As of October 8, 2012, there are greater than 150 companies which obtained the rights to use the Lodsys Group patent portfolio, and more than 4 out of 5 of these companies have entered into licenses outside of the litigation process. These companies have realized significant savings by taking advantage of lower licensing rates.

The “significant savings” of paying for a license over continuing to pay the costs of an extensive legal battle is, as my colleague Jeff Roberts has put it, an offer many of these small companies can’t refuse. The licensing fee is rumored to be around 2.5 percent of revenues.

Apple stepped into the dispute last year, claiming that its own licensing of the technology from Lodsys protects its developers from having to do the same. Lodsys disagrees with that position and says that it will continue to move forward even as Apple has joined the fight.

In a separate blog post Monday, Lodsys wrote that it has ”every confidence that all claims will ultimately be confirmed through this lengthy process.”

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In a complaint filed in Wisconsin, Creative Mobile is asking a federal court to declare that it’s not infringing and that the patents in question are not valid. The Estonia-based company also claims that it is protected by Lodsys licenses acquired by Apple and Google.

While the practice known as patent trolling (in which shell companies formed by lawyers and investors acquire patents and sue real companies) has become increasingly pervasive, Lodsys has gained a special infamy. It has sued or threatened to sue not only large companies like Adidas and the New York Times but also hundreds of one- or two-person app makers.

In the case of Creative Mobile, Lodsys is demanding it pay for a license whose price is based on 0.575 percent of all sales between 2007 and 2012.

While a handful of small companies have attempted to stand up to Lodsys in the past, they have typically withered quickly under the legal cost. More recently, major companies like Oracle, Apple and Google have gone to court in attempts to smash the troll and protect app makers.

The identity of Lodsys itself remains a mystery. The Guardian has accused it of being a front for Intellectual Ventures (IV), the giant patent trolling venture run by former Microsoft executive Nathan Myhrvold. The allegation appears credible given that IV sold patents to Lodsys in the first place and considering that Lodsys’s lawyers are based in IV’s home town of Seattle.

But in an email message, Intellectual Ventures on Wednesday stated that it had no ownership interest in Lodsys.

A copy of Creative Mobile’s complaint that describes Lodsys’s threats against many other companies, including Wolfram Alpha and the New York Times, can be found below.

In a final bit of irony, Creative Mobile is also being accused of stealing its hit game Drag Racer from a company that may have actually made the game. In a report last month, Toronto’s XMG Studio claimed that Creative Mobile is an opportunist that looks for other games to take off and then simply copies them, polishes them and markets them themselves.

Creative Mobile v Lodsys

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This time, though, Larry Ellison’s company gets to be the good guy. In a lawsuit filed in Wisconsin federal court, Oracle is asking the court to invalidate four patents belonging to a patent troll that has been terrorizing corporations and small software developers across the country.

The troll in question, Lodsys, is a Texas-based shell company that gained infamy last year by suing app makers who included a common “in-app” purchase feature in their Apple products. The company’s business model is based  in part on using threatening letters to force app makers to hand over part of their revenues —  money which then fuels new legal campaigns.

Oracle has decided to weigh in because Lodsys “has repeatedly threatened numerous Oracle customers” such as Walgreens over the use of a web-chat feature Lodsys claims to own. Oracle is asking the court to declare that the four patents Lodsys is using to bully its customers are not new inventions. The patents, including US Patent  5,999,908 (“customer based design module”), came to prominence last year when Lodsys used them to sue Best Buy, Adidas and others.

Oracle’s lawsuit also takes a swipe at Lodsys’s status as a patent troll — a shell firm that doesn’t make anything but instead collects patents to sue companies that do:

Oracle is not the only heavyweight to challenge Lodsys. A court recently gave Apple permission to intervene on behalf of its developers in a Texas case.

The patents themselves were obtained by Dan Abelow, a self-styled inventor who attended several business schools but appears to have no training in science or engineering. The front man for Lodsys is a Chicago man named Mark Small but the real owners of the shell company have yet to reveal themselves. Lodsys is believed to be tied to Intellectual Ventures, a Seattle firm that aspires to make patent trolling a multi-billion dollar industry.

