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What to Do If You Receive a Lodsys Letter - by Patrick T. Igoe, Esq.
Tuesday, June 14 2011 @ 07:34 PM EDT

What to Do If You Receive a Lodsys Letter
~ by Patrick T. Igoe, Esq.

If you are a developer and you receive a letter from Lodsys alleging patent infringement, my primary advice, of course, must be, "see an attorney." However, the more you know, the better, faster, and more efficiently an attorney can help you.

Background

On May 13, 2011, developers of iOS apps began reporting receipt of letters from Lodsys, LLC. In the letters, Lodsys CEO Mark Small asserted that the developers were making use of technology covered by patents now owned by Lodsys. We have since learned that The New York Times and customers of ForSee Results and OpinonLab were also receiving Lodsys letters in that timeframe.

According to Lodsys, Dan Abelow, the inventor listed on the asserted patents, began his patenting efforts in 1988. He sold the resulting portfolio to Intellectual Ventures, which assigned them to a holding company, in 2004. Intellectual Ventures licensed them to certain of its customers, then sold off the remaining rights, which ended up with Lodsys, LLC, which is now asserting the patents.

In the case of at least some of the iOS developers, Lodsys set a twenty-one day deadline from the May 11 letter date for developers to respond. Lodsys indicated separately that its licensing terms were "0.575% of US revenue over for the period of the notice letter to the expiration of the patent, plus applicable past usage." Lodsys did not wait the full twenty-one days, instead filing suit in the Eastern District of Texas on May 31.

The stated goal of Lodsys is to "make relatively small amounts per licensee, but to have the large volume of licensees aggregate to be a worthwhile business." Given that business plan, Lodsys can be expected send letters to many more developers. If you receive a letter from Lodsys, my primary advice, of course, must be, "see an attorney." However, the more you know, the better, faster, and more efficiently an attorney can help you.

Read the Patent, Not the Blogs.

It should go without saying, but do not believe everything you read on the Internet, especially about patent cases. It appears, especially with patent coverage, that the desire to post quickly or mold the story to fit an agenda often trump factual analysis.

For instance, early articles and posts about Lodsys repeatedly parroted Lodsys' own broad characterization of the patent claims, using phrases like "a patent on Apple's in-app purchase system." One commentator, based on just an abstract, went even further than Lodsys, saying a patent seemed to cover "any kind of communication over a network."

Even worse, nearly all Lodsys coverage overlooked two very fundamental questions:

  • Do the patent claims cover anything similar to Apple's in-app purchase system?

  • Do the patent claims cover developers' use of such a system?
Those questions can only be answered with consideration of the patent and its claims.

Focus on the Patent Claims.

Infringement of a patent is defined in 35 U.S.C 271. Generally speaking, to be liable for infringement, an accused direct infringer must make, use, sell, or import the patented invention, or perform all of the steps of the patented process. A party may also be liable for inducing infringement or providing a component specifically for use in infringement.

Patents end with claims. Those claims define the bounds of the legal monopoly granted by the patent. The patent claims are used to determine whether or not there is infringement. That makes the patent claims extremely important. (Despite their importance, you will find massive blog posts on some sites giving advice about Lodsys that fail to even mention the patent claims or hint that they have been read.)

Here is a claim that is being asserted against iOS developers by Lodsys, claim 1 of US7,222,078:

1. A system comprising:
  • units of a commodity that can be used by respective users in different locations,

  • a user interface, which is part of each of the units of the commodity, configured to provide a medium for two-way local interaction between one of the users and the corresponding unit of the commodity, and further configured to elicit, from a user, information about the user's perception of the commodity,

  • a memory within each of the units of the commodity capable of storing results of the two-way local interaction, the results including elicited information about user perception of the commodity,

  • a communication element associated with each of the units of the commodity capable of carrying results of the two-way local interaction from each of the units of the commodity to a central location, and

  • a component capable of managing the interactions of the users in different locations and collecting the results of the interactions at the central location.
Regardless of your level of familiarity with patents, "in-app purchase" is not the phrase that will come to mind. You also do not need to be a patent expert to find some more specific problems with Lodsys' infringement assertions.

