The Prior Art

Bilski v. Kappos Oral Arguments: Supreme Skepticism Toward Method Patents

2009-11-10T11:09:00-08:00

For the first time in almost 30 years, the U.S. Supreme Court on Monday considered the issue of what types of technology should be eligible for patent protection when it heard oral arguments in Bilski v. Kappos.

Across the board, the justices indicated a deep skepticism toward the invention described in the patent application at issue, which was rejected by the U.S. Patent and Trademark Office and describes a method for trading commodities. Some of the justices went even further—expressing both a fair amount of disdain for the idea of granting broad "method" patents and a concern that ruling in favor of the petitioners would lead to patent grants on fundamental ways of conducting business or organizing human behavior. (Click here for a related story by sibling publication The National Law Journal Supreme Court correspondent Tony Mauro.)

Based on the justices' attitude during the arguments, it not only seems extremely unlikely that Bernard Bilski will ever get the patent at issue, it also seems clear that the court is poised to establish a new, and most likely stricter, test of what is patent eligible.

One after another, the justices prodded Bilski's lawyer, Michael Jakes of Finnegan Henderson, Farabow, Garrett & Dunner, in search of some idea about where to draw the line. The thrust of the questions: Does absolutely everything fall within the domain of the U.S. patent system?

"So, an estate plan?" asked Justice Ruth Bader Ginsburg. "A tax avoidance method? How to resist a corporate takeover? All of these are patentable?"

"They are eligible for patenting under section 101," replied Jakes, referring to the section of the 1952 patent statute that governs what is patent-eligible subject matter.

Justice Stephen Breyer was among the most vocal justices during the argument—and perhaps the most skeptical of Jakes's wide-ranging claims.

"Your argument is that anything that helps business succeed is patentable," Breyer said. Would the framers of the Constitution, he asked, really have wanted everyone with a new idea to run to Washington to get a patent, in the process enabling them to "stop the wheels of progress" unless competitors got permission?

"Why not patent a method of speed dating?" Justice Sonia Sotomayor asked.

There are a few, limited areas, Jakes said, where patent protection isn't available; he pointed to the fine arts as one example. Otherwise, he argued, patents encourage people to innovate, and it is via the patent system that they disclose their new creations to the public.

Chief Justice John Roberts directly attacked the Bilski patent, reading part of claim one aloud and asking: "How is that not an abstract idea? It's a series of transactions." The chief justice then posited his own idea for a business-method patent: "I buy low and sell high—that's my patent for maximizing wealth," said Roberts. "I don't see how that's different from your claim number one," he added, referring to the central claim in the Bilski patent, which supposedly covers a method for trading energy that hedges weather-related risk.

Justice Sotomayor took issue with Jakes's suggestion that patents are always a manifestation of innovation.

"A patent limits the free flow of information," she said. "It requires licensing. You can't argue your position is enhancing the free flow of information."

Jakes replied: "It does, because of the disclosure requirement."

"Even though the public can't use [the patented invention]," noted Scalia.

"That's our system," said Jakes. "We do grant exclusive rights in exchange for disclosure."

Time and again, Jakes refused to draw a line that ruled anything off-limits to the patent regime. His position left the justices questioning whether he was advocating the "ownership" of basic human activities.

"Let's take training horses," said Justice Antonin Scalia. "Don't you think that some people, horse whisperers or others, had some ... insights into the best way to train horses? Why didn't anybody patent those things?"

"I think our economy was based on industrial processes," responded Jakes.

"It was based on horses, for Pete's sake!" said Scalia. "I would really have thought somebody would have patented that."

Jakes argued that the the "machine-or-transformation" test adopted by the Court of Appeals for the Federal Circuit in its Bilski decision, which requires that a process patent must either be tied to a particular machine or must transform something into another state in order to be patent-eligible, was a rigid, narrow test that would preclude a wide range of new technologies from enjoying patent protection.

The machine-or-transformation test, Jakes said, "would exclude some valuable inventions that I think everyone would agree are technological under any test, such as data compression, such as FM radio."

Justice Anthony Kennedy and Chief Justice Roberts then asked about what part of the Morse code—arguably an alphabet transformed into electric signals—would be patentable under this test.

"You think you can patent an alphabet because it is a process of forming words," said Chief Justice Roberts.

