Sunday, July 3, 2011

The cost-efficient way for app developers to deal with Lodsys

The Lodsys situation is getting out of control, and I think each affected app developer should now look for an exit strategy. In this blog post I describe the way I would go about. After an update on the Lodsys situation, I'll outline the short version of my suggested course of action. Thereafter, I go into detail on its various parts.

iOS and Android (and cross-platform) app developers receive letters and phone calls, take down apps and remove features

About two months ago, Lodsys started sending out patent assertion letters to iOS app developers. More than one month ago, Lodsys sued seven app developers in Texas -- mostly over iOS apps but also one Android app.

In recent days and weeks I have seen that Lodsys continues to send out letters and to pressure app developers into taking a license. I have seen some very recent letters to iOS and Android developers and to developers who offer apps on both platforms. Android community websites increasingly report on this mess, such as (on June 22, June 26, and June 30), (on June 22), and (on July 4).

There are reports

At the same time, Apple only communicates with Lodsys and the court, not with app developers, and Google has neither said anything to app developers nor filed anything with a court. This tweet here to Google's Mr. Android, Andy Rubin, was retweeted by more than 20 people but went unanswered like countless other tweets, emails and forum posts:

It's time to be pragmatic

Lodsys won't go away quickly unless Apple and Google pay them many millions of dollars (which could happen anytime but might also never happen). Meanwhile, each app developer who faces this problem should make a rational and responsible decision -- even if it means to pay. So far there's no indication that Android developers can get away without paying, and iOS developers don't have a dependable basis for ignoring Lodsys's insistent demands.

In order to help each app developer do the right thing for himself, I am going to explain now how to solve this problem cost-efficiently. It takes time to understand the suggested course of action and why it makes more sense than alternative routes, but I'd rather explain this in great length to those who really want to understand (and don't necessarily know how to deal with this kind of situation) than do a short post that would give rise to misunderstandings.

My advice here is not meant to be a substitute for legal advice. Instead, this here is some guidance for how to get help from lawyers in a cost-efficient, solution-oriented way. The short version is:

  • Don't underestimate Lodsys. Other assertions that looked no more convincing than those brought by Lodsys have also resulted in lucrative settlements.

  • Lodsys is probably shooting for tens of millions of dollars, if not more.

  • One company said in a court filing that it has information and believes that "many of the companies targeted by Lodsys accede to its demands despite the lack of merit to the patent infringement claims" as a lower_cost alternative to the cost of a patent infringement defense.

  • If you have a few million to spend on fighting Lodsys, and can take the risk of a substantial damage award in Lodsys's favor, then this blog post is not for you. I'm writing this just for those who can't afford to defend themselves and can't take any risks.

  • Even if you make very little money with your apps, you do need legal help now because of what's at stake, but you should use that help in a cost-efficient way by (i) sharing the costs with other affected app developers and (ii) focusing on solutions you can afford rather than letting them exacerbate the problem and charge you for efforts that are a waste.

  • Check on the coverage the platform makers (Apple and/or Google) give you. They probably won't offer anything serious. If they surprisingly do, have a lawyer evaluate their proposals. If (even more surprisingly) the coverage they offer is really good, you can fight. But in any other event you should focus on the only solution you can afford, i.e., a license agreement.

  • If a license agreement is the only affordable way out of this for you, you should focus on solving the Lodsys problem now. You will cross other bridges when you get there. There may very well be more problems of this kind further down the road, but for now it's all about Lodsys. Don't cut off your nose to spite your face.

  • You have to think in commercial rather than philosophical terms. There are many things in life for which you have to pay even though you don't like to or don't feel it's justified. This is just one more of them. I repeat: don't cut off your nose to spite your face.

Now, the detailed version.

