which then used that money to buy (among tens of thousands of other patents) the very patent that is now, after IV sold it, being asserted against the most vulnerable members of Apple's own ecosystem.
17. Can app devs pay Lodsys without being in breach of Apple's iOS developer license agreement?
There continues to be some talk on the Internet about whether app devs have the choice and can license Lodsys's patent(s) without being in breach of . The question came up on various sites, probably for the first time on TidBITS. The concern relates to the following clause in Apple's iOS Developer Program License Agreement:
"In no event may You enter into any settlement or like agreement with a third party that affects Apple's rights or binds Apple in any way, without the prior written consent of Apple."
Only Apple itself can provide definitive clarity by saying officially that licensing patents doesn't violate that clause of the agreement. However, I can't imagine that the above clause could be reasonably construed to preclude app devs from licensing patents. I'm sure many have already done so. At least the larger players like eBay and Amazon who have all sorts of patent license agreements in place. Looking beyond patents, I'm sure there are apps that are based on copyright or trademark licenses (such as officially licensed sports-related apps etc.).
Certainly there's no way to claim that a license deal between Lodsys and an app dev "binds Apple in any way". The question is whether one can argue that this "affects Apple's rights [...] in any way". While that appears to be an extremely broad clause, I don't think it would be a reasonable interpretation to say that app devs can't take a license. Apple's rights are technically the same even if app devs choose to pay license fees to Lodsys. If Apple has any problems with the patent in question (which Apple probably doesn't have because it already has a license to that patent for its own products), any disagreement would have to be sorted out between Apple and Lodsys. In that case, Lodsys might argue that various app devs chose to take a license, and that may help Lodsys to describe the patent as being perceived valid by other companies operating in this market, but it would be easy for Apple to brush this aside, saying that those other entities may have taken a license no matter whether the patent is valid or actually infringed.
18. Lodsys owns patents only in the US but has contacted developers not only in the US but also in Europe, possibly also elsewhere. How can they do that?
Patents regulate a target market into which someone sells, not a country of origin.
Lodsys asserts its US patent only in connection with the US sales of US-based or foreign entities. If a US-based or foreign entity wanted to reduce the likelihood of patent assertions, it could theoretically opt to sell its app only outside the US. However, that would come with a huge opportunity cost, and there would still be a risk of being sued for past infringement in the US if an app was previously marketed there.
Also, there are plenty of software patents in other jurisdictions, such as in Europe, where Apple is suing Nokia over at least nine software patents. So even a European company doing business only in Europe is not safe from software patent assertions. The cost of litigation is lower in most of Europe than in the US, and many European countries have a loser-pays principle that allows the recovery of legal fees, which does discourage frivolous patent litigation. Damage awards in Europe also tend to be much lower. So the situation is in some ways more comfortable in Europe than in the US, but Europe is not a complete safe haven either.
If Lodsys sues a non-US company, it will also face some practical challenges concerning cross-border litigation and cross-border enforcement of rulings. However, don't assume that just because you're based outside the US, they don't have access to you. If your product is declared unlawful under US patent law, they will shut you down there, and when it comes to collecting damages, you'd have to discuss with a lawyer in your jurisdiction what your country's agreements with the US provide for.
19. Do app devs face the risk of owing treble damages for any hypothetical infringement since their receipt of Lodsys's letter?
You may have heard that US patent law provides for treble damages for willful infringement, meaning that the court will multiply the usual amount of damages for a period of willful infringement by a factor of three.
Many patent holders do claim that on the day on which an alleged infringer received the first notification of the allegations, willful infringement began. And there have been cases in which the courts agreed (or even cases in which the courts decided that willful infringement began well ahead of any such notification). But it's not that simple. As IPWatchdog's Gene Quinn notes, willfulness "is a question of fact and involves a determination as to an infringer's state of mind." He quotes various decisions, including one according to which this question of fact "includes elements of intent, reasonableness, and belief."
I don't want to go into too much detail here because it's a complicated question. So let me look at it from a practical point of view in connection with Lodsys:
After receiving Lodsys's letter, any continued sale (in the US market) of apps with an in-app upgrade functionality certainly comes with an increased risk of possibly being found by a court to be a willful (and not just inadvertent) infringement, and in turn, could increase the damage award for the related period by 200%. If you defended yourself in court, there would probably be quite some discussion over this question of fact. If you don't have the resources to defend yourself in court anyway, then this makes the situation potentially worse but it's already so bad that the difference is only gradual because then you have to avoid litigation unless someone like Apple covers you.
If Apple decides to support its app devs, I'm sure Apple will also take the issue of willful infringement into account and help you deal with it.
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