"It could be, yes," Jakes answered. But, he added, applicants for such a patent would have to prove their tests were, among other things, novel and non-obvious.

Deputy Solicitor General Malcolm Stewart, meanwhile, argued in defense of the "machine-or-transformation" test. The justices pressed him for some idea about what kind of test might be more useful.

Stewart made clear the government was looking for a way to kick out "pure" business method patents such as the Bilski claims. "Innovations as to new techniques of public speaking, new techniques of negotiation... they may be valuable. They may be innovative. They are not patent eligible because they don't deal in the realm of the physical."

At the same time, Stewart didn't express support for rolling back patentability in a way that would threaten software patents or coming out in favor of a blanket ban on "business-method" patents. Such a ban could be seen as eliminating certain types of patents tied to machines, he said. And Stewart said the Federal Circuit's test wasn't "rigid or inflexible," as his opponent had argued.

Chief Justice Roberts pushed back on an inconsistency in Stewart's briefing of the case. On the one hand, he said, the government claims Bilski's method just describes a way of doing business, and therefore isn't patentable—but then posits that a computer with an "interactive website" doing the same thing might be. "That's like saying if you use a typewriter to type out the process, then it's patentable," said Roberts.

If the website scheme was part of a computer program, Stewart said, "the computer would be at the heart of the innovation."

"No, no," said Roberts. "That's just saying instead of looking in the Yellow Pages, you look on a computer."

Stewart urged the court not to use the Bilski case as a vehicle for determining what kind of patents are allowed in important technology sectors like software and medical-diagnostic technology. He also made clear that the government isn't seeking a reversal of the State Street Bank and Trust, which is generally seen as the Federal Circuit case that opened the door to the widespread patenting of software. (Several of the more than 70 amicus briefs filed in the Bilski case asked the court to take a clear position on software patents—some in favor, others against.)

Stewart acknowledged that the Federal Circuit's Bilski opinion "didn't answer all of the hard questions," such as the precise level of machine involvement needed to pass the test.

Justice Breyer agreed, saying the Federal Circuit had left "much unresolved."

After the arguments concluded, Michael Jakes answered a barrage of reporters' questions about the court's apparently hostile attitude towards the Bilski patent application specifically and business method patents generally.

Standing on the plaza outside the court, Jakes put on a confident face, noting that the Supreme Court "has said rigid and inflexible tests are not the way to go. We want the patent system to be open to all methods."

Then reporters were also treated to an appearance by inventor Rand Warsaw, who described the fixed-billing method offered by his company, WeatherWise. Warsaw was followed by an appearance by the elusive Bilski himself, who hasn't spoken publicly about his high-profile case before.

"I was completely awed and impressed by the whole process," Bilski said. "I couldn't tell you what the outcome will be. But not getting this patent made it very difficult to get this service out to many customers."

When reporters asked Bilski, who departed from WeatherWise in 2003, what his occupation is today, he responded, "At present I'm an employee of the federal government." In what capacity? "Not in the patent office," he said with a smile. And with that, he walked away.

Cross-posted at IPLB.com.

Patent Litigation Weekly: How to win $25 million in a patent suit—and end up with a whole lot less

2009-11-02T12:32:06-08:00

This week: DeepNines collected $25 million when it won an infringement suit against anti-virus software giant McAfee Inc. in the Eastern District of Texas two years ago. But after paying off its Fish & Richardson lawyers and outside investors at Altitude Capital Partners, the small network-security company wound up with less than $800,000 of the $25 million. And now DeepNines is being sued by Altitude, which wants millions more than it's already gotten. A revealing look at how a leading player in the lawsuit-investment trade does business.

Third-party financing of lawsuits—often described as a new and growing phenomenon—has been much in the news lately. But outside investors have been making multimillion dollar bets on patent lawsuits for years. One of the field's leading players is Altitude Capital Partners, founded by investment bankers Robert Kramer and Warren Hurwitz. Altitude, which has been investing in patent lawsuits since at least 2006, boasts of having more than $250 million to spend on such litigation.

Last week, The Prior Art reported on one patent-holding company Altitude has invested in. This week, we offer the story of another Altitude investment—one that resulted in an acrimonious lawsuit between parties that used to be on the same side.