Lodsys is apparently making headway getting paid by many companies

On Thursday (June 30, 2011) a company named DriveTime Automotive filed its declaratory judgment action against Lodsys. Five other companies did so before them, but DriveTime Automotive is the first one to tell the following to the court:

16. On information and belief, many of the companies targeted by Lodsys accede to its demands despite the lack of merit to the patent infringement claims, because by design, the cost of settlement, while not cheap, is much less significant than the average cost of a patent infringement defense.

Yes, Lodsys's cash registers are apparently ringing. That statement is pretty significant because companies think very carefully about what they tell to a court. I'm sure DriveTime Automotive wouldn't have said this if it didn't already know of a number of cases in which companies decided to pay Lodsys.

Rule 11 of the Federal Rules of Procedure requires, among other things, that "the factual contentions [in such a pleading] have evidentiary support or, if specifically so identified, will likely have evidentiary support after a reasonable opportunity for further investigation or discovery".

The trolls' business model works very well

Most cases in which trolls successfully collect money are not announced. There have in fact been various assertions against mobile app developers in recent years, but none received as much attention as Lodsys's letters. Only a small part of all patent assertions result in lawsuits. Most of the time, the alleged infringers pay up. But even the small part that does go to court is pretty significant in absolute numbers.

I recently wrote a post entitled "Data points on U.S. patent litigation and the huge patent assertion business". This paragraph is quite telling, I think:

Analysis conducted by RPX showed that "there were over 600 patent infringement cases filed by NPEs [non-practicing entities] in 2010 against more than 4,000 defendants, which comprised over 2,000 unique companies, some of which were sued more than once. Most cases are resolved prior to trial but still result in significant defense and settlement costs. For cases that reached summary judgment or trial [meaning that a judge or a jury decided], a study of over 1,500 final decisions found that damages awarded to NPEs had a median value of $12.9 million during 2002-2009."

Given that Lodsys is particularly active, its investors presumably aim for an amount much greater than the aforementioned median value of $12.9 million.

I have been monitoring patent lawsuits for some time. In my observation, the usual pattern is that a troll sues, the alleged infringers defend themselves for some time, initially with defense filings that look like they are very serious to fight it out, but after a while most of them simply settle. They make a one-time payment, or take a royalty-bearing license going forward, or some combination.

Patent litigation in the U.S. is very expensive. Many settlements result in payments that are significantly lower than the cost of litigation, and if you get sued in East Texas, there's a particularly high risk of losing the first round. There's also a risk of high damage awards. Uncertainty is huge.

Let me give you some examples of how the major players often settle patent lawsuits along the way even though those cases weren't necessarily stronger than Lodsys's case. In those examples, the exact amounts paid for the settlements were not disclosed. But you can be sure that substantial amounts of money changed hands. Otherwise the trolls take their chances and let the courts decide. Now, some examples that show how likely Lodsys is to make serious money:

  • A company named Achates Reference Publishing, which recently sued Quickoffice (one of the entities sued by Lodsys), claims to hold two patents on activating software with an encrypted key. They sued Microsoft in June 2007 and settled in December 2008. In 2009, Achates filed a suit against nine companies: BMC Software, Borland Software, Citrix Systems, The MathWorks, Dassault Systèmes SolidWorks, MindJet, McAfee, Bentley Systems, and Intuit. All of those settled between February and August 2010.

  • Site Update Solutions LLC claims to own a patent on a "process for maintaining ongoing registration for pages on a given search engine". In May 2010 they sued 35 legal entities, including Internet businesses like, Facebook, LinkedIn and Monster as well as hotel chains like Accor and Starwood, retailers like Target and Wal-Mart, media companies like NBC and Thomson Reuters, and software companies like Adobe and Intuit. I reported on Red Hat's settlement with them. Many others also paid.