Here’s the Oracle suit:

Oracle v Lodsys
(Image by Tereshchenko Dmitry via Shutterstock)

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Lodsys, a shell company that doesn’t do anything but file lawsuits, appears undeterred by the pressure from Apple or by popular contempt. This month alone, it used the same patents to sue dozens more companies, including names like Dell, Rosetta Stone and Overstock.com. Last month, a federal court finally gave Apple permission to intervene in one of the lawsuits and argue that its own license should protect the app developers.

But it appears that Lodsys is continuing its shakedown of small app makers by offering them a “licensing solution” they can’t refuse in return for a share of their royalties. The troll’s latest antics came to light this week after a brave Seattle app maker, A Thinking Ape, refused the shakedown and instead asked a federal court to declare that apps like “In Your Dorm” don’t infringe the patents.

The complaint by A Thinking Ape lists Lodsys’ campaign of lawsuits against everyone from the New York Times to Wolfram Alpha and sums up the nature of the racket:

Defendant does not create products; it solely engages in aggressive litigation tactics to compel licenses of their AssertedPatents from companies that do produce products.

A handful of other developers have tried to stand up to Lodsys in the past but most capitulated soon after and agreed to pay the troll a tax (rumored to be 2.5 percent of revenues).

The Soul of a Patent Troll

Patent trolling took off after the U.S. Patent and Trademark Office began issuing a flood of questionable “business method” patents related to things like software and, believe it or not, a crustless peanut butter and jelly sandwich. In 2006, lawyers used such a patent to threaten Research in Motion with an injunction against the BlackBerry and extract a $612 million payout.

Lodsys appears to have perfected the art. The troll has been sending identical threat letters (you can see one below) that extol the virtues of patent developer Daniel Abelow. The letter explains that “Dan” has been to several Ivy League schools and “an independent consultant on presenting information via the internet.”

So who is this latter-day Ben Franklin? Here’s a shot from his homepage:

Dan repeatedly describes himself as an “inventor” but it doesn’t appear he has any training in science or engineering. An average person would be as likely to call Dan an inventor as they would call former Yahoo CEO Scott Thompson a computer scientist.

But given the state of the patent system, it appears we’re stuck with the likes of Dan for a while. Or at least until courageous app developers or Apple can flush Lodsys and its shadowy backers from the patent system once and for all.

Here’s a typical Lodsys letter. Scroll down to see Dan’s marvelous inventions in action:

Lodsys Letter Copy

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The University of Chicago, through its Nobel-prize winning economists, is a champion of property rights and free market policies. Now, in the field of technology, Chicago’s ideas are also being used to justify harmful and expensive lawsuits.

Patent lawsuits made headlines yet again this month after Yahoo (NSDQ: YHOO) used ten questionable patents to claim that it, not Facebook, invented the social network. There have also been a rash of new suits by patent trolls — shell companies that don’t make anything but use patents to sue companies that do.

Trolls (known more politely as “non-practicing entities”) have been around for years but stepped into high gear in 2012. In the last two months, for instance, troll shell companies have unleashed lawsuits that claim monopolies on everything from emoticons to virtual goods in video games.

The problem is becoming worse. Top patent lawyers are leaving their firms to partner with hedge funds on new trolling ventures and super-troll Intellectual Ventures (reported to own more than 60,000 patents) is now suing with a vengeance. Meanwhile, mystery troll Lodsys is still demanding small app developers hand over two percent of revenues or else be taken to court over a common ‘in-app purchase’ feature.

So where does Chicago fit into all this? The answer is that it’s behind the “liquid market” theory of patents that gives a gloss of legitimacy to what many people would call extortion.

Chicago firms like Ocean Tomo, which runs intellectual property auctions, have helped popularize the idea of treating patents like widgets to be bought and sold. Lodsys front man, Mark Small, is also from Chicago. In their view, the patent status quo is working well.