In 2007, Altitude loaned DeepNines Inc. $8 million to pursue a patent infringement claim against leading anti-virus software maker McAfee in the Eastern District of Texas. The case went to trial and DeepNines, a small, Texas-based network-security company, won an $18 million jury verdict. Facing additional potential exposure, McAfee eventually agreed to end the litigation by paying DeepNines what at the time was a confidential settlement, but what documents now show was $25 million.

That settlement allowed DeepNines to repay the Altitude loan, plus 10 percent interest, plus another $700,000 in "participation" cash—Altitude's contingent fee winnings.

But Altitude founder Kramer wasn't satisfied with that amount. In 2008, he told DeepNines it owed Altitude some $5 million more. When he didn't get paid, Kramer hired Akin Gump Strauss Hauer & Feld to sue DeepNines in New York state Supreme Court. Most of the key documents in the case—including the heavily redacted public complaint [PDF]—were filed under seal. But this week, TPA acquired unredacted versions of many of those key documents. Taken together, they provide an intriguing peek into the workings of Altitude's patent litigation-loan business.

Among the highlights:

The parties on the plaintiffs' side in the McAfee litigation anticipated a much bigger payday than they got. Agreements between DeepNines, Altitude, and Fish & Richardson lawyers show an "estimated damages model" that posited a $200 million win. Such a victory would have translated into more than $50 million for Altitude and more than $100 million for DeepNines.
Instead, after paying its Fish & Richardson lawyers and repaying Altitude, DeepNines walked away with less than $800,000 of the $25 million.
In total, Fish & Richardson collected more than $11 million for handling the litigation: $4.07 million in hourly legal fees, $3.25 million thanks to a 13 percent contingent stake in the case, and an additional $1.9 million (It is unclear from the court papers what the latter amount was for). The balance went to DeepNines in October 2008. Two months later, company president Daniel Jackson wrote in court papers that he "questioned many of the [firm's] charges" and specifically disputed the $1.9 million took above and beyond its hourly and contingent fees. Contacted this week, lead Fish & Richardson partner Tom Melsheimer declined to comment except to say the firm has "no current disputes" with DeepNines.
Well-known former federal judge Robert Parker of Parker, Bunt & Ainsworth of Tyler, Texas, served as local counsel in the case. Parker had a 5 percent contingency stake in the matter, which netted him roughly $1.25 million. (The figure pales in comparison to the $10 million that Parker—who, according to Stanford University's LexMachina database, has been listed on the docket in more than 100 East Texas cases since 2005—stood to make under the "estimated damages model.")
DeepNines' "out of pocket" legal expenses for the case, including payments to experts and travel expenses, totaled more than $2.1 million.
The patent lawsuit represented a major gamble for DeepNines, which had less than 40 employees and just $8.4 million in assets in 2006. Only about $1 million of that amount was cash in the bank.

The saga began in 2006 when DeepNines sued McAfee for patent infringement. At issue: patent No. 7,058,976, which deals with network security technology. Soon after filing suit, DeepNines borrowed the $8 million from Altitude. The lawsuit paid off when McAfee lost the jury trial and was hit with the $18 million verdict for willful infringement.

Facing additional damages connected to the willfulness and a false marking claim, McAfee ultimately ended the dispute by agreeing after trial to pay DeepNines a settlement that the documents unearthed by TPA reveal to be $25 million. For its trouble, DeepNines walked away with less than 5 percent of that sum.

Though Altitude received $10.1 million on its original $8 million investment, CEO Kramer wrote to DeepNines in October 2008 demanding another $5.3 million, arguing that DeepNines shouldn't have deducted legal expenses before giving Altitude its contingent-fee share. The next month, Altitude hired Akin Gump to sue DeepNines for breach of contract. (The named party in that suit is Altitude Nines, an Altitude Capital subsidiary set up for the DeepNines deal.)

Aware that DeepNines has two new patents suits pending—and worried that it would plow whatever cash it has into those suits—Altitude's lawyers asked the judge in the breach-of-contract case to force DeepNines to set aside several million dollars so that the company's funds wouldn't be "dissipated." DeepNines responded by saying Altitude was unlikely to succeed in the suit, was using bogus math to calculate its fair share of the McAfee winnings, and shouldn't be awarded a preliminary injunction. DeepNines also noted that a second investor in the McAfee suit, venture capital firm Dawntreader Ventures, agreed with DeepNines' calculation even though it stood to gain if it went along with Altitude's calculations.

