Wed, Oct 3, 2012
On May 9, the Wall Street Journal reported that Etsy, Inc, the DUMBO-based web company, was worth more than $600 million. Five days later, a company called Unified Messaging Solutions filed a lawsuit against Etsy, claiming that a feature on etsy.com infringed five of its patents. The patents in question are on “methods for storing, delivering and managing messages.” Put simply, Etsy is accused of infringing patents by letting users of its website send messages to one another.
Unified Messaging Solutions, LLC, is a Texas-based company that does two things: buys patents and sues. In the past year, it has filed more than 60 patent infringement complaints. Unified is just one of many firms that are part of a growing trend: suing innovators for alleged patent violations. They’re known in the business world as non-practicing entities (NPEs) and in the technology world as patent trolls. These firms do not invent or produce any products of their own. They buy up patents from inventors or from corporations gone bust, and then they wait. On average, a 2011 study found, NPEs own patents for seven years before litigating–hence the “troll” moniker.
Etsy’s $600 million valuation came after a $40 million investment, which had brought the company’s total venture funding up to $91 million. That amount of cash creates a lot of incentive for an NPE to act. For Unified Messaging Solutions, it seems, the time was right.
“If you ever talk to anybody who’s been sued by a patent troll, everybody takes this really, really personally,” said Drew Curtis, founder of Fark, the news aggregation website. “I think it’s because there’s something visceral about being told you can’t do something that’s obvious.”
By “obvious,” Curtis means technologies and practices considered ubiquitous–like the messaging system for which Etsy is being sued. There are patents on countless such technologies, and they are the type of patents NPEs tend to stockpile and file lawsuits over. For example, a Chicago-based NPE is currently suing The New York Times, claiming the newspaper infringed a patent by sending hyperlinks over text messages. Another company in Memphis says it owns the patent on serving personalized advertisements on the web, and is now suing Facebook and Amazon.
And in 2010, an NPE called Gooseberry Natural Resources sued Curtis, claiming Fark was infringing one of its patents by sending news releases over email. He initially didn’t take the suit very seriously, but it wasn’t long before the threat began to sink in.
“I did know enough about law to know that I was in for some trouble,” Curtis said. “And my attorneys were really, really worried about this. They were like, ‘Yeah, these guys could bleed you to death if this is done the wrong way; they can really tear you up.’”
When Curtis received word of the lawsuit, he was already having a strange day. He was with a friend on a boat. The friend was Tucker Max, the best-selling author of “I Hope They Serve Beer in Hell.” The boat was the Time Bandit, the crab fishing boat from the Discovery Channel’s “Deadliest Catch.” Curtis and Max had been invited to Dutch Harbor, AK, by the ship’s first mate.
“And I thought, well, this is definitely the most bizarre day of my life,” Curtis said. “They’re like, ‘You’re being sued by a patent troll!’ And I’m like, wow. Aliens need to show up and abduct all of us for this to get any more bizarre.”
But reality soon set in.
“Everything just basically stops,” Curtis said. Before the lawsuit, he’d been planning to hire two new people and release a mobile app. “I had to basically halt all hiring, halt all new projects. You don’t want to be writing checks to people and then all of a sudden get this massive, massive legal bill.”
The high cost of legal bills are what the plaintiffs in these cases seem to count on. Companies often settle out of court, even if they believe they can win, because they think settling will be cheaper. To combat this, a bill known as the SHIELD Act was introduced to the House last month. It would require that the plaintiffs pay the legal costs of the defendant if the defendant wins in court, and if “the court finds the claimant did not have a reasonable likelihood of succeeding.” The bill was referred to committee on August 1 and has gained three cosponsors, but hasn’t yet been put to a vote.
Presently, when companies choose to fight, the legal costs can have a big impact, especially on smaller businesses. When Fark was sued, Curtis felt the pressure. But the patent in question was on compiling and sending news releases via email, and once Curtis read it, he didn’t understand how he could be accused of infringement. Fark does not send emails to its users.
“They really shouldn’t have sued us based on that,” he said. “And even then there’s still a chance you can get screwed. That’s how crazy the law is.”
This is when things got personal for Curtis. Especially, he said, because he owns 100 percent of his company. “This is like having your house broken into, having robbers in the house with guns pointed at your family, threatening to assassinate them, while they’re discussing with the cops how much of your shit they can carry out with them after they’re done,” he said. “It’s time to fight. I never considered doing anything else.”
And Curtis fought. His attorneys told him Gooseberry would ask for the past 15 years of his emails in discovery, so he asked them for the past 15 years of their emails in discovery. They said Gooseberry would ask him for his source code, so he asked them for their source code. He antagonized Gooseberry’s lawyers to the point that his own attorneys stopped letting him in on the phone calls. He then gave his opponents a list of 10 names in discovery–names of people associated with Gooseberry, turned up by users of Fark and Reddit–and asked how the people on the list are associated with the company.
“There’s an obvious subtext there if you’re an attorney,” Curtis said. “Which is, if any of them are involved in this company, we’re going to sue them personally.”
Curtis’s aggressive tactics seemed to do the trick: Gooseberry eventually called and asked him to make his best possible settlement offer. He made an offer of zero dollars. They accepted it. He struck the non-disclosure agreement from the contract. They accepted that, too, making Curtis a rarity–he’s allowed to tell the tale. He’s since done a TED talk about it and is writing a book on the subject. And when other companies are sued by NPEs, they sometimes call Curtis in for advice.
“Other companies I’ve talked to in the same boat, they literally want to go strangle these guys,” Curtis said. “And I think they would if they could get away with it. I absolutely would, I’ll tell you that right now.”
The NPEs, of course, have a different perspective. Patrick Van de Wille, the public relations director for an NPE called InterDigital, argues that NPEs help inventors. “In almost all instances, the person who developed the technology first is being rewarded, either by a licensing company that chooses to buy their innovation or by an end user of that technology that chooses to license it,” he said. “At the end of the day, somebody who developed a new technological solution is getting rewarded for that, and we think that’s important and we think that supports innovation.”
Van de Wille does, however, concede that although not all patents are the same, “there are business process patents, and there are certain types of patents that are frankly difficult to defend.”
In the end, Curtis estimates he spent about $100,000 in legal fees, though he isn’t sure of the exact number. “The only good news about it was, my attorneys did take AmEx,” he said, “so I racked up a ton of flyer miles that year.”
Fark was one of 11 defendants on Gooseberry’s lawsuit; Yahoo was another. Curtis believes the real “mark” was one of the larger companies, and thinks that being a smaller target helped him get out of the case. But the reason NPEs have typically filed multi-defendant lawsuits is that they’re cheaper than filing each complaint separately. The government has since made efforts to stop the practice.
One year ago, President Obama signed into law the America Invents Act, which comprises the most sweeping reforms to the patent system in 60 years. One provision is that companies are now prohibited from filing a single suit against multiple parties “based solely on allegations that they each have infringed the patent or patents in suit.” The legislation only applies to new patents, but a decision made last June by The U.S. Court of Appeals for the Federal Circuit in Washington, D.C. seems to have set a precedent to end multi-defendant litigation over old patents as well.
Another provision of the act allows third parties to analyze patents and submit their findings directly to examiners at the United States Patent and Trademark Office. In an effort to generate high-quality submissions, the USPTO is turning to Internet crowdsourcing. The office recently collaborated with Stack Exchange to launch Ask Patents, a website where users can discuss patents they believe to be bogus. The site’s community can work together to find prior art, which is any work that entered the public domain before the patent was granted. If the community finds prior art, they can submit their findings to the USPTO and the patent may ultimately be revoked.
None of this has stopped Unified Messaging Solutions, however. Most of the complaints it’s filed over the past year have been against single entities, like Etsy. And while the Ask Patents website has the potential to prove many patents invalid, there are a lot of patents out there.
The lead attorney for Unified Messaging Solutions, Steven Hayes, was contacted for a comment on the subject but did not respond to phone or email messages. In court documents, Etsy denies all allegations of patent infringement, but a spokesperson said the company cannot comment while the lawsuit is ongoing.
Meanwhile, Etsy remains a prominent force in Brooklyn’s Tech Triangle. Its presence in DUMBO helps to establish the borough as an attractive area for tech companies, both big and small.
Recently, in Brooklyn, a long-time entrepreneur named Claire Cunningham launched her new startup, LessonFace, which is a web platform for music instruction. The business is small, but Cunningham is excited about its potential.
On September 13, Cunningham moved LessonFace to an office in a building in Downtown Brooklyn. She used a Zip Car–it took two hours and two trips, then lots of desk-building. She was sad to learn that the nearby Dekalb Market is scheduled to close, but happy to settle into to her new space. Because her business is so new, Cunningham doesn’t spend a lot of time worrying about patent infringement, but she is aware of the practice. “It’s certainly something I’ve thought of,” she said. “I really don’t know the best way to protect one’s self.”
Her new office is located on the fourth floor of a building on Gold Street. In the same building, six years ago and two floors above, another young entrepreneur named Robert Kalin had just moved in to build his new startup, an eCommerce website called Etsy.