First, this is a system claim requiring multiple units of a hardware device, but the claim is being asserted against iOS application developers and companies using server-based solutions from other companies, like ForSee Results. In the case of the iOS developers, the "units of a commodity" under any reasonable claim mapping would seem to be the iPhone, iPod Touch, or iPad. The accused developers do not make or sell iOS hardware. Second, the "component capable of managing the interactions" sounds much more like Apple's iTunes Store servers than anything produced by an iOS developer.

Thus, I argued it would be Apple, if anyone, not the iOS developer, who would be making, using, or selling most of such a system. Apple seemed to agree and sent Lodsys a letter saying as much. Apple has since filed a motion to intervene in the case, asserting that Apple itself is licensed to the Lodsys patent and that developers' use of Apple's systems and APIs would be covered under the license if the patented technology was used.

Question the Claim Chart.

The burden is on the patent-holder to show that you are infringing the patent. Many times, the demand letter or "offer of a license" will come with a claim chart. Claim charts are supposed to show how each element of a patent claim is or is not embodied in a product or process. Expect an NPE like Lodsys, however, to point out only the strengths of such a mapping, not the weaknesses.

In every Lodsys claim chart I have seen, Lodsys has cherry-picked a few words from each claim element, put them in a yellow bubble, and pointed to a portion of a screen shot of the targeted company's application or a browser showing the third-party web pages. Patent infringement, however, involves all of the words in every element of the patent claim.

When evaluating the claim chart, focus on the claim language that was left out. Ask why it was left out. The answer may very well be that the language was left out because you do not infringe the claims as they are written.

Don't Listen to the Doomsayers. Consider an Active Defense.

Not only did most commentators fail to ask the important questions about the patent claims, but some even asserted that the answers to those questions did not matter. The basic argument was: The patent system is broken. The developers have no reasonable choice but to pay. It costs too much to fight. A license is cheaper than talking to an attorney.

The success of a Lodsys-like business model, collecting small amounts from a large number of companies based on questionable claims of infringement, requires a low transaction cost for each collection. Targets that roll over without a fight, even when they are not infringing, keep transaction costs low and enable the business model.

However, if transaction costs rise through legitimate defenses or declaratory judgment actions, the business model is strained. Lodsys needs developers to think it is cheaper to settle than it is to fight. Developers should consider, however, whether filing a declaratory judgment action in their own district might have the possibility of creating a less costly and more satisfying resolution. With a declaratory judgment action, it is Lodsys that is faced with a dilemma. For a small or medium sized target, it may be more economically sensible for Lodsys to drop the demand for the small licensing fee even if they somehow feel they could win. It may be especially compelling if major weaknesses are identified in the infringement case, as I believe they could be here.

While the first targeted iOS developers did not follow the declaratory judgment path, larger Lodsys targets now have. ForSee Results, OpinionLab, ESET, and The New York Times have all filed such actions, asserting non-infringement and invalidity of the Lodsys patents. Lodsys now must deal with cases in at least three jurisdictions. Lodsys may try to consolidate the cases, but things have already gotten more expensive.

Finally, Again, Talk to an Attorney.

Developers should not take legal advice from the Internet, and especially not from a non-attorney blog or a software development podcast. Every legal situation is different, which is why it is important to see an attorney. Show the attorney the claim chart you received. Analyze the claim language that was left out of the claim chart. Assess whether you could even be capable of infringing the patent. Then, discuss with your attorney whether to fight or just settle based on cost concerns. Be informed when you make the decision.

For much more detail on these points, see my Lodsys posts at applepatent.com.

_____________
Patrick T. Igoe, Esq. is the founder of Igoe Intellectual Property, LLC in Philadelphia, PA. He is a registered Patent Attorney with over a decade of prior experience in the architecture, design, implementation, and management of large-scale embedded-systems software. Mr. Igoe holds a B.S. in Computer Science, an M.S. in Software Development, and an M.S. in Imaging Science from RIT, an M.B.A. from Duke, and a J.D. from Temple. He is an inventor on ten issued U.S. patents in the digital print, social networking, and digital home entertainment spaces.


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