Ultimately, Justice Richard Lowe ruled that Altitude's lawsuit was a "garden variety" breach of contract case that didn't require an injunction.

Neither Altitude founder Kramer nor DeepNines' Jackson responded to phone calls and e-mails requesting comment this week. Court papers indicate that both were both scheduled to be deposed last month. DeepNines is being defended by Mintz, Levin, Cohn, Ferris, Globsky and Popeo.

This fee dispute aside, Altitude's litigation investments have been getting more ambitious. In January, TPA reported that Saxon Innovations, a patent-holding company set up by Altitude, filed suit against five cell phone manufacturers at the International Trade Commission, seeking to bar imports of several popular phone models into the United States. That's a high-stakes undertaking, because litigating a case at the ITC can cost $10 million or more.

Meanwhile, e-mails between DeepNines' Jackson and his outside investors that are included in the breach-of-contract case documents show reveal frustration with Fish's performance in the McAfee case—and with the firm's bill: "The fact that we ended up with less than expected is because they screwed up the claim construction," wrote Ed Sim of Dawntreader Ventures in one e-mail to Jackson and other investors. Sim also suggested that in the future, DeepNines hire its lawyers on a full contingency basis.

Apparently Fulbright & Jaworski fit the bill. DeepNines has hired the Texas firm for its two pending patent lawsuits: a second one against McAfee filed in May that accuses the software maker of infringing two other DeepNines patents, as well as the '976 patent again, and a suit filed last month asserting two patents against Fortinet, Inc.

Altitude Nines, LLC v. Deep Nines, Inc. 603268-2008, Supreme Court, County of New York.

Documents:

Spreadsheet showing DeepNines' and Altitude's differing calculations of "IP Revenue" [PDF]
Declaration of DeepNines President Daniel Jackson [PDF]
Declaration of Altitude Capital founder Robert Kramer [PDF]

Image: Wikimedia / FML

Patent Litigation Weekly: Revealed! How Much Money a "Patent Troll" Makes

2009-10-23T12:16:50-07:00

This week: a motion filed by a convicted felon/inventor spills the details of how he, patent-holding company SP Technologies, and the Niro Scavone law firm divvied up the loot from a set of suits against top tech companies—including one over Apple's iPhone.

One thing that can make reporting about civil litigation frustrating is that so much of it ends in confidential settlements. Occasionally, though, a ray of light pierces the shroud of secrecy, and it's possible to find out how much money changed hands when a case settles before going to trial. Thanks to an unlikely source—an Iowa ear, nose, and throat doctor currently residing in a federal prison in Wisconsin after being convicted of insurance fraud—we now know how much patent-holding company SP Technologies collected as a result of filing suit against four leading tech companies: $2.17 million.

That information is contained in a motion to intervene filed in July by otolaryngologist Peter Boesen in connection with a pending suit brought by SPT against GPS makers Garmin and TomTom in the Northern District of Illinois. In addition to being a convicted felon, Boesen happens to be the inventor on the patent SPT has asserted in the suit—and in previous suits against Apple, Magellan, and Samsung—as well as a second patent asserted in a suit against LG Electronics.
Boesen, whose sentence requires him to make restitition of $931,000, says in his filing [PDF] that he wants to get involved in the Garmin suit because he isn't being adequately represented by Niro Scavone Haller & Niro, the law firm pursuing the litigation campaign launched by SPT using Boesen's patents. According to a receipt [PDF] attached to his filing (p. 23), Boesen's share of the settlements extracted by SPT is $748,500. But Boesen "has never personally received any monies from SP Technologies," he writes in his motion, which appears to have been written on a jailhouse typewriter. He also objects to getting anything less than the full 40 percent cut to which be believes he is entitled, since "fees and expenses were not be a factor in the percentage of gross recoveries paid to aggrieved party/Petitioner."

Given the prevalence of settlements between large companies and so-called patent trolls like SPT—and how little is known about those settlements—the receipt is a remarkable document, a kind of spreadsheet that shows exactly how much money SP Technologies collected from four large tech companies and how the proceeds were divided up.

