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IP, Patent, Risk Mangement

Patent Infringement Claims Against iOS Developers — Top 5 Things To Remember

After an interesting bombshell was dropped on iOS developers this past Friday, patent owner Lodsys, LLC has come forward with answers to a number of questions circulating about its licensing program.  But there are some key things to keep in mind if you find yourself dealing with, or even reading/writing about this development.

First, in case you missed it, from my previous post: Patent Threats Lobbed Against App Developers, But Apple Is The Target,

A company called Lodsys has apparently sent threatening letters to a number of independent software developers. The common thread was use of Apple’s in-app purchase API.

The strategy strikes me as a good way to burn a lot of energy trying to draw blood from a turnip, but while it may seem unwise at first glance, anyone sending out demand letters usually has a purpose.

Software patent activist and watchdog Florian Mueller explained:

Apparently some or all of the app developers who were targeted have contacted Apple to discuss next steps with them. Obviously, this is a nightmare-come-true for “indie” app developers like them. They just don’t have the resources to defend themselves against patent infringement assertions.

Now, as developers look to Apple (and perhaps to their own legal counsel) for guidance, it’s important not to lose sight of some key guideposts:

1. Apple is concerned about their liability, not yours.

Apple may indeed by studying Lodsys’s patents and notice letter, as they are claiming, but rest assured they are primarily concerned with two questions: 1) Does Apple have any liability to Lodsys? 2) Does Apple have any liability to the developers?

The first question is pretty easy.  According to Lodsys’ company blog, “Apple is licensed for its nameplate products and services.”  Therefore, the only thing Apple would concern itself with is an indemnification claim, or breach of any licensing terms it imposed on itself for licensing developers to use the in-app payment API.

Are they also wondering whether the developers have any liability to Lodsys? Sure, they may be curious, and they may be conducting this type of analysis, but this is not the question that will drive their business decision in this case.  Might they still jump in, and help developers defend these claims to the extent possible? Sure, but they’ll only do this if they think failing to do so would negatively impact their bottom line.

2. An Apple “rescue” might be hindered by non-disclosure terms.

Imagine the following (very likely) scenario: Apple believes its license to Lodsys’ patents is broad enough to cover any use by independent developers writing software for iOS devices.  They might believe the license expressly covers this situation, or they might believe that the legal doctrine of exhaustion curtails Lodsys’ patent claims (or perhaps both).  Of course, Lodsys has a different interpretation, saying, “The scope of their current licenses does NOT enable them to provide ‘pixie dust’ to bless another (3rd party) business applications.”

If this turns out to be the case, Apple might conclude that the developers have no liability to Lodsys, meaning Apple has no liability to the developers.  Even if Lodsys disagrees, from Apple’s perspective, it did what it believed necessary to allow third parties to use the API free of these infringement claims.  However, non-disclosure terms in the license agreement itself might prevent Apple from giving this information to its developers.

Granted, any developer Lodsys sues would be entitled to discovery of the license agreement, but that’s another matter.

3. Lodsys does not appear to be asking for much.

Lodsys requests 0.575% of US revenue, for the scenario of an in-application upgrade.  Lodsys claims not to have actually be asked for this information yet, but that’s no great surprise.  Of course, this demand is qualified by the in-app upgrade scenario, “and only this scenario.”  I honestly don’t know whether that means no other scenarios practice the patent in question, or whether there are different licensing demands for different scenarios.

This seems like small potatoes, but a slightly outdated figure pegs App Store revenue at $250 M each month.  Lodsys’ mere $5750 per million would add up to a little under $1.5 M per month.  That said, not all app sales are implicated by their “scenario” above.  Still, the point remains that the overall App Store economy is vibrant, though distributed. (See no. 5, below).

4. Patent licensing is perfectly legal, death threats are not.

Dealing with Lodsys, particularly for a small company, or perhaps even a side project, is likely an unwelcome distraction.  Florian Mueller, though not implicated himself, described his emotional response as “outrage.”  These reactions are understandable; however, at this stage, it appears that Lodsys is in legally in possession of patents, giving them the legal right to exclude others from using the specific implementations claimed.  Even genuine disagreements over the scope of the Apple license may be a matter of opinion. (Obviously, if Lodsys has a completely frivolous legal argument, this question becomes much murkier).

On the other hand, the company claims to have received death threats, which are hopefully nothing more than distasteful expressions of frustration.  Even still, the potential for patent liability creates a legal cloud over you and your business by purporting to capture some of your revenue (and take time and focus away from other projects).  It’s not a good idea to make that could darker and more ominous by attracting the attention of law enforcement as well or incurring personal liability, in addition to corporate liability.

5. Lodsys claims Apple isn’t the target, but I’m not convinced.

Call me a skeptic if you will, but Lodsys is targeting a very small percentage of a very large revenue pool that is distributed over a collection of almost 30,000 developers (again, assuming the data is accurate).  Basically, the $250 M per month works out to an average of around $100,000 per year in total revenue.  I haven’t seen any data on the distribution of this revenue, but I would anticipate that number of developers exceeded $100,000 per year to be much less than 50%.

In other words, the high water mark for the majority of Lodsys’ potential licensing targets is less than $575 per year.  The cost to file a federal complaint is $350. Thanks to the licensing letter, Lodsys may also request treble damages (raising the fee to a whopping $1500 per year, give or take), but even still it appears that Lodsys will undoubtedly have to ask for far more if it ends up filing lawsuits.  Even still, the announced royalty demand sets a data point for future defendants to work from.

Lodsys could very well end up burning a significant chunk of licensing fees if it has to chase settlements in individual lawsuits.  However, having established a figure that Lodsys is willing to accept, given the overall economics of the App Store marketplace Apple might now be getting the message on a dollar amount that can put this entire issue to bed.

Lodsys recognized that Apple (or any other device or OS vendor) could purchase a license on behalf of the entire ecosystem, “but so far such discussions haven’t taken place.” Granted, Lodsys was responding to an issue specifically raised by a blogger, but I’m entirely sure that if Apple were to call and make an offer, Lodsys would pick up the phone.

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Discussion

4 thoughts on “Patent Infringement Claims Against iOS Developers — Top 5 Things To Remember

  1. Also remember that a patent infringement law suite can be a David-versus-Goliath confrontation. Defendants in patent infringement lawsuits are usually large corporations with unlimited resources, while plaintiffs in patent infringement lawsuits are often individuals or small businesses with very limited resources.

    Posted by Jared | May 25, 2011, 2:15 pm

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