For Whom the Bell Trolls: Life for a startup on the receiving end of a patent lawsuit
Once a month, Steve Wright* gets a large envelope from his lawyers and goes into a whir. “Every month when that hits my desk, I just get this feeling in the pit of my stomach, like, ‘How bad is it going to be?’” says Wright, the founder and CEO of a New York-based ecommerce startup.
Invariably, the envelope contains a bill, a consequence of a patent lawsuit that has cost Wright’s startup more than $100,000 over the last six months. And that’s with a discount. While his lawyers are offering cut-price services, the number in that envelope each month is still so large that Wright has to wait until the rest of his team, five people in total, have left at the end of the day before he opens it. Then, alone in his office, the envelope’s force does its work. “You can’t hide the emotions,” Wright says, sitting in a Washington DC bar after a day of meeting with White House officials to discuss his plight. As the debate over patent reform gathers steam in Congress, Wright and his fellow developers want to make their voices heard.
Those envelopes have been finding their way to Wright’s three-year-old company because of a lawsuit filed by a patent assertion entity (PAE), otherwise known as a “patent troll.” Such PAEs are known for putting legal pressure on tech companies in order to extract financial settlements based on the alleged infringement of questionable, and usually broadly defined, patents. Wright says his company is not infringing on the patent in question, and he has argued as much with the guy from the PAE who brought the suit, which also involves a number of other defendants in a similar position.
Wright’s opponent didn’t respond kindly to his resistance. “You’ll stay in business and license from us, or you’ll go out of business,” he told him over the phone. “Either way is fine with me.” Wright was shaking while on the call, but continued to press his case. The litigant was unmoved. “Everybody says they don’t infringe,” he said matter-of-factly, “and everybody pays.”
The PAE was demanding a rolling royalty in perpetuity on two parts of Wright’s business. When Wright ultimately refused to cave, the man responded by email: “You’ve made a terrible strategic decision about yourself.”
Wright can’t really afford the lawsuit. His business has modest revenue, but not enough to cover this kind of expense. The company has been through a high-profile accelerator and, fortunately, received funding from an A-list venture firm. But it has already spent more than 10 percent of its funding on legal fees alone. Wright himself is not a rich man. He lives in a New York apartment with his wife and two kids, who go to public schools. He can’t afford to put any money into the kids’ college funds, and for the last year he has been taking a salary big enough only to cover taxes and daycare. His wife, a marketing consultant, pays for everything else. He believes that his company and its co-defendants can win the lawsuit, but he’s not sure if it can stay the distance through protracted proceedings. The PAE has already showing a talent for drawing out proceedings, which only makes that number in those monthly envelopes grow even bigger.
Wright has chosen to stay anonymous for the purposes of this story because he believes that if the patent-holder finds out he is fighting the suit in public, he may never decide to settle. In identifying himself and his company, he also runs the risk of attracting the attention of other PAEs, who might see the company as a “wounded bird,” an easy target. He has disclosed the suit to his investors and potential future investors. One client has asked about the case. He worries that it will affect his company’s ultimate valuation. These are the same reasons why so many other developers and startups under threat of legal action for alleged patent infringement are afraid to speak publicly about their cases.
Todd Moore, the founder of a three-man app development company called TMSoft, is also being sued by a PAE, ostensbily over the use of hyperlinks, to which the assertion entity claims to own a patent. Moore, who has published a defiant blog post outlining why he refuses to pay the “troll toll” for his popular White Noise app, says it’s critical that people like him and Wright speak out against such tactics, which he describes as “shakedowns.”
“I feel like if I don’t share this story there’s not enough people that will come forward,” says Moore. “It’s wrong what they’re doing,” he says. “I’m in a position where I can fight it. If I can show others that are facing similar lawsuits a way to get out of them, then that’s beneficial to everyone.”
Moore considers himself lucky because a lawyer is representing him pro bono. Like Wright, he’s also in Washington DC to talk to White House and Congressional staffers about patent reform. He is encouraged by changes proposed by members of Congress that would make it more difficult, and potentially more expensive, for PAEs to file lawsuits against developers and tech companies. But he’s also concerned that the little guys, who can’t afford to pay for $600-an-hour lawyers in the first place, won’t be protected by the proposed legislation, which mostly deals with the issue at a “get lawyers involved” level.
People involved with patent assertion entitites appear to have little sympathy for the likes of Moore and Wright. Dan Abelow, who identifies himself as an inventor and is affiliated with the patent-holding company Lodsys, says PAEs are just following the rules, and that we’re at a point of time in human history in which the systems around digital property are still being worked out. “Morally, I believe there should be some form of compensation for people who own the assets," says Abelow in a phone interview. “Ideas that are valuable and worth taking and using are worth something.”
Abelow's patents are based on ideas, not actual products.
Abelow has a curious relationship with Lodsys, which the Electronic Frontier Foundation claims is a notorious patent troll. While he is featured prominently on the Lodsys website as “The Inventor” and is the only person named in association with the company, he says he doesn’t benefit from the licensing of its patents and is a mere consultant who has a minor contract with the company.
However, as The Verge’s Nilay Patel, a former copyright lawyer, has pointed out, in 2004 Abelow assigned a patent related to in-app purchases to a company called Ferrara Ethereal, a shell company of Intellectual Ventures, notorious for being the subject of a "This American Life" exposé that revealed aggressive patent-assertion tactics. In 2009, Ferrar Ethereal merged with a company called Webvention, which is run by Abelow himiself and has sued Dell, Visa, and Gamestop, among others, over a patent that covers rollover images. Then, in 2010 Webvention assigned the same in-app purchases patent to Lodsys, which exists solely to collect royalties on Abelow’s patents. (Again, credit to Nilay Patel at The Verge for the legwork.)
Abelow has no qualms about the tactics of such patent-holding companies as Lodsys, even against small companies and developers for whom litigation, and even threat of litigation, is a costly process. “I don’t agree fully with the current state of the whole morass that you’re talking about,” Abelow says, before adding that it’s something that society is still working out, a process that could take two or three decades. “The regulations, the way patents are developed, are all changing. As an inventor I simply try to follow the rules.”
The truth is, however, that the likes of Lodsys go beyond “just following the rules.” Such companies look at the rules, interpret them in a specific way, and push them to the limit. For many subjects of their claims, the threat of a costly lawsuit is enough to elicit a financial settlement. Many companies just want to make the problem go away. What Abelow calls “following the rules,” meanwhile, might more accurately be described as “testing the rules,” subjecting them to an extreme interpretation that can be used as an instrument to extract financial gain that might not be warranted.
That’s certainly the way that Steve Wright sees it. The founder-turned-defendant says the PAE suing his company doesn’t want to settle. He once met his legal opponent in person in an attempt to come to terms agreeable to both parties. He looked like a regular guy, Wright says, as if he could have been an English teacher or a bank teller. But Wright felt powerless in his presence. “Shaking his hand made me feel like I was touching the devil.”
Asked if he can empathize with the litigator in any way, Wright just shakes his head. “I think this is hubris. I think this is a total lack of integrity. I think he’s mean. I think he’s a mean-spirited bully.”
Wright and his cofounder built something from nothing, he says, and it’s working. Now the PAE is trying to lay claim to that. “I feel like this troll is trying to take something from me.”
* Not his real name. His identity is protected for reasons described later in the article.* The PandoDaily series “Patent Troll Smackdown” is brought to you by the Application Developers Alliance. To join the fight against patent trolls and tell Congress that innovators need patent reform please visit devsbuild.it/fightpatenttrolls. (Sponsored message.)