Most intriguing is the sum paid by Apple to settle an SPT suit brought over the iPhone in the Eastern District of Texas in 2008: $865,000. Without any motions being filed after the intial complaint or any substantive discovery, a bit more than 30 percent of that amount, $271,817, went to Niro Scavone, which also billed $46,568 in expenses. Nearly $40,000 went to someone identified as "Ward"—most likely Johnny Ward Jr., who served as local counsel to SPT in the case. Of what was left, almost $109,000 went to SP Technologies, then owned by investor Courtney Sherrer, and $311,400 went to Boesen.

Also noteworthy: a full 10 percent of Apple's payout, $86,500, is marked as going to "LG"—an apparent reference to LG Electronics, which, according to the Boesen receipt, paid $834,964.01 to settle a separate SPT suit in 2006. Why would LG be getting a cut of the settlement in a suit to which it was not a party? And was Apple aware that a piece of that settlement might wind up with one of its competitors? Representatives from Apple and LG did not immediately respond to requests for comment.

Other SPT settlements detailed in Boesen's receipt: Samsung paid the patent-holding company $417,500, about half of what LG and Apple forked over, while Magellan paid even less, $50,000. (A possible explanation for Magellan's smaller payout: The market for GPS devices is far smaller than the market for cell phones, greatly reducing the potential exposure from a patent suit.) SPT settled another suit with HTC Corp. in July, but that deal was apparently struck too late for Boesen to include it in his filing.

SPT's Niro Scavone lawyers oppose Boesen's move to intervene in the Garmin case. While he may not be getting money directly, they say, he is getting paid. A letter from Sherrer indicates that the money is going straight to fulfill his restitution obligation.

In addition to being forced to pay the $931,000, Boesen was sentenced to serve 51 months in federal prison after being convicted in 2006 on 82 counts of health care fraud. Prosecutors said he committed a series of fraudulent acts between 2000 and 2002 that bilked Medicare and private insurance companies out of more than $400,000 for procedures he never performed. He is being held in a minimum-security section of the federal penintentiary in Oxford, Wisconsin, and is due to be released in February 2011.

How did an ear, nose, and throat doctor wind up doing business with a patent-holding company? Boesen holds at least 21 patents, most which relate to cell phone technology; the others cover auditory aids. He first joined forces with SPT in 2005, and the initial infringement suit came soon after. In that suit, plaintiffs Boesen and SPT used his 6892082 patent, covering a type of cell phone design, to sue Kyocera, LG, and Sanyo. (SPT owner Sherrer also controls companies that enforce some Scott Harris patents, and her name has come up in this space before.)

But not long after Boesen and SPT teamed up, the authorities began investigating the doctor. That put a crimp in the nascent litigation campaign. When Boesen was indicted in February 2006, Sherrer and her lawyers became concerned that having him as a co-plaintiff was a serious liability. That same month, Boesen sold 19 of his patents to SPT under a contract—also included in his motion to intervene in the Garmin case—that provided for him to get 40 percent of any revenue produced by patent lawsuits and licensing. (Thus far, the Boesen patent that has proven the most profitable for SPT is the 6,784,873 patent, which claims to cover many types of touch-screen keyboards.)

Boesen is upset now because he says Sherrer and Niro knew he was under "severe duress" when they got him to sign the contract selling his patents. Not only was he facing a criminal probe and possible jail time, he says his mother and brother had both been diagnosed with cancer.

In May, Boesen was deposed in connection with the Garmin litigation. During the deposition, he said that the copy of the contract that he received doesn't look like the one he recalls signing, and that it may have even been forged.

Sherrer responded sharply, refusing to address his allegation but saying that "it is apparent... that you are refusing to cooperate in the enforcement of your patents." If true, that would be a violation of the contract his contract with SPT, she added. In a motion opposing Boesen's intervention, SPT lawyer Raymond Niro included an e-mail chain from the attorney who negotiated the contract for Boesen stating the doctor's intention to sign the pact. Sherrer also wrote a letter to Boesen explaining that the proceeds he has reaped from patent enforcement are going towards paying off his restitution tab.

Niro, reached by telephone on Thursday, said Boesen's attempted intervention in the case is more annoying than threatening.