The liquid market theory has a more formidable defender in Richard Epstein, a renowned University of Chicago law professor and Financial Times contributor. In an email exchange, he described trolls as “an overrated issue” and added, “So long as there is quick closure, a patent is a wasting asset, and marketing beats lurking every time.”

This view — that treats patents as any other form property to be bought and sold — holds up in theory. But in practice, it’s dangerous because the property in question is not a widget but an idea that the owner can control and punish others for using. And since a patent is effectively a monopoly, the royalty demands seem less like a free market exchange than an old fashioned tax.

If Congress imposed a two percent tax “invention tax”, the politicians responsible would be voted out for a generation. But if a company like Lodsys does the same thing, it can claim to be promoting a free market.

The larger problem here is that a market for shaky patents is not a good idea in the first place. Do we think a complicated IRS tax is justified just because it creates a market for accounting services?

And if anyone doubts the patents are shaky, read what a former Yahoo engineer or a leading venture capitalist has to say about Yahoo’s so-called inventions. And these are just a small sample of the thousands of suspect patents fueling lawsuits and license demands.

The patent system is obviously dysfunctional and needs to be fixed but the role of patents in American mythology makes it hard to do so. To most people, the word “patent” still conjures images of Thomas Edison or Abraham Lincoln (US Patent 6469) — even though most of today’s patents are the product of lawyers and MBA’s using obtuse language to pressure a swamped and overworked patent office. The courts, meanwhile, are still in a state of confusion about what can and can’t be patented.

As for Silicon Valley developers, most know intuitively that innovation comes from sharing and collaboration and not from a single genius shrieking Eureka! For them and many academics, patent monopolies (especially those for software and “business methods”) are not a spur to research but a barrier.

These real inventors of Silicon Valley have champions of their own such as Mark Lemley, a Stanford professor and the country’s leading authority on patent law.

In a new paper called “The Myth of the Solo Inventor,” Lemley provides evidence that many famous inventions were produced by different people at the same time, and that patent owners typically sue independent inventors and not copycats. His work raises important questions about why patents are awarded in the first place.

Meanwhile, new economic research
suggests that free licensing is more efficient than patent monopolies to achieve technology breakthroughs and create large markets for new products.

For now, though, this research is going unheeded as Intellectual Ventures and others continue to spin Chicago-style theories to justify their troll taxes.

If Silicon Valley is to escape a circular firing squad of patent litigation, it must push back with its own homegrown patent theories. The recent SOPA victory taught engineers to flex their political muscles. Now, it’s time for them to flex their policy ones and restore sanity to the patent system.

(A final note: debates over innovation are, of course, taking place in many forms across the country. In this article, “Chicago” and “Silicon Valley” are simply used as shorthand for two very different visions of America’s patent system — one based on market theories and one based on how innovation actually works — and to point out that Chicago has gained the upper hand.)

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GroupCamp is a Paris-based firm that provides web-based software to small business clients. In September, the company received a notorious “Lodsys letter” informing the owners they were infringing four patents. Such letters have been sent to dozens or hundreds of companies. The letters typically boast about “inventor” Dan Abelow‘s Ivy League education (he took business classes) and ask the recipient to purchase a license for the patents. You can see a sample Lodsys letter embedded below (apologies for the blurry text).

The Lodsys phenomenon gained widespread media attention after the company began to sue Android and Apple (NSDQ: AAPL) app developers over an in-app purchasing method. Some developers have folded to the demand while others are hanging on in the hope that Google (NSDQ: GOOG) and Apple will rescue them. The latter has a license for the patents and has filed to intervene in a Texas court case on behalf of the developers. Meanwhile, Google has asked the USPTO to re-examine the patents for invalidity.

While the tech titans prepare to weigh in, small companies like GroupCamp are left to wait while a lawsuit hangs over their head. The primary patent it is accused of infringing relates to a method of exchanging information about a commodity and is the same one that Lodsys has used to sue the New York Times Company and Hewlett-Packard.

