New York Times’ 5-year fight with patent troll may cost millions

Even as belt-tightening has led the New York Times to close sections and shed reporters, the Gray Lady is spending large sums on legal bills to fight a patent troll that claims to own the rights to sending internet links via text message.

The Times has been fighting the case since 2010, arguing that the patent is unenforceable in part because the mobile phone companies that deliver the text messages have already paid the troll, known as Helferich Patent Licensing LLC, to license it.

Even though a federal court agreed with the New York Times and tossed the claims in 2013, the case sprang back to life last month after an appeals court ruled that the patent claims are not “exhausted.” Now the Times must brace for another round of litigation.

The five-year ordeal illustrates once again the dilemma that companies like the New York Times face when confronted by patent trolls: either pay for a dubious license (in this case for sending a text message), or pay even more to go through a legal meat-grinder.

The New York Times and its lawyers would not disclose how much the company is spending on the Helferich case, but this 2013 chart produced by the American Intellectual Property Law Association shows how much these lawsuits typically cost to defend (NPE stands for non-practicing entity, a synonym for patent troll):

Troll litigation costs

Given the length and complexity of the case — docket filings show Helferich has engaged in repeated procedural jousting, and even sought to obtain sanctions against the Times and its lawyers — it’s likely that the legal bills are already in the millions.

This situation, in turn, points to the economic asymmetry that makes patent trolling so effective in the first place.

“One of the business models many NPEs leverage is offering a settlement that will cost less than at trial,” said Michael Strapp, a patent lawyer at Goodwin Proctor, who has written a guide to defending against patent trolls.

Strapp added that, while there are too many variables to predict the cost of a given case, the process of discovery — in which companies have to turn over evidence in the form of documents and testimony — drives much of the cost. Patent trolls, meanwhile, are shielded from most of these costs since they are basically shell companies with little in the way of assets or discoverable documents.

Helferich’s business model has so far been effective enough to extract reported settlements of $750,000 from the likes of Apple and Disney.

As such, by choosing to fight (in 2012 a Times lawyer, Brian Buroker of Gibson Dunn, likened the demand to a “tax on the internet”), the Times may simply be paying more to prolong its legal misery.

The Times case, however, may provide further momentum for patent reform in Congress, where senators like John Cornyn (R-Tx) and Chuck Schumer (D-NY) have long backed measures to rein in patent trolls, in part by reforming the discovery process that makes it easy for trolls to extract settlements.

The case also comes at a time of growing scholarly evidence that patent trolls don’t result in innovation, as their defenders claim, but instead force productive companies to cut operations and R&D.

A lawyer for Helferich, whose operations appear to consist of no more than law offices in Arizona and Chicago, did not immediately return a request for comment.

Patent trolls hurt R&D say scholars in letter to Congress

“Be careful about changing patent law — it could harm innovation,” is a favorite talking point for those who oppose plans to reform to America’s troubled patent system. But what if the opposite is true? What if it’s the status quo, in which patent trolls sock productive companies with abusive lawsuits, that is hurting innovation?

That’s the position of more than 50 law professors and economists, who submitted a letter to Congress, encouraging elected officials to do something about the current mess. In one striking passage, the academics suggest patent trolls (also known as PAE’s) are wreaking havoc on both R&D and venture capital investing:

“An econometric analysis finds that the more R&D a firm performs, the more likely it is to be hit with a patent lawsuit, all else equal. Another study associates lawsuits from PAEs with a decline of billions of dollars of venture capital investment; another found that extensive lawsuits caused small firms to sharply reduce R&D spending; and yet another found that costly lawsuits caused publicly listed defendant firms to substantially curtail R&D spending,” said the letter (the cited studies can be found in the letter below).

Such a finding stands in sharp contrast to the patent troll lobby, which argues that the current system is effective for promoting innovation. That system often involves investors and lawyers teaming up to create shell companies that acquire old patents, and then threatening lawsuits against hundreds or thousands against businesses.

This model is effective because patent trolls exploit an economic asymmetry in which patent lawsuits are relatively cheap to file, but extremely expensive to defend, which prompts companies to simply pay the trolls to go away.

The trolls can also strike it rich by seeking out favorable jurisdictions like East Texas, where juries last month granted a $533 million verdict against Apple, and another for $16 million to a troll who claims to own Bluetooth.