"He’s acting like a jailhouse lawyer," said Niro. "He’s acting like he knows how to practice law. We’re trying to focus on the merits of the case. We got a nice claim construction."

Is Boesen's status as a convicted felon a potential liability for SPT's enforcement campaign? "Of course, it affects your case," Niro said. "You’ve got an empty chair for an inventor." He noted that a co-inventor on the '873 patent who has no connection to Boesen's crimes, Thomas Mann, is participating in the litigation.

Niro described Sherrer as "an investor who invests in patents, and helps inventors," but added that she has sold her interest in the holding company to Altitude Capital, a company that invests in patent lawsuits.

SP Technologies v. Garmin International et al. 08-cv-03248, N.D. Illinois.

Documents:

Peter Boesen's Motion to Intervene [PDF]
Receipt of payments to Boesen [PDF]
Declaration of Courtney Sherrer describing SPT [PDF]
SPT response to Boesen's Motion [PDF]
Press release on Boesen conviction from U.S. Attorney [PDF]

Photo: Flickr/ f-l-e-x

Patent Litigation Weekly: Foley Tries Turning Tables on Spangenberg

2009-10-16T10:33:50-07:00

This week, the man behind a notorious network of patent-holding companies finds himself in an unaccustomed spot: on the defense.

When it comes to litigation, Erich Spangenberg, well known for running a network of patent-holding companies, is usually a plaintiff. Now, though, he's on the other side of a lawsuit, having been named as a third-party defendant in a dispute between patent-holding company DataTern and its former lawyers at Foley & Lardner.

DataTern—a spinoff of an operating company, Firestar Software—made news last year when it settled a closely watched East Texas patent infringement suit against open source software leader Red Hat Inc. The settlement was considered novel because of the protection it offered to Red Hat's developer community. At the time, the parties kept financial terms of the settlement confidential; it has since been revealed that $4.2 million changed hands. (See Red Hat's press release on this settlement; analysis of the agreement at Groklaw; IPLB profile of Red Hat lawyer Richard Fontana.)

Foley & Lardner, which represented DataTern in the suit, claims it is still owed more than $1.5 million in fees for its work on the case. But rather than paying up, DataTern filed suit against Foley in January, essentially saying the firm did such poor work on the matter that it should be the one doing the paying. With the litigation now heating up, Foley has named Spangenberg, his wife, Audrey, and several related companies as defendants in a third-party complaint filed on October 1.

There is some logic to Foley's move, given that Spangenberg's consulting company, IP Navigation Group, wound up with most of the money Foley seeks. Court documents show that IP Navigation, which DataTern hired late in the Red Hat litigation, collected about 80 percent of that $4.2 million settlement.

Spangenberg says Foley should not be dragging him or his company into a billing dispute that doesn't involve him. In an early October e-mail to Foley & Lardner, he said that if the firm didn't drop him from the suit by October 12, "IPNav will be required to recount numerous instances—all supported by references—of Foley's culture of bad conduct, poor judgment, and nonchalance regarding professionalism, which contradict Foley's vastly overrated claims of superiority and excellent client service."

When Foley didn't drop the complaint, Spangenberg acted on his threat by filing counterclaims against the firm in which he and his lawyers say Foley is unfairly interfering with his consulting business.

"IP Nav is the deep pocket here," says Spangenberg, speaking from his office in Dallas on Wednesday. "It's a new role for me. As IP Nav enjoys tremendous success, you become a target."

In the IP Nav brief, Spangenberg says: "Foley's bad judgment here is typical, however—typical of Foley's bad decision-making that has it frequently in the news for all types of malfeasance, including sexual discrimination, racial discrimination, trademark abuse... legal malpractice—including revealing client confidences, and fraud." The allegations are accompanied by footnotes that cite newspaper articles and blog posts about a variety of contentious matters Foley has been involved in. Those matters include a sexual discrimination claim brought against the firm in the Seventh Circuit and a suit in which patent-holding company SPH America accused Foley of revealing its trade secrets—a suit that was recently resolved in Foley's favor. Read the full IP Nav answer and counterclaims [PDF].

Spangenberg says all the allegationss are fair game because Foley boasts in its suit against him about its professionalism and the high regard in which it is held in IP litigation circles. Beyond that, Spangenberg maintains that Foley badly mishandled the Red Hat suit, and even goes so far as to say that opposing counsel Kilpatrick Stockton was "mopping the floor up with them." For example, Spangenberg says, less than two months before the Markman hearing, the Foley lawyers on the case hadn't deposed any witnesses.