“We’re not experts and we can’t engage in a legal battle with Lodsys,” said GroupCamp co-founder Dickel Sooriah, who said he was surprised that Lodsys had branched out from suing app developers to cloud-based companies like his. Even though his company his based in France, it could face liability in the US for any American-related transactions. This threat led a number of London app developers to yank their products out of Apple’s U.S. app store this summer.

Sooriah and his partner can’t afford to pay for a full-blown litigation campaign so they are trying something else. They have opened an online resource center called “Joining forces against Lodsys patents” where defendants can share papers and compare strategies. It already contains documents and humorous summaries of their encounters so far with the American legal system. GroupCamp is also hoping the forum will be a place where people will post so-called “prior art” to challenge the patents (a patent will fail for lack of novelty if an earlier document shows the same invention).

But what Sooriah is really hoping for is assistance from a US patent attorney who can contribute advice about navigating the litigation process. While Lodsys has targeted app developers around the world, Sooriah believes this is the first time that it has reached deep into Europe to target a non-app based company.

Patent trolls have already given rise to various push-back efforts in the United States, including an app legal defense fund led by a Texas intellectual property and as a patent defense “boot camp” hosted by the Electronic Frontier Foundation.

Lodsys Letter Sample
var docstoc_docid=”101634998″;var docstoc_title=”Lodsys Letter Sample”;var docstoc_urltitle=”Lodsys Letter Sample”;

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Michael Karr, the maker of a popular (and rather dirty) app called 69 Positions, says he agreed to license a patent related to the commonplace process that lets people make purchases within an app. Karr said he cannot discuss the terms of the license but the patent owner’s demand letters typically ask for 2.5% of revenues.

The patent is owned by Lodsys, a shell company that does not make or produce anything but instead makes a business of obtaining old patents and filing lawsuits. Lodsys became a lightning rod for critics after it filed a high-profile lawsuit against app makers, which are typically small companies of one or two people without the resources to fight a patent case.

The litigation also brought calls for Apple and Google (NSDQ: GOOG) (whose Android developers have also been targeted by Lodsys) to provide legal support for their developers. Apple says it has a license for the patent that should extend to its developers and filed to intervene in the case. Google has started a separate proceeding to try and invalidate the patent. But the process has been slow moving, leaving an unwelcome uncertainty hanging over the developers

“As an independent developer in my sophomore year at college, I simply didn’t have the funds to continue on with the lawsuit. I had hopes that Apple would have been able to intervene by now and potentially even offer some sort of blanket coverage for the small developers, but this has not been the case. I believe I made the best possible decision I could bearing the circumstances,” wrote Karr, in an email to paidContent.

A court filing shows that Lodsys and Karr have agreed to dismiss the case. Lodsys’ lawyer, Chris Huck, said he could not comment on the case.

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The patent application, which appears to have been first reported by Erik Sherman at BNET, pertains to in-app purchasing technologies, covering such details as the architecture for how they are implemented; how the system would appear to a user; and where such a service could be used.

The patent application dates from April 26, 2010, which means that Apple would have filed it nearly a year after first introducing the in-app payment service with iOS 3 in June 2009. Lodsys’ patent for in-app purchasing was granted in 2009. Apple licenses Lodsys’ technology and its position has been that this license should also cover those third-party developers who create content for its service, a view it outlined in a letter to Lodsys, which mocoNews obtained.

Some have conjectured that if Apple is granted its patent, it could use it in legal actions against Lodsys: “The idea is, in general, very similar to the Lodsys patent, however, it is much more specific. If Apple was granted the rights to the patent, both sides could easily challenge each other’s patents,” writes Wolfgang Gruener in Tom’s Guide. But others point out that this would be complicated, if not impossible. Because Lodsys’ patent predates Apple’s application, “Apple’s patent can’t be used to invalidate Lodsys’s patent,” Florian Mueller noted to me.

Apple applied to intervene in Lodsys’ developer suit back in June and is still waiting to hear back about this.