The scholars’ letter calls the wisdom of this system into further question. Its signatories include economists and some of the country’s most prominent intellectual property scholars, including Mark Lemley of Stanford University, Pamela Samuelson of University of California, Berkeley and Robert Cook-Deegan of Duke University.

The letter comes at a time when Congress is attempting patent reform for the third time in five years. The previous two attempts floundered, despite bipartisan support, after trial lawyers and other special interest groups pressured former Senate Majority Leader Harry Reid (D-Nv) to scuttle key bills.

Supporters of the measure are optimistic that the third time will be the charm. A source familiar with the process predicts reform will gain momentum if Sen. Chuck Schumer (D-NY), a long-time patent troll opponent, supports a reform bill that is expected to be introduced this month by Sen. John Cornyn (R-Tx). Rep. Bob Goodlatte (R-Va) already introduced such a bill in the House of Representatives in February. The White House is in favor of patent reform as well.

Here’s the letter from the scholars, which was circulated by Jim Bessen and Mike Meurer of Boston University, and Brian Love of Santa Clara, in order to refute suggestions there is no empirical evidence about flaws in the patent system:

IP Scholars’ Letter to Congress

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As Uber, Lyft, and Sidecar count patents, warning signs ahead

Government regulators and the taxi industry can’t stop Uber — but maybe a patent can. At least that’s the hope of Sidecar, a small rival of Uber whose founder obtained a patent related to mobile ride hailing way in 2002, and who claims he thought up today’s version of the industry way back in the 1990s.

Meanwhile, Uber itself has been busy on the intellectual property front. The company has filed more than a dozen patent applications that seek a monopoly on not just Uber’s hated “surge pricing,” but also on other basic aspects of the car hire business such as dispatching and calculating tolls.

All this raises the question of whether a patent battle, like the epic one between Apple and Google that roiled the smartphone industry, could break out among the car companies.

Meet the patents

At first glance, Sidecar’s patent looks like it could bring Uber’s cars to a screeching halt. Titled “System and method for determining an efficient transportation route,” the patent describes the use of GPS-tracking to plot routes and connect drivers with passenger pick-up locations.

The patent, which confers on Sidecar the right to exclude others from using the invention until 2020, includes a drawing that shows a wireless network linking a car and passenger via satellite:

Sidecar patent

As for Uber, it doesn’t own any patents yet, but a Google search reveals it has filed more than a dozen applications since 2010 for car-related patents that list the company or CEO Travis Kalanick as the inventor. (It’s likely that Uber has filed even more applications since, under Patent Office procedures, an application typically remains secret months for 18 months before it is laid open – meaning any applications filed in 2014 have yet to come to light.)

Uber’s earliest patent application, filed in 2010, is titled “System and method for operating a service to arrange transport amongst parties through use of mobile devices,” while others refer to more specific features of the company’s operations, which are based on consumers using an app to summon nearby drivers.

The later patent applications include the infamous one for surge-pricing or, in Uber’s words, a method for “a user to verify a price change for an on-demand service.” It includes this diagram:

Uber surge pricing screenshot

Other applications include one published in 2013 that describes a system for rating Uber drivers through a star-system, and one that turned up late last year that describes the use of location data points to include tolls in a passenger’s final fare, and that refers to this diagram:

patent for tolls

All of these claims — related to tolls, driver-rating, services to “arrange transport” and so on — are for now just applications. But if the Patent Office grants Uber even some of these patents, the company could be in position to threaten its competitors, including Lyft and Sidecar, with the prospect of injunctions or multimillion dollar jury awards.

A spokesperson for Uber declined to state how the company plans to use any patents that the Patent Office might bestow.

As for Sidecar, the company simply replied “Yes” in response to an question as to whether it would exercise its 2002 patent.

Owning the ideas of Adam Smith

While patents in theory confer powerful 20-year monopolies, the reality can be different, especially when it comes to claiming abstract ideas.

“This application is really seeking to claim the basic idea of pricing and service, which is a concept Adam Smith discussed 200 years ago. The notion that’s a new idea in this day and age is far-fetched,” said Michael Strapp, a patent lawyer with Goodwin Procter, in a recent phone interview.

