Apple must pay patent troll $532M, Texas jury rules

Apple must pay a shell company $532.9 million because iTunes infringes upon three patents related to online patents, a jury in East Texas ruled on Tuesday.

The company in question, named Smartflash LLC, is also based in Texas and doesn’t make or do anything besides file patent lawsuits, as an Apple spokesperson pointed out.

“Smartflash makes no products, has no employees, creates no jobs, has no U.S. presence, and is exploiting our patent system to seek royalties for technology Apple invented,” said Apple’s Kristin Huguet to Bloomberg, which reported the verdict, shown here in a screenshot:

Screen Shot 2015-02-25 at 7.38.37 AM

Court records show that Smartflash is also suing [company]Google[/company], Samsung and [company]Amazon[/company] with the same patents.

The patents themselves have a priority date of 1999, and describe a method for “downloading and paying for data such as audio and video data, text, software, games and other types of data.”

The broad-based nature of the patents, which appear to cover basic internet-based payment transactions, could expose a variety of companies, including app makers, to royalty demands. Bloomberg noted that the complaint cited apps like Game Circus LLC’s “Coin Dozer” and “4 Pics 1 Movie” as the basis of infringement.

The huge damage figure against Apple may draw renewed attention to the role played by the District of East Texas in America’s troubled patent system, which Congress is attempting to reform for the third time in five years.

For years, patent trolls like Smartflash have chosen East Texas towns like Tyler, the site of this week’s jury verdict, where local judges and lawyers have built a cottage industry on patent litigation, drawing a stream of visiting lawyers to the town’s hotels and restaurants.

In the Apple case, Smartflash was represented before the jury by John Ward, a former East Texas judge who left the federal bench to join his son T. John “Johnny” Ward Jr., a prominent patent lawyer at a local law firm.

Apple said it will appeal the ruling.

“We refused to pay off this company for the ideas our employees spent years innovating and unfortunately we have been left with no choice but to take this fight up through the court system,” the Apple spokesperson also told Bloomberg.

Here’s the verdict, which shows the jury found Apple’s conduct to be willful — meaning Smartflash can ask the judge to triple the damages:

Smartflash Verdict

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Study shows patent licenses don’t lead to tech transfer

It’s been another bad week for America’s benighted patent system: a Texas jury ordered Samsung to pay a patent troll $16 million for using Bluetooth — even though the “inventor” admitted Bluetooth had been on the market for years before he patented it. The system is a mockery.

Still, its defenders say, the system is working because it facilitates “tech transfer” and the passing of critical knowledge from inventors to companies. But now even that justification is collapsing in light of a new study that suggests patent licensing often does nothing at all to promote research or new products.

The study, titled “Does Patent Licensing Promote Innovation?,” is by Mark Lemley of Stanford and Robin Feldman of UC Hastings, and is based on a survey of 188 people whose job involves negotiating patent licenses at major companies and elsewhere.

The results, to put it mildly, are depressing. The screenshot below relates to patent trolls, and shows how often the survey respondents say that deals with the trolls result in technology transfer (top graph) and in personnel transfer (bottom graph):

Lemley/Feldman

In other words, those who paid patent trolls (which are responsible for the lion’s share of legal activity around patents these days) for a license say they received virtually zero benefit from doing so.

This is significant because the patent troll industry — which consists of a coterie of law firms, investors, judges, insurance fixers and so on — likes to claim that patents induce inventors to share knowledge that they would otherwise keep to themselves. But as the survey suggests, the licenses do no more than force companies to pay a tax for old technology, or for products they’re making anyways. Here is how two respondents, quoted in the survey, expressed it:

“Virtually every license my company has taken has been to ensure freedom of action for products or services we already offer. We have never received any value from a patent license other than to avoid litigation.”

“[Trolls] do not have any of the details worked out and they do not put any capital at risk developing any product, service or market. NPE’s simply exact a tax . . .”

The paper also notes that the same phenomenon, in which licensees pay money for nothing, is also pervasive when universities are the ones wielding the patents. Instead, as with the trolls, university patent deals rarely lead to meaningful tech transfer or innovation. The findings could have important implications at a time when more universities, including MIT and Boston University, are using decades-old patents to demand money from Apple and other big companies.

While the study doesn’t offer specific prescriptions for reform, it does repeatedly raise the fact that many of the (apparently useless) patents at issue are being asserted at the end of their life-cycle. This points to a solution in the form of shorter patent terms or, as Professor Brian Love has suggested, the President could order the Patent Office to change its fee structure so as to discourage trolls from hoarding patents on obsolete technologies.

The paper notes that its sample size is small, and that more study is needed, but the survey could still gain attention in light of the provenance of the authors.