The case against the developers earlier this month got a new presiding judge, David Folsom, when Judge T. John Ward stepped down from the bench to join a private law frim. The U.S. district of East Texas, where the case has been filed, is known as a hotbed for patent disputes.

To iOS, and beyond? Although this is a patent application from Apple specifically, what’s interesting is that Apple could potentially use it to exercise its own patent rights against other platforms. The application specifies iPhones but it also clearly says that all of the described payment functionality could be used for a number of other devices. From the patent application:

“…the device…is a handheld computing device, for example, a smart phone, e.g., an IPHONE, by Apple Inc. of Cupertino, Calif. However, the device…can be any computing device such as a personal computer, laptop, or personal media-playing device; even a household appliance having a processor and a display can be used with the present technology.”

And what about the developers? One of the app makers who had received initial contact from Lodsys demanding royalty payments over an iPhone app, but has not actually be sued, tell us that for now its a quiet kind of business-as-usual:

“I think most of us who weren’t sued are just keeping our heads down. We’re still distributing our software, but I’m trying not to be too visible on the patent front. I’m just hoping the case gets resolved quickly one way or another so we can move on. If Apple isn’t allowed to join the suit, I think there isn’t a lot of hope for the rest of us.”

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Judge Ward was instrumental in making the District of Eastern Texas a favorite forum for patent plaintiffs by changing procedural rules to make the district a “rocket docket. According to American Lawyer, these changes and a reputation for plaintiff-friendly juries made the small towns of East Texas a national hotspot for patent litigation.

The current state of that litigation is reflected by the app developer case, which was launched by Lodsys Inc, a shell company commonly known as a patent troll. Lodsys has no real employees but created a business by obtaining a handful of patents and then filing lawsuits against the makers of Angry Birds and other developers.

Many of the developers do not have the resources for a Texas patent fight and are pleading with Apple and Google to help them fight the troll. Apple has filed to intervene in the case, arguing that it has a license for the patents that extend to the developers. Google has initiated a separate proceeding to invalidate the patents.

For the last two months, the case has been confined to procedural matters and the terms of Apple’s license are sealed so it is for now difficult to predict the outcome of the case.

A court filing on Wednesday by Chief Judge David Folsom confirmed that all of Judge Ward’s case were transferred to him this week. Judge Folsom has been on the East Texas bench for 16 years and says he will retire in March.

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On Wednesday, the Globe and Mail revealed that a Canadian app developer received a notorious Lodsys letter. These letters offer a “licensing opportunity” that allow victims to pay big bucks to Lodsys in return for not being hit with spurious patent litigation.

The target of the letter is Rotten Ogre, a small app shop that sells a game called Lonely Turret that lets users “protect your base from attacking enemies” (it is not clear if these enemies include lawyers..)

The patents in question are reportedly related to a button that allows users to make in-app purchases. This is consistent with the wave of lawsuits that Lodsys has launched against app developers for Apple (NSDQ: AAPL) and Google’s Android.

In those lawsuits, developers have called on Google (NSDQ: GOOG) and Apple to come to their rescue — in no small part because the Lodsys patents relates to technology that the companies themselves provided to the app makers. Apple is shielded from direct litigation because it licensed the patents in question from their previous owner.

Apple this summer filed to intervene in the Lodsys litigation, saying its patent license should also cover its developers. Meanwhile, Google has formally asked the US Patent Office to re-examine the patents in the hopes they will be invalidated.

Research In Motion is almost certain to be called on to enter the fray as skittish developers seek reassurance they will not be sued for making BlackBerry apps. RIM (NSDQ: RIMM) did not respond to repeated requests for comment.

RIM already has bitter firsthand experience with patent trolls, known more politely as “non-practicing entities” or NPEs.

In 2006, RIM helped put patent trolls on the map when it reached a dramatic last-minute settlement for $612 million with NTP, a shell company owned by a lawyer who had obtained the patents of a dead inventor. The settlement came as NTP was on the verge of obtaining an injunction that would have forced RIM to shut down its BlackBerries worldwide.

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