  • In April, an East Texas jury found Google to infringe (by using certain versions of Linux on its servers) Bedrock Technology LLC's patent covering "information storage and retrieval using a hashing technique with external chaining and on-the-fly removal of expired data" and ordered a (relatively modest) $5 million damage award. Google settled a few weeks after the jury verdict -- the patent holder likely gave them a discount in order to eliminate the risk of the judge overturning the jury decision or Google appealing the decision. Yahoo, by contrast, won a favorable jury verdict. In the meantime, several defendants -- AOL, MySpace, SoftLayer and Amazon -- settled.

  • The week before Christmas I reported on a troll lawsuit (in East Texas) that really made a lot of people shake their heads in disbelief. Hopewell Culture & Design claims to hold a patent on the concept of displaying additional information if an object is double-clicked. That patent was applied for in 2002 (ten years younger than Lodsys's '078 patent, which means you don't have to go that far back to search for prior art). It's really hard to imagine that no one did before 2002 what that patent covers -- or at least something sufficiently similar to invalidate the patent for obviousness. Hopewell sued Apple, Motorola, Samsung, HTC, LG, Nokia, Adobe, Palm, Opera and Quickoffice (this mobile app maker appears to be a regular target of patent lawsuits).

    So there you have it: a patent that a lot of people found unbelievable, and a list of defendants most of whom are very large players. A cakewalk for the defendants? Not really. Some of them filed defenses and brought counterclaims. But Hopewell has already made quite some money with this litigation. Opera settled in April, Nokia in May, and Motorola Mobility in June. Most likely there'll be more settlements.

Those were just a few examples. I picked cases that I previously blogged about. As you can see, this is serious business. There are valid reasons to settle even if one feels that the asserted patent is dubious or that the infringement allegations are unconvincing.

The first clarification you need: coverage

Unless your business is really very sizable, the real issue here is not even whether Lodsys's patent is valid or what exactly it covers or whether Apple or Google may have a license that extends to you. Those are interesting questions but relevant only if you have the wherewithal to fight Lodsys.

Lodsys appears to have a lot of funding. It has sued 27 companies so far and may sue more. Six companies have brought declaratory judgment lawsuits against Lodsys -- four of them in Illinois, one in California and the latest one in Arizona. Even if Lodsys had to defend itself in all of those lawsuits in parallel, it could most likely afford it. But it won't have to because the courts will somehow consolidate those cases. For example, the court in Illinois won't look at the validity of those patents in four different lawsuits with four different juries. And the courts in Arizona or California will probably send their cases to Illinois or Texas.

Lodsys uses two law firms -- though one would be enough -- and the work they do so far looks competent and professional.

Since only a tiny minority of all app developers can really afford a U.S. patent lawsuit, the first thing most of you need to clarify is whether the relevant platform maker(s) will cover you.

When I say coverage, I mean absolutely hard and fast, clear-cut coverage. Anything less wouldn't do.

At this point, neither Apple nor Google have made definitive commitments to that kind of coverage in a way that the app developer community at large could rely on. Google says nothing. Apple provided some app developers with a letter to Lodsys, but that letter doesn't say what Apple will do for app developers if they get sued. They may be willing to cover the costs of those who do get sued, but they don't say it.

So if you have received a Lodsys letter, and especially if Lodsys is making calls to pressure you into signing, you should ask Apple and/or Google (depending on which platform/s you develop for) whether they cover all of your costs and risks if you pick a fight with Lodsys, including but not limited to

  • lawyers' fees

  • court fees

  • possible damage awards (which could theoretically amount to millions)

  • related travel expenses

  • your time spent on this matter instead of income-producing work

If you develop apps for more than one platform, it gets tricky. Assuming you do apps for both Android and iOS, you either need Apple and Google to make a joint commitment that covers you completely, or you need one of them to cover your entire dispute with Lodsys. Apple and Google may not be the best friends at this stage but they can always cooperate if it's in their mutual interest. Otherwise, if Apple covers you only for your iOS apps and Google doesn't cover you for your Android apps, you still have to fend off a lawsuit and that means you should rather settle than pick a fight you can't afford.