Feldman has been instrumental in revealing the massive trolling operation, involving hundreds of shell companies, carried out by Intellectual Ventures, the standard bearer for the patent trolling business. Lemley, meanwhile, is one the country’s most prominent antitrust and intellectual property scholars, whose work has shown how patents and innovation are not one and the same, and that many of the conventional justifications for awarding patent monopolies are false.

The study also comes at a time when Congress is trying for a third time to pass a bipartisan bill to reform the patent system.

Goodlatte revives Innovation Act to curb patent trolling

Rep. Bob Goodlatte (R-Va) has reintroduced a patent reform bill, known as the Innovation Act, that enjoyed bipartisan support last year, but was killed by Senator Patrick Leahy (D-Vt). The prospects for the bill, which would undercut the business model of so-called patent trolls, are bright since Republicans now control both House of Congress and President Obama has long opposed patent trolling. Once again, though, the real action is expected to take place in the Senate — where influential figures like Chuck Schumer (D-NY) and Jon Cornyn (R-Tx) are likely to again offer their support. On the other side, trial lawyers and the patent trolls are expected to push to water it down, in part by warning that it will threaten “innovation.” (See “5 key questions for patent reform in 2015” to see how this might all play out.

Startup founder offers free legal help to startups hit by patent troll

Chris Hulls got mugged on payday. The founder of Life360 had just raised $50 million to expand his business, a social network app for families, when a patent troll came calling with an invitation to discuss how Hulls could hand over a cut of that money.

According to the patent troll, Life360 was infringing on its “method of establishing a cell phone network of participants with a common interest” — a description that Hulls believes would apply to anyone using location-based social networks.

Despite the seemingly absurd claim, the economic asymmetries of patent litigation would still have led most companies in this situation to pay the plaintiffs to go away. Hulls, however, took a different route and told the troll what he thought of the claim in a missive that opened “Dear piece of shit.”

That letter was sent in May of last year, and since then Law360 has been battling the troll tooth and nail in court, racking up some victories. Now Hulls wants to help other startups facing the same situation by offering a model he hopes will reduce trolling directed at startups in the first place.

On Tuesday, Life360 announced “free legal support” for anyone else facing patent claims from the same troll, an entity called AGIS. Hulls told me by phone that he thinks AGIS was once a viable business, but that it’s now no more than a shell being run by patent lawyers working on contingency.

The nature of legal support will come in the form of access to lawyers and, importantly, the trove of motions, prior art research and other legal documents that Life360 has used to win key rulings on claim construction, and stop AGIS’s early advance.

Hulls hopes that this might be a model for fixing what he sees as a prisoners’ dilemma problem that arises when startups are confronted by a patent troll.

This version of the dilemma is that even though one startup may have a good chance to defeat the patent claims, the founders don’t want to take on the cost and consequences singlehandedly — with the result that the troll wins, imposes a non-disclosure settlement and moves on to other startups.

If the Life360 model catches on, however, the economic model for patent trolling would be much more perilous since the trolls, which typically target dozens of companies, could face the combined strength of all the startups.

It’s unclear if this will work but it does adds to the emergence of creative models the tech industry is using to roll back patent trolls; another one is partnerships between law schools and startups.

Meanwhile, Life360 will continue striking back at AGIS, including through a novel false-marking counterclaim. (“False marking” under patent law lets a company seek damages if a competitor asserts claims based on an outdated or nonexistent patent).

Engineers, tech firms battle patent trolls on standard setting

A big showdown is taking place at the Institute of Electrical and Electronics Engineers, an important standard-setting body, about rules for patents that cover basic building blocks of tech, such as chips or Wi-Fi protocols.

The outcome of the fight is significant since the new rules for so-called “standard essential patents” will affect what consumers ultimately pay for everyday devices like phones and routers.

On Monday, executives from high-profile tech companies, including [company]Apple[/company] and [company]Microsoft[/company], put their names to a public letter that sought to safeguard an upcoming IEEE decision from “smoke and mirrors” tactics by patent assertion entities (commonly known as patent trolls).

“[A] 21-member group of chipmakers, OEMs, former regulators, and law professors have written a letter to the IEEE to express their support for the proposed clarifications, and to urge them to stand strong in face of those misleading arguments,” stated Cisco, one of the group members, in a press release announcing the letter.

To make its case for implementing new IEEE rules on how to pay for standards patents, the letter points to the recent example of a patent troll that has been brandishing a standards essential patent to demand thousands of dollars per Wi-Fi chip from hotels and small businesses.

The new rules are supposed to be up for a vote next week. If they go into effect, the group says they will result in a more streamlined process for determining reasonable payments for patent holders, while also reducing the sort of high-stakes litigation tactics that adds expense and uncertainty for everyone in tech.

The troll industry, meanwhile, is pushing back with blog posts warning that the new rules will mean the end of innovation.