"It's a poorly managed firm," says Spangenberg, who resents being pulled into the dispute between Foley and its former client: "How much money DataTern owes Foley — that's not my fight. Erich Spangenberg gets into lots and lots of scrapes, this is not one of them." And, he says, DataTern was better off once it hired him: "Love me, hate me, I understand IP, and I know how to monetize it."

In emailed statement, a firm spokesman said "Rather than focus on the merits of the claim, IP Navigation has dredged up and distorted irrelevant and erroneous allegations with no apparent purpose other than trying to discredit our firm. Not only has [Spangenberg] been unjustly enriched by the valuable work we provided on this case, but he has interfered with our right to be fairly compensated for our efforts." Any holdups in the case were the results of FireStar's inability to pay and reluctance to make key decisions, like authorizing the hiring of experts, the firm stated in court documents.

How did Spangenberg and Foley end up here? Here's a brief history of the underlying patent dispute, with new information gleaned from recent court documents.

In 2006, FireStar Software, an operating software company based in Massachusetts, and Amphion Innovations, an investment firm with 15 percent stake in FireStar sued Red Hat for patent infringement. At issue: an open-source database product called Hibernate that Red Hat acquired when it bought JBoss in a transaction announced in April of that year. FireStar and Amphion said Hibernate infringed FireStar's Patent No. 6,101,502, which makes broad claims to linked databases. The firm hired Foley & Lardner to prosecute the lawsuit.

The suit was closely watched in the open source community because it was one of the first brought by a non-practicing entity or "patent troll" against a major open-source software product. Among the noteworthy facts and figures to emerge about the case from recent court document:

FireStar/DataTern/Amphion and Foley apparently had no written contract. Foley says it was understood that the firm would bill by the hour, and that its lawyer had only agreed to discuss the possibility of future contingent-fee work. DataTern lawyers, meanwhile, claim the lawyers "agreed to agree on a contingent fee arrangement," or a hybrid hourly/contingent model, but that the lawyers delayed drawing up an agreement spelling that out "so they could continue to overwork the case" and charge "enormous, unreasonable hourly fees."

In October 2006, in the lawsuit's early stages, FireStar told Red Hat it wanted $100 million to settle its patent claims—and Red Hat said "there was nothing left to discuss."

FireStar, Amphion, and their Foley lawyers worked out a litigation budget of $4.4 million to take the case against Red Hat to trial in Marshall, Texas. According to Foley's filing, FireStar and Amphion said they would be willing to spend a total of between $5 million and $10 million on the litigation.

FireStar hired an unnamed PR firm that advised the company to act like "a reluctant plaintiff, acting solely to protect its intellectual property rights" in order to "avoid being perceived as 'patent trolls.'" Doing so, the PR firm counseled, would "maintain FireStar's credibility as a product developer." That is why FireStar only sued Red Hat.

FireStar and its lawyers discussed the pros and cons of going after Red Hat customers and "other users of Hibernate" — some of whom were, the lawyers noted, were Foley clients that the firm could not sue because of "ethical conflicts." Ultimately FireStar didn't go after other defendants because it didn't fit the "reluctant plaintiff" pose it was trying to strike. (DataTern ultimately did. See below.)

After the case was underway, FireStar apparently tired of the patent litigation game. The company was reluctant to make engineers available for deposition because, Foley's brief states, they "were focused on product development rather than the Red Hat case and as a result were not sufficiently responsive." By December 2007, the bankers at Amphion had agreed to take the suit off FireStar's hands by creating DataTern, a shell company solely focused on patent enforcement that acquired the patent in early 2008. (Amphion also agreed to compensate FireStar for employee time spent on the litigation.) At about the same time, DataTern stopped paying Foley's bills, and turned to IP Nav and its lawyers to press the suit.

Those lawyers—Texas solo Dan Perez and Michigan-based Patrick Anderson, both of whom frequently work for Spangenberg and his patent companies—quickly hammered out the $4.2 million settlement. The figure, Foley notes, was lower the total litigation budget it had agreed to with FireStar. If the plaintiffs were willing to settle for so little, Foley lawyers Michael Lockerby and Greg Neppl write, a deal could have been struck "without the expenditure of much in the way of legal fees."