Ensuring that you have coverage is already a point at which you need a lawyer to help you. Ideally the lawyer will ask Apple and/or Google on your behalf. If you asked on your own and got a reasonably specific answer already (which is totally hypothetical because no one has received any specific answer on this so far to my knowledge), you should discuss that answer with a lawyer and have him clarify relevant details with Apple and/or Google on your behalf.

Now you probably don't like the idea of having to spend money on lawyers. You may also feel that it's a kind of cost that's disproportionate considering the size of your app revenue. But this here is about huge risks and you do need professional advice. But use it wisely and don't waste legal fees on all sorts of efforts that don't benefit you in the end.

Anyway, if you have a lawyer-approved commitment from Apple and/or Google to cover you in all respects, then you can fight Lodsys. Since Apple and Google have been aware of Lodsys's activities since the first half of May, there's no point in waiting for them forever. If they don't give you the necessary commitments quickly, I suggest that you give up on them and focus on working out a deal with Lodsys.

Apple's letter to Lodsys does not explicitly promise you the kind of coverage I outlined above. Apple has not even stated that its $50 damages limit per app developer is waived in connection with Lodsys. In other words, if you rely on Apple's letter, one of the risks you have is that they offer you only $50. This article on the Electronic Frontier Foundation's website has a paragraph that starts with "We Never Owe You More than Fifty Bucks". As I'm sure you know, fifty bucks are pretty much nothing compared to the cost of a lawsuit with Lodsys.

Sharing legal fees among multiple app developers

Since Lodsys initially focused on letters to iOS app developers, many of those are already in contact with each other on Twitter and by email. But now that Lodsys increasingly also targets Android and that websites like DroidGamer and AndroidPolice report, I believe Android developers are also quickly making contact with each other.

I also know that many developers are already in contact about this with the Electronic Frontier Foundation.

Others have previously suggested that app developers should retain legal advice. Someone also had the idea of a "kickstarter" fund. But the key difference between what others have suggested and what I am telling you here is that I urge you to focus on real solutions, keeping your costs and especially your risk exposure as limited as possible. What I tell you about is the shortest possible path toward a solution.

If many of you jointly hire a lawyer, you'll get some synergy effects. For instance, if a platform maker like Apple or Google proposes coverage, that proposal will in all likelihood be the same for everyone, and in that case a lawyer needs to review it only once. Also, if the next step is a license agreement with Lodsys, there will in all likelihood be just one proposed contract on the table.

If you went to court, some issues would affect all developers alike while others (the specific infringement allegations) may vary. But for a swift and peaceful solution, the only difference between the different developers will be an exhibit to an agreement that defines the scope of the license. Such exhibits may be simple and just list the apps.

Use lawyers wisely

Even if you share the cost among many of you, make sure your money is not wasted on efforts that are ultimately pointless. In particular, if you can't afford litigation with Lodsys, there's no point in having a lawyer evaluate the validity or potential invalidity of the patent, or the infringement allegations (claim charts etc.).

It's not hard to come up with all sorts of doubts about the patent as well as Lodsys's claim charts. But that doesn't really matter unless you can afford to fight.

Even if you split the costs and feel that litigation becomes somewhat more affordable that way, a lawsuit would still be a bad idea due to the risk of damage awards in Lodsys's favor.

You'll have to be very firm if a lawyer tries to talk you into a detailed analysis of Lodsys's claims. Your position should be that you're only interested in legal help with two things: clarifying if Apple and/or Google provide full coverage, and if they don't, a license agreement.