His comment was addressed specifically to the surge-pricing patent application, but Strapp is also skeptical that Sidecar’s patent or any of Uber’s proposed patents would stand up to scrutiny. His doubts stem in large part from recent rulings from the Supreme Court that have set stricter standards for the Patent Office.

Alice said tying a well-known idea to a computer or smartphone is ineligible,” said Strapp, referring to Alice v. CLS Bank, a seminal decision from last year that called into doubt the validity of thousands of computer-related patents.

This means that Sidecar’s swagger with its 2002 patent could be a bluff, given that Uber or another defendant may have a good chance to invalidate it under the patent law doctrines of “obviousness” or “ineligible subject matter.” And likewise, the Patent Office may point to the stricter standards in order to deny Uber’s applications altogether.

But despite what looks like a weak hand, Sidecar or another ride-booking service could try to start a patent war anyways.

Doing it on the cheap

While patents can invoke images of “eureka” moments and grand invention, in practice they’re typically just another tactic — like talent raids or squeezing suppliers — by which businesses try to get the upper hand on competitors. And while the legal costs of a full-blown patent case can reach tens of millions of dollars, a company can also wield patents on the cheap.

“If Sidecar was going to decide as a business matter that they were going to raise investment or look like a more viable competitor, they could [file a patent lawsuit] and take initial steps without a lot of costs, especially if they find a lawyer willing to operate on contingency,” according to Strapp, the lawyer.

In this context, a Sidecar lawsuit could amount to leverage against Uber, either to encourage acquisition talks, or else to further founder Sunil Paul’s narrative that Sidecar is the real, original ride-booking company. The risk of course is that Uber or Lyft might respond with an aggressive legal approach of their own, perhaps by buying patents to launch a countersuit (Facebook used this approach successfully when Yahoo sued it in 2010 over the rights to social networking).

And in the event Uber, which is known for bare-knuckle business tactics, succeeds in obtaining patents (or buys Sidecar), it has the deep pockets to hire as many lawyers as it thinks would help it to wipe every other car service off the map.

For consumers, this would be a bad thing since the costs of a patent war in the ride-booking industry would be passed on to them. But for now, it’s too soon to fear the worst. Not only are patents in this area still few and far between, changing attitudes to patents among courts and entrepreneurs (remember what Tesla’s Elon Musk did last year) mean that war is less likely in the first place.

Supreme Court strips more power from controversial patent court

The Supreme Court issued a ruling Tuesday that will have a significant impact on the patent system by limiting the ability of the Federal Circuit, a specialized court that hears patent appeals, to review key findings by lower court judges.

The 7-2 patent decision, which came the same day as a high profile ruling by the Supreme Court on prisoner beards, concerns an esoteric dispute between two pharmaceutical companies, Teva and Sandoz, over the right way to describe the molecule weight of a multiple sclerosis drug.

The Justices of the Supreme Court, however, appears to have taken the case in part because it presented another opportunity to check the power of the Federal Circuit, which has been subject to a recent series of 9-0 reversals and which some regard as a “rogue court” responsible for distorting the U.S. patent system.

As for the legal decision on Tuesday, it turned on the question of whether the Federal Circuit judges can review patent claim findings as they please (“de novo”) or only in cases where they has been serious error. Writing for the majority, Justice Stephen Breyer concluded that the Federal Circuit could not second guess how lower courts interpret those claims (a process called “claim construction”) except on rare occasions.

Since claim construction is an important first step in deciding whether a patent has been infringed, this means that federal district judges throughout the country — rather than the Washington, D.C.-based appeals court judges — will have the final say in far more patent cases:

The ruling may also have implications for the tech industry, which has been frustrated by the Federal Circuit’s willingness to disregard the findings of highly respected jurists, such as Justice Richard Posner’s interpretation of “tap” and “swipe,” and Justice Alex Kozinski’s interpretation of navigation and Google Street View.

(Update: As Brian in the comments points out, Google and other tech companies submitted a friend-of-the-court brief in favor of preserving the Federal Circuit’s de novo review power. And on Twitter, some have suggested — here and here — that the ruling could benefit patent holders).

For the Federal Circuit, the ruling is another blow to its prestige and authority following an ethics scandal that last year led to the resignation of its Chief Justice.