All of these subjects at stake — like standards setting, RAND patents and the IEEE — amount to inside baseball, even for those familiar with the world of the patent bar.

But the outcome will likely have a direct outcome on issues like royalty stacking and patent hold-ups that hit consumers in their pocketbooks, so it’s worth paying attention — if only for the high-profile names at the bottom of the letter. These also include execs from the likes of Verizon, HP, and Samsung, as well as prominent IP and antitrust academics like Mark Lemley.

You can read the letter for yourself below:

Jan. 30 Letter to IEEE Board (Rev)

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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.

Intellectual Ventures founder steps down: “market is tough right now”

Peter Detkin, a lawyer and former Intel executive, is standing down as vice chairman from the notorious patent trolling venture he co-founded alongside three others, including one-time Microsoft exec Nathan Myhrvold, in 2000.

As IAM Magazine reports, Detkin will quit his post at Intellectual Ventures as of January 1, 2015, but will stay involved in the company’s decision making process. Detkin also denied the existence of rifts within IV following a rough year for the company:

However, Detkin stated categorically that his decision was not prompted by a falling out with the other IV founders or any worries about the firm’s future. “I am in it for the long term and have complete faith in our business model – which is needed and promotes investment in innovation. The market is tough right now, but I believe that the pendulum will swing back,” he said.

Detkin’s departure comes after a year in which IV had to lay off a significant portion of its workforce, and after the company struggled to raise money for its newest patent fund, in part because Apple and other one-time investors refused to participate in the fund.

More broadly, Intellectual Ventures and Detkin himself remain unpopular due to the company’s controversial business model, which entails arming thousands of shell companies with old patents in order to demand licensing payments from productive businesses.

While Intellectual Ventures initially earned buzz over the prospect of using patents to crowdsource genius, the company’s tactics quickly came to be perceived by many as a form of legal extortion that harmed innovation. Detkin himself figured prominently in a widely-publicized This American Life documentary called “When Patents Attack” that helped bring the problem of patent trolls to mainstream attention.

In response to a request for details about Detkin’s departure, an Intellectual Ventures spokesperson said the company had nothing to add.

In recent months, Intellectual Ventures has set its sites on emerging tech areas like wearable computers, even as Republicans in Congress vow to revive a patent reform bill that nearly passed in the spring, but was derailed by Sen. Harry Reid (D-Nv) at the behest of patent trolls and trial lawyers.

Notorious patent troll dings Nebraska taxpayers for $750,000

It’s no secret the U.S. patent system is dysfunctional but, still, this one’s a doozy: a Texas patent troll that sent thousands of shakedown letters to small businesses, and has been sanctioned by the federal government, will collect big time courtesy of Nebraska taxpayers — all because state officials tried to shut down their hustle.

This latest twist in the sorry situation can be seen in recent court documents that show Nebraska has agreed to pay $750,000 to resolve claims that the state’s Attorney General violated the patent troll’s civil rights when it ordered the troll to stop sending so-called demand letters.

Those letters demanded that small businesses pay a fee for infringing on patents related to scanning or digital signage, or else face an expensive lawsuit. The patents in question are controlled by lawyers who have made a business of demanding $1,000 per employee from small companies that lack the money or sophistication to push back against highly questionable legal claims.

The antics of these lawyers, who operate through shell companies known as MPHJ and Activision TV, have been the subject of damning journalistic features and led them to be called “bottom feeders” by a U.S. Senator. In response, state governments in Vermont and Nebraska turned to consumer protection laws in an effort to protect their businesses from the shakedown.

But while Vermont was largely successful in driving the trolls from the state, the outcome unfolded differently in Nebraska where a federal judge ruled in September that the Attorney General’s attempt to crack down on the shakedown letters violated the troll’s First Amendment rights. The judge also ruled that Nebraska’s attempt to restrict the activities of law firm Farney Daniels — the same firm under fire from the FTC — violated the rights of the trolls to seek legal counsel of their choosing.

So to sum up: a patent trolling outfit, that relies on shell companies acting as an alter-ego for a notorious law firm, expanded to Nebraska in order to shake down legitimate businesses. When the state tried to protect its own businesses from the shakedown, a judge ordered its taxpayers to pay $750,000 to the patent troll, which can presumably use the money to fund new legal campaigns.

Somehow this is what passes for innovation under America’s current patent system.

Here’s a court filing showing the payment arrangement which Omaha.com reports will cost the Nebraska Attorney General’s office about 10 percent of its annual budget.

Nebraska Troll Settlement

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Patent reform is likely in 2015. Here’s what it could look like

The head of the House Judiciary Committee, Rep. Bob Goodlatte (R-VA), said on Tuesday that a bipartisan bill to fix America’s dysfunctional patent system failed this spring after it ran into the “DC version of quicksand known as the Senate,” but that 2015 will be a different story.