Lawyers may just want to make more money by doing that additional work for you. They usually work for clients who can afford this. If someone says he wants to do anything other than the two priorities I've outlined, ask him what that extra effort costs. Let him give you a specific number. Then compare that number to the cost of paying 0.575% of your app revenue (past as well as until August 5, 2012 -- then their '078 patent will expire and they don't expect you to pay beyond that point according to their website). [Update] I have now seen another contract. Lodsys appears to send out different ones. It imposes royalty payments until six years beyond the expiration of the relevant patents. While that's bad news and inconsistent with Lodsys's website, it's only a gradual difference -- compared to the hugely greater costs and risk that come with litigation, the calculus is materially the same. Also, I have been pointed to an audit clause. Developers would pay audit costs only if they send substantially inaccurate royalty statements to Lodsys (discrepancy of 15%). That's not an unusual rule. I've seen and done license agreements in which a deviation of 3% resulted in audit costs. [/Update] In most cases, just the initial analysis of the patent's validity and of the infringement allegations will already be so costly that in commercial terms it's better to pay Lodsys. Even if the initial analysis doesn't exceed your expected licensing cost, a lawsuit almost certainly will.

So you have to think of this like a businessman. It's perfectly appropriate to tell a lawyer what your course of action is.

License agreement

While I believe that a license agreement is in all likelihood the way to go for the vast majority of app developers who got contacted by Lodsys, you certainly have to understand that if you sign it, you have certain obligations under it. And you won't get out of it if, at a later point, Lodsys's patent turns out to be invalid or not infringed.

If you do a license deal now and Apple and/or Google later settle with Lodsys, you may not get your money back. It would then depend on Apple and/or Google whether they make a refund for app developers part of the deal. They may or may not do that.

That said, litigating with Lodsys is not a good idea unless you can afford it and can sleep well despite the considerable financial risk it entails. So even if you find out later that others didn't have to pay, all that matters is your own situation. If Lodsys pressures you to pay, you have to make a rational and responsible decision based on what you (and your legal advisor) know right here and now.

Together with other app developers you should evaluate Lodsys's license agreement. I've seen it and if that's the one they present to you as well, I'm confident that your lawyer will tell you that there's nothing unusual about its terms.

It's key to ensure that by signing the agreement you don't expose yourself to even greater risks. Also, you have to know that it's not just the license fees you owe. You also have to send periodic royalty statements to Lodsys and they have a right to audit your books if they doubt their accuracy. But based on what they say on their website, all of that would end in early August 2012 anyway. A lawsuit would likely take longer.

Your lawyer will also have to check that the scope of the agreement clearly covers all your needs (i.e., all your apps). That shouldn't be difficult to do.

Focus on solving this particular problem now

I have said all along that paying Lodsys will encourage other trolls to come after you and other app developers. Some will assert patents against many app developers; others against only a small group. But it has already happened -- Lodsys is not the only one and not even the first one -- and it will inevitably happen again at any rate.

Big companies make sure they don't look like a soft target because otherwise they get attacked by even more trolls. However, don't let patent lawyers who usually work for big companies persuade you of confrontational approaches that aren't a responsible strategy for you.

Theoretically, app developers could be put out of business by a large number of trolls, especially if some are more demanding than Lodsys with its 0.575% royalty rate. However, it's very unlikely that you'll get hit by a huge number of trolls in the short term. A rational, commercial approach is to cross the bridge when you get there. For now, the bridge you have to cross is named Lodsys.

You should also suppress -- to the greatest extent possible -- any bad feelings you may have about this. Believe me, I hate what Lodsys is doing. But you have to take care of yourself now.

Look at it this way: your tax money is also used in all sorts of ways you don't like. Critics of the Iraq War also had to co-finance it if they lived in a country that sent soldiers or money. Your government is likely financing all sorts of programs you're ideologically opposed to. But you have to pay anyway.

Lodsys is only a risk for you, not an opportunity to get rid of trolls or of software patents. Eliminate the risk now. Follow the two-step approach. Try to get coverage. If not (which is the most likely outcome), do a license deal. Do all of this with legal help, but don't let any lawyer persuade you of futile efforts. Pick the most direct path to a solution. Share the costs with other app developers. And when you've solved this problem, focus on more important, more interesting, more productive and more edifying things in life.

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