Overall, Foley's complaint against Spangenberg portrays the firm as representing an operating entity in the Red Hat matter. That scenario, the firm argues, only turned into something with the typical markings of "patent troll" suit—keeping litigation costs low and ultimately settling for a figure in line with those costs—because of a major change of strategy by the patent-holders.

Spangenberg says that if Foley has qualms about handling litigation that morphs into a patent-troll suit, it simply shouldn't take on such cases. And, he notes, they can cause lots of conflicts with existing corporate clients. Like most big firms, he says, Foley is "ill-suited to do work for an NPE [non-practicing entity]."

One final note: Open-source software advocates may not know that Spangenberg considers himself a Red Hat fan. He considers the settlement between the company and DataTern "one of the coolest licenses ever," because it covers Red Hat's community members. Red Hat and Spangenberg might seem like strange bedfellows considering that Red Hat has asked the Supreme Court to use the Bilski case to wipe out software patents—the form of IP that Spangenberg has used to build his sizable fortune.

Spangenberg sees no irony in that. Red Hat, he says, is "not only a true believer, they're a true doer. I have never fought with Red Hat, and in the future I don't intend to."

Datatern, Inc. et al v. Foley & Lardner LLP. 09-cv-00038, E.D. Texas.

Documents from the case:

DataTern's Amended Complaint against Foley & Lardner [PDF]
Foley & Lardner's Third-Party Complaint vs. Spangenberg and the "Plutus Parties" (Oct. 1) [PDF]
Spangenberg's letter to Foley & Lardner on behalf of IP Navigation (Oct. 9) [PDF]
IP Navigation Answer and Counterclaims (Oct. 12) [PDF]

DataTern isn't playing "reluctant plaintiff" anymore, and has sued a few dozen companies, employing lawyers that also work for Spangenberg companies, as well as lawyers from L.A. firm Russ, August & Kabat.

Datatern, Inc. v. Bank of America Corporation et al. 08-cv-00070, E.D. Texas, filed 4/21/2008 against 16 defendants. Settled 7/2009.
DataTern, Inc vs Sun Microsystems Inc et al. 08-cv-00307, E.D. Texas, filed 8/05/2008 against 5 defendants. Settled 6/29/2009.
Datatern, Inc. v. Oracle Corporation et al. 08-cv-00308, E.D. Texas, filed 8/05/2008 against same 5 defendants. Settled 6/30/2009.
Datatern, Inc. v. United Air Lines, Inc. et al. 09-cv-00053, E.D. Texas, filed 2/17/2009 against 8 defendants.
Datatern, Inc. v. The Allstate Corporation et al. 09-cv-00178, E.D. Texas, 6/02/2009 against 16 defendants.

(FireStar should not be confused with Firepond, the Minnesota software company owned by Audrey Spangenberg that filed a class-action trademark lawsuit against Google.)

Image: Taurus constellation by Johann Hevelius, via Wikimedia

U.S. Senate committee passes bill against "pay for delay" drug settlements — more in October/November IPLB

2009-10-15T18:55:18-07:00

The Judiciary Committee of the U.S. Senate passed a bill today that would ban "reverse-payment settlements," which are settlements that end patent litigation between branded and generic drug companies in which the branded company pays money to the generic. The Federal Trade Commission, which calls the agreements "pay for delay" settlements, has been fighting against these settlements for a decade now, but hasn't been doing well in court. Three separate appeals courts have ruled that different reverse-payment schemes are, in fact, legal. Both generic and branded pharmaceutical companies, and lawyers who work for them, have defended the settlements; but the FTC says consumers are losing out on billions of dollars in potential savings.

It's a development that makes the cover story in the October/November issue of IP Law & Business, recently mailed to subscribers, particularly relevant.

The story looks at the history of how reverse-payment settlements developed, and focuses on what this controversy says about the different views on patent rights held by courts, federal antitrust enforcers, and the drug industry.

It's a hot topic for the drug industry, but the underlying question could affect all patent owners: Are patents truly "property" rights, or merely an option to litigate?

It's available now on IPLB.com: "One Man's Drug War."