Blog Post

Lodsys Speaks Out About iOS In-App Purchase Threats

Lodsys, the company behind the in-app purchase legal threats that went out late last week, has created a blog in response to the apparently large volume of feedback it received regarding the action. Lodsys was widely accused of patent trolling when it issued the threats, which asked app developers to pay licensing fees directly to Lodsys for use of Apple’s (s aapl) in-app purchasing system.

Lodsys is a patent holding firm, which means it does nothing with the patents it owns the rights to besides sit on them and charge licensing fees to companies looking to use its tech. The company, run by Mark Small, purchased its patents from inventor Dan Abelow in 2004. It owns U.S. patent No. 7222078, the broad definition of which is as follows:

In an exemplary system, information is received at a central location from different units of a commodity. The information is generated from two-way local interactions between users of the different units of the commodity and a user interface in the different units of the commodity. The interactions elicit from respective users their perceptions of the commodity.

The definition of this patent has to be fairly broadly applied to arrive at the conclusion that it covers in-app purchasing, but according to Lodsys, Apple, Google (s goog) and Microsoft (s msft) have all taken licenses from Lodsys for use of the patent. If Apple is already licensed, then why is Lodys going after iOS developers? Because, according to the holding company, Apple’s use rights don’t cover those of individual devs:

The economic gains provided by the Lodsys inventions (increase in revenue through additional sales, or decrease in costs to service the customer) are being enjoyed by the business that provides the product or service that interacts with the user.  Since Lodsys patent rights are of value to that overall solution, it is only fair to get paid by the party that is accountable for the entire solution and which captures the value (rather than a technology supplier or a retailer).

In other words, for every app maker our there that gets a payday on in-app purchases, Lodsys wants a payday too, because the software developer is profiting from Lodsys’ patented technology.

Lodsys also expanded on the details of the licenses its seeking from developers. The company wants 0.575 percent of revenue from U.S. sales, due from receipt of the notice letter until the expiration of the patent. That means that on $1 million dollars worth of sales, a developer would have to pay out $5,750.

Throughout the course of reading the Q&A blog posts, it becomes clear that Lodsys is a well-versed and well-practiced legal negotiator which knows the U.S. patent system inside and out. It no doubt managed to secure licenses from Apple, Google and Microsoft by being persistent, but also by knowing not to ask for so much that the companies in question would bother risking becoming involved in expensive legal action. But this is a different matter, and for all its well-reasoned arguments, Lodsys will still have a very hard time convincing anyone in the general public that it is anything but a patent troll. Of course, the legal system doesn’t care what the general public thinks, and Lodsys is pretty confident it is in the right, so short of a lawsuit, developers may not have much choice.

Apple provides developers with access to the in-app purchasing API as a part of its iOS software development kit, and ostensibly, developers pay for that access by virtue of the 30 percent they hand over for all revenue gathered through App Store-based sales. Apple has yet to make any official statement regarding this move by Lodsys, but even if Apple itself has been willing to agree to the patent holder’s terms and play nice until now, there’s no way it will allow Lodsys to set a precedent by going after iOS developers. It would open the door for other patent holders that have existing licenses with Apple to do the same, and it would ultimately undermine Apple’s ability to sell iOS as an attractive development platform.

Apple hasn’t said anything because it wants this to go away quietly, and it’s no doubt working behind the scenes to make that happen. But this is a matter ultimately worth its legal attention, and Apple will most likely be more than willing to bring that to bear if pressed.

13 Responses to “Lodsys Speaks Out About iOS In-App Purchase Threats”

  1. This is indeed a troubling trend — the fact that MacroSolve and Lodsys are filing patent enforcement actions against one-person app development shops, rather than against the “deep-pockets” targets like Google and Apple, does not bode well for the future of innovation. Such lawsuits will inevitably discourage some small-scale developers from continuing their work, which will in turn deprive consumers of technological advances. What a shame.

  2. Having a grasp of what passes for law and technology in the 21st Century qualifies some folks as educated thieves, layabouts and parasites. That’s without even getting to their lawyers.

  3. I’m not sure why everyone is expecting Apple to ride in on some white horse and put themselves at legal risk in order to save a few developers a few dollars. Newsflash: that’s not going to happen. Apple’s shown time and again it cares about customers first, itself second, and developers last. Was Apple caring about developers when they implemented the new In-App-Purchase (IAP) rules that required all content (including books) to be available via IAP? Nope, thinking of themselves the customer. Was Apple caring about developers when they killed off entire businesses by eliminating offer walls? Nope, themselves and the customer. If you’ve been sued, there’s no hero coming to save you. You’re on your own.