Overall, the Supreme Court ruling also comes at a time when all three branches of government appear to be skeptical about the current state of the patent system. This includes Congress, which is expected to propose a law next month to reform abuses by patent trolls.

For those curious about the details of Tuesday’s decision, I’ve pasted a couple key paragraphs below (emphasis mine). The full majority opinion, from which Justices Thomas and Alito dissented, is further down.

Indeed, we referred to claim construction as a practice with “evidentiary underpinnings,” a practice that “falls somewhere between a pristine legal standard and a simple historical fact.” 517 U. S., at 378, 388, 390. We added that sometimes courts may have to make “credibility judgments” about witnesses. Id., at 389. In other words, we recognized that courts may have to resolve subsidiary factual disputes. […]

Finally, practical considerations favor clear error review. We have previously pointed out that clear error review is “particularly” important where patent law is at issue because patent law is “a field where so much depends upon familiarity with specific scientific problems and principles not usually contained in the general storehouse of knowledge and experience.” Graver Tank & Mfg. Co. v. Linde Air Products Co., 339 U. S. 605, 610 (1950). A district court judge who has presided over, and listened to, the entirety of a proceeding has a comparatively greater opportunity to gain that familiarity than an appeals court judge who must read a written transcript or perhaps just those portions to which the parties have referred. Cf. Lighting Ballast, 744 F. 3d, at 1311 (O’Malley, J., dissenting) (Federal Circuit judges “lack the tools that district courts have available to resolve factual disputes fairly and accurately,” such as questioning the experts, examining the invention in operation, or appointing a court-appointed expert)

 

Teva v Sandoz Fed Circuit Smackdown

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Here we go again: 5 key questions for patent reform in 2015

Will the third time be the charm? In the last five years, Congress has twice tried to fix the country’s dysfunctional patent laws only to see those efforts founder at the hands of shrewd lobbying by reform opponents.

Now, lawmakers are at it again, vowing to cut down the patent trolls who have made a mockery of a system that is supposed to promote innovation by instead turning it into a tool for economic extortion. Here’s a short look at the story so far, plus five factors that will determine if this year’s patent reform effort will fare any better than 2011 and 2014 — and a prediction of how it will all turn out.

A short, unhappy history of patent reform

Patents became a major problem in the early 2000s with the rise of so-called patent trolls, which are companies that don’t make tech products or provide services, but instead acquire old intellectual property and threaten expensive lawsuits against those that do.

The trolls (who prefer to call themselves “non-practicing entities,” or NPEs) soon grew rich by exploiting an economic asymmetry in federal law that makes it relatively cheap and risk-free to file a patent lawsuit but ruinously expensive to defend one. As a result, many companies have chosen to simply hold their nose and pay the trolls — those who didn’t often landed in the patent swamps of East Texas, where lawyers and plaintiff-friendly juries have built a cottage industry based around multimillion dollar verdicts. The trolls’ recent scalps in Texas include Google, which faces an $85 million jury award over push notifications on smartphones, and comedian Adam Carolla, who was browbeat into a settlement by a troll that claims to own podcasting.

The growing economic toll of the trolls, which came to target everyone from big tech companies to small coffee shops, eventually led to calls for Congress to pass laws to stop them. Proposed remedies included fee-shifting, which would undercut the economic imbalance that makes trolling so lucrative, and the creation of expedited review procedures to challenge the validity of so-called “business method” patents, which the Patent Office began issuing by the thousands after 1998, and which can grant 20-year monopolies on basic business practices.

While Congress did pass a reform law in 2011 known as the America Invents Act, it had virtually no effect since lobbyists for patent owners had gutted almost every key provision by the time President Obama signed it into law. Indeed, after 2011, the scale of patent trolling actually increased to the point where it became a source of national notoriety through mainstream media exposes, including a landmark radio documentary titled “When Patents Attack.”

As a result, Congress tried again in 2014 and came close to achieving meaningful reform with a proposed law called the Innovation Act, which passed the House of Representatives by a large margin, and which enjoyed bipartisan support from influential Senators like John Cornyn (R-Tx) and Chuck Schumer (D-NY), as well as President Obama. The law foundered last spring, however, when Sen. Patrick Leahy (D-Vt) abruptly cancelled a key vote. Leahy never offered an explanation for his decision to pull the plug, though it’s rumored he did so in order to win favor from trial lawyers and other key Democratic constituencies ahead of last year’s mid-term elections.

