Earlier today Apple, Inc. (NASDAQ: AAPL) poked a finger straight in the chest of alleged patent troll Lodsys, LLC, saying in no unmistakable terms — back off Apple App developers! For several weeks Lodsys has been sending threatening letters to Apple App developers (see ComputerWorld report) and Apple has had enough and isn’t going to take it any more!
Indeed, in a letter from Apple’s Senior Vice President & General Counsel, Bruce Sewell, Lodsys was told in no uncertain terms: “There is no basis for Lodsys’ infringement allegations against Apple’s App Makers. Apple… is fully prepared to defend Apple’s license rights.” According to the letter sent to Mark Small, Lodsys’ Chief Executive Officer, Apple is a licensee of each of the four patents in the Lodsys portfolio and the terms of the license allow Apple to grant sub-licenses to Apple App developers. According to Sewell’s letter, “Lodsys’s infringement allegations against Apple’s App Makers rest on Apple products and services covered by the license.”
There is really no way to know for sure whether the claims of Lodsys or the assertions of Apple are correct, not at least without knowing what the license agreement between Lodsys and Apple specifically covers. Nevertheless, it is noteworthy that Apple has come out hard in defense of its App developers and seems to be daring Lodsys to push the issue further. In all likelihood, this is Apple drawing a line in the sand with Lodsys, wanting to make clear not only to Lodsys but to any other patent owner that when Apple takes a license there had better not be an attempt to cash in individually against the App developers as well.
Based on the limited information available it does seem like there is a generous double-dip approach to what Lodsys appears to be doing. But is that illegal? Sewell certains thinks so, even getting somewhat specific in his letter to Lodsys:
Through its threatened infringement claims against users of Apple’s licensed technology, Lodsys is invoking patent law to control the post-sale use of these licensed products and methods. Because Lodsys’s threats are based on the purchase or use of Apple products and services licensed under the Agreement, and because those Apple products and services, under the reading articulated in your letters, entirely or substantially embody each of Lodsys’s patents, Lodsys’s threatened claims are barred by the doctrines of patent exhaustion and first sale.
At the end of the day Apple may well be correct, but something bothers me about this explanation regarding why Lodsys’ activity is prohibited by patent law. First, there is no first sale doctrine in patent law, that is a copyright theory, albeit with a patent law counter-part. Second, the patent law counter-part to the first sale doctrine — patent exhaustion — manifests itself in a defense of patent misuse. The term “patent misuse” refers to specific types of prohibited behavior engaged in by the owner of the patent rights.
Generally speaking, there are two separate types of prohibited activity that can lead to a finding of patent misuse. First, if a patent owner engages in conduct that violates the antitrust laws, and the antitrust violation is sufficiently related to the patent in question in the infringement action, the patent owner will be unable to seek redress and the patent will be unenforceable as a result of patent misuse. The second type of patent misuse occurs when the patent owner seeks to extend the exclusive rights beyond those guaranteed by the patent grant. This extension of rights theory is sometimes referred to as the “extension of the monopoly” doctrine, and will come into play when the patent owner engages in conduct that impermissibly broadens the physical or temporal scope of the patent rights granted. In this case there does not appear to be support for an antitrust violation, but Apple is quite clearly saying that Lodsys has engaged in misuse of the second type; namely by trying to extract royalty payments for a patent where there is no obligation to pay due to the fact that payment has already been made once. That is certainly the type of extension of the patent grant that could become the subject of a patent misuse defense.
Notwithstanding, is this really patent misuse? Does the patent exhaustion doctrine really apply? If this matter goes beyond the posturing stage, and the license is less than crystal clear, the question is likely to become whether the licensing of products such as the iPad, iPhone and iPod effectively cover the downstream development of Apps (i.e., software) intended to run on those devices. This would seem to be a stretch of the patent exhaustion doctrine into new territory.
I can conjure up arguments that would support the Lodsys view that this would not be patent exhaustion, and I can also conjure up arguments to support Apple. For Lodsys they will almost certainly argue that a license to a patent family for an iPad, iPhone or iPad cannot carry forward downstream to an undeveloped (at least at the time of the license) App, which is a separate product. Support for the fact that Apps are separate products would be the fact that they are purchased separately and do not come standard on Apple devices. Of course, Apple will argue that the Apple Apps work only on Apple products, thus making them an extension of the Apple devices themselves. Further, the fact that the iPad, iPhone and iPad do not come with third-party Apps and yet Apple licensed the products would have to imply that the license was intended to cover App developers, who follow the strict guidance of Apple as they create new Apps.
Regardless of where the merits lie, Lodsys has started a blog to get their story out in the most favorable terms. It doesn’t appear as if they are succeeding. Their blog is largely Questions and Answers, but with little explanation and no apparent spin that one would anticipate if you are going to try and engage in this type of effort. For example, in one post Lodsys responds to the charge that they are “shooting in the dark hoping for a payout.” The response explains that Lodsys is just trying to monetize it’s product, which just happens to be patent rights. Patent rights as a product? Open mouth, insert foot. That is an admission they are a non-practicing entity, and the perception is they are a bad-acting non-practicing entity, hence the fact that most are referring to them as a patent troll.
In another post Lodsys explains why they are going after Application developers and websites rather than operating system vendors and device manufacturers. They explain:
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…
Who knows why they are really going after App developers, but the fact that they are low hanging fruit — easy targets, sitting ducks even — no doubt played a part. One can only wonder whether Apple getting involved and attempting to wrap its App developers around the Lodsys licenses it has will get Lodsys to back off.