  4. It seems to me the Lodsys strategy here is particularly diabolical. They’ve effectively seeded potential for a large, hurried payoff, rather then starting a fight outright.

    1.) Set the trap by filing small, strategic lawsuits against the big boys, anticipating that complacency will lead them to settle thereby legitimizing the claims which will be made in step two.

    2.) Create a developer backlash and media attention by filing additional strategic lawsuits against app developers.

    3.) Reap a large settlement from the big boys to make the problem that they previously legitimized disappear.

  5. For those who’re wondering why this mess developed, the short answer is that, in one of its less-than-bright moments, Congress decided to fund the USPTO with monies charged to patent applications. Within the USPTO bureaucracy, that created an incentive to increase the number of applications by broadening the terms under which patents could be issued, as well as keeping the award rate ridiculously high. The result is a lot of patents that wouldn’t have passed muster a few decades ago. Once that process began, patent lawyers, whatever side they might take in disputes, had an economic incentive to make patent laws as broad and messy as possible. The more problems, the more billable hours.

    Business method patents (like this one) used to be verboten, under the reasonable assumption that no public benefit would result from them, that those who discover them gain enough advantage by being the first to market with them. Also, those applying for a patents used to have to present a working model. Now, the last thing these patent trolls want to do is go to the actual bother and expense of creating something that works. They’d rather lurk under the bridge waiting for others to develop ideas and do the actual work, and then hit them with the treat of a lawsuit.

    Keep in mind that one result of our now-flawed patent law is that innovation is driven offshore. It’s much harder to go after a product that is created, manufactured and marketed overseas than it is one where all that takes place here. At best, a patent troll can only pounce, at great legal expense, on a product as it is brought into this country. Any damages the troll gets from that are likely to be small because, in the end, it has no product to sell. That’s one of several reasons why our former manufacturing Midwest is now a Rust Belt and our economy is mired in a long recession. If you have a good idea. You don’t want to make it here. You want to make it in China.

    In general, the health of any society is linked to how effectively intelligent thinking is directed to useful purposes. In healthy societies, it’s applied to creating new products and societies that create jobs and improve lives. In unhealthy societies, it’s applied to contriving lucrative ways to exploit innovation and risk-taking, in this case by trolls such as Lodsys. These are people who lurk under bridges waiting for a chance to tax the ideas and hard work of others.

    The simple solution to this fuss? Developers and consumers should steer clear of in-app purchasing until all the dust settles. That’d be a good way to punish both Lodsys and Apple. Lodsys for being a troll and Apple for covertly paying the toll itself and not warning us about them.

    Doing things that way is also sensible. I buy apps for my iPhone with iTunes and ebooks for my Kindle with Safari, both running on my iMac. It’s actually better, since the UI is easier, the screen is bigger and I can use Google to research before I buy. Once I’ve bought, Apple and Amazon take care of the downloads. In the case of my Kindle, all that’s required is that my Kindle be on and connected to WiFi.

    Most important of all, I’m establishing a habit that means I’ll never need to pay tolls to these trolls.

    • But Mike,

      How about the “little guy” that creates something and patents? The little guy needs protection from the “big guys” because he doesn’t have an endless supply of money like them. If he creates a great tech related invention, and doesn’t patent it, Facebook, Apple, Microsoft – you name it – will just immediately copy it. Look at how GroupOn is being copied by EVERYONE. Do you think that is fair? GroupOn innovated, yet now everyone is copying them, essentially stealing money right out of their pockets.

      • I won’t get into whether groupon is an invention or not (it’s an application, not an invention), but why should we protect the extreme minority at the expense of the majority? The rules that would protect the “little guy” might help a handful of them, but at the same time allow lots of “big guys” to totally exploit the flaws in the system. Which they do now. Getting a patent for something that was never built or tested, in the hopes that someone else will do so in the future is not rewarding innovation.

        You’re defending a system that is analogous to what content owners (studios, music companies) would like to do – tax technology products to compensate them for their losses due to piracy. Yes, it’s unfair that some people use computers and the internet to steal songs and movies, but should every user of the internet be forced to compensate the victims? Should all of society be forced to live with a patent system that rewards fraud, just to protect a small handful of true inventors?

  6. It’s bad enough patents are granted to “inventors” for things they never produce or even demonstrate, but giving one for what’s described in the first quoted paragraph is absurd. It’s as if the patent examiner had no idea what the applicant was talking about, so they approved it because they thought it must be something useful, and not obvious to anyone skilled in the art.

    The patent system is a cruel joke, and just a vehicle for people to game the system to extract rents. Anyone who says it provides incentive for innovation is lying or delusional.