Now, patent reform is brewing in Congress for a third time. Last week, an unusually broad coalition of tech companies and main street retailers announced a campaign to “take back our system from trolls,” and the wind appears to be in their sails thanks to support from the Republican-controlled Congress and the White House.

While a proposed bill is expected to arrive next month, skeptics who have seen this movie before may wonder if patent reform will go 0-for-3 — either by failing to pass, or suffering an Innovation Act-style gutting. It’s too soon to know, but here is what will determine the answer:

5 questions that will make or break patent reform in 2015

1. Will there be one reform bill — or more?

Despite bipartisan support for “patent reform,” lawmakers in 2014 offered up a potpourri of different bills that drew supporters in different directions.  This played into the hands of patent trolls, who were able to claim the mantle of “reform” for themselves by supporting the weaker legislation, which offered only cosmetic changes and none of the measures (like fee-shifting or discovery reform) that would threaten their operations.

2. Will tech and retail stick together?

On previous occasions, opponents have been able to portray patent reform as a pet project of Silicon Valley, and suggest reformers were no more than slick tech villains looking to ride roughshod over inventors.

Now, as patent trolls present a growing burden to the likes of restaurants and retailers, companies like Macy’s and JC Penney are standing side by side with big tech names like Google, Adobe and Oracle. According to a person close to the campaign, the tech and retail companies have agreed to an all-or-nothing approach, and committed to seven core reform principles as a condition of membership. But it remains to be seen if this will hold up once the lobbying dollars start flying around.

3. Will anyone fall for the “good trolls” versus “bad trolls” distinction?

In recent months, the strategy of big players in the patent troll space has become clear: head off reform by drawing a distinction between themselves and the small-time shakedown players who have been targeting mom-and-pop coffee shops. In the case of Intellectual Ventures, which is the largest and most famous NPE/patent troll, the company has been scrambling to create associations with startups and charities in an effort to downplay its core business.

Likewise, in an interview late last year, the CEO of Finjan Holdings — which looks, walks and talks like a patent troll — assured me that his company was not a patent troll, but that its reputation has been harmed as a result of people associating it with “bad actors.” Whether lawmakers will appreciate this distinction, or if they will continue to swallow the trolls’ “be careful not to harm innovation” shtick, is an open question.

4. Will Apple step up?

While tech companies like Google and Rackspace have been at the forefront of patent reform, Apple has been less vocal — even as it has groused about being the very favorite target of trolls. So far its name is not among the other tech giants, including Facebook and Amazon, who are anchoring the new “United for Patent Reform” coalition.

If Apple goes all-in pushing for reform, the iPhone maker’s powerful reputation among inventors and consumers could persuade any wavering lawmakers to drive a fatal stake into the patent trolls.

5. Will pharma stay on the sidelines?

In the past, the pharmaceutical industry has been one of the most powerful opponents to patent reform on the grounds that it could weaken incentives to develop new drugs. This has been a sticking point for reform because the justification for patents in pharma, where innovation is slow and incredibly expensive, is much different than in tech where innovations are often obsolete in a year or two.

This time, however, the source familiar with the patent coalition said that the pharma industry may stay out of the legislative debate — so long as the drug companies feel comfortable the measures are aimed at patent trolls and not pills.

Is reform for real? Handicapping the 2015 outcome

Patent reform proponents are optimistic 2015 is their year. Of course, this was also the case last year when the Innovation Act was one of the few pieces of bipartisan legislation that people predicted could pass in a dysfunctional Congress.

The difference this time, however, is it will be harder other Senate Democrats to throw wrenches in the process.

But the best indication that this really could be the year for genuine patent reform may come from Erich Spangengberg, a notorious patent troll, who boasted to the New York Times in 2013 about how he likes to “go thug” on those who resist his licensing demands.

Early this year, Spangenberg blogged that 2015 would be the worst year yet for his much-maligned industry. Many companies and consumers, who pay higher prices due the trolls, no doubt hope he’s right. My own prediction is that Congress will pass some sort of reform, but that real reform — which must include fee-shifting and the end of discovery abuse — is still a crapshoot.