By Steven Levy
One afternoon in the early 1980s, Mitchell Medina and Robert Lech were hanging out in the dining room of Medina’s Essex Fells, New Jersey, home. The two friends got together about once a week. This time the conversation turned to the topic of invention. Lech, a chiropractor, was in the process of computerizing his office. That required converting his claim forms and doctors’ reports into an electronic format, an ordeal that involved painstakingly typing in all of the information by hand. It gave Lech an idea: What if you could scan all those documents digitally and store them on the computer? Lech had been chewing on the concept for a while. Now he was eager to share his thoughts with his friend Medina, in part because Medina knew a lot about patents.
The US patent system goes back to the nation’s founding; it is explicitly delineated in the Constitution, which, in the name of “the progress of science and the useful arts,” gives Congress the power to grant inventors “the exclusive right to their respective writings and discoveries” for a limited time—generally 20 years—during which period competitors are forbidden from selling similar products. Without those assurances, there would arguably be no incentive to innovate; why invest money and effort on a breakthrough that anyone could then take and sell? Patents created a business environment that led to such landmark technologies as the cotton gin, Morse code, the Yale lock, the Xerox machine, the laser, and the Hula Hoop.
But over the years patents became much more than just protection. They were also assets. Inventors who won patents were free to sell them on the open market, giving the buyer the right to their creations. In theory this was another boon for innovation; even if original patent holders couldn’t maximize the potential of their inventions, they could still turn a tidy profit by allowing someone else to build on their ideas. But in practice it meant that even people who never invented anything in their lives—a group of lawyers, for instance—could scoop up a bunch of patents and start suing other inventors for infringing on their intellectual property.
Medina had some expertise in patent litigation. He worked for his grandfather’s business, Randolph-Rand, which supplied metal parts to the leather industry. Randolph-Rand had acquired a patent for a magnetic snap from a Korean inventor. Medina felt that Randolph-Rand’s competitors—who sold their own versions of a magnetic snap—were infringing on that patent, so he set up an “enforcement program,” suing rivals if their products included a snap that he considered to be infringing.
Medina didn’t immediately embrace the specifics of Lech’s scanning idea. There were limits on what kind of concepts could win a patent; if everyone could stake a claim to whatever idea floated into their head, nobody would be able to create anything without infringing on someone else’s intellectual property. And so the US Patent and Trademark Office was forbidden from awarding patents to ideas that were too obvious, insufficiently novel, or just plain impractical. It was up to the Patent Office to decide which inventions fell into those categories, but Medina felt sure that the scanning idea was too obvious to pass muster. As they discussed it over the next few weeks, however, he did come up with a twist on the idea that he thought might be patentable. Instead of just scanning and storing the documents, why not create a software process to automatically extract the information and format it on the computer?
Medina had a pretty good grasp of what could and couldn’t win a patent. Traditionally, patents could be awarded only to specific technologies, not broad concepts—and the notion of exporting data from scanned documents into a personal computer, before flatbed scanners had become widely available, seemed to fall firmly in the “conceptual” category. But during the 1970s, the Patent Office didn’t have the expertise or bandwidth to limn those kinds of distinctions. In the mechanical age, it was relatively easy to determine when a series of equations crossed the line into patentable invention; you couldn’t protect the underlying math, but you could protect the machines built from it. Software presented a new kind of challenge. It never left the realm of algorithms; it represented a process, not a physical object. Meanwhile, the industry was exploding, burying the undermanned Patent Office with a burst of applications. The Supreme Court would eventually provide guidance by declaring that software processes and business practices could indeed be considered patent-worthy. The overwhelmed Patent Office seemed to take this as an OK to apply a rubber stamp to thousands of requests, some of them questionable. “Many patents are approved because examiners don’t have time or resources to search all the relevant references,” says Colleen Chien, an assistant professor who specializes in intellectual property at Santa Clara University School of Law. And when an examiner did reject an application, candidates would sometimes simply make cosmetic adjustments and keep reapplying until the Patent Office approved it. Hundreds of thousands of patents began to accumulate, resulting in a vast bureaucratic ammunitions dump that could not help but eventually explode.
Several patents would belong to Medina. It took the better part of a decade—until 1990—to find a patent attorney who understood his concept well enough to prepare a filing, which was submitted to the Patent Office in March 1991. (By that time, scanning was commonplace, making the idea of data extraction less of a conceptual leap.) On November 2, 1993, Lech and Medina—along with Catherine Elias, a friend with a computer science degree who had helped draft some specs for the process—were granted a patent for an “Information Processing Methodology.” Though written in typically dense and baffling jargon, the very first sentence stated its nature fairly precisely: “The invention is directed to a system for efficiently processing information originating from hard copy documents.”
Although the three had never tried to build a working model before they were granted the patent, they now set out to create a business based on the idea. Elias made a prototype, albeit one that Medina would later admit “didn’t work particularly well.” He claimed to have visited “every big player” they could think of in the computer industry to see if they would like to license his patent and build a commercial version themselves. He also claimed that he had attempted to raise venture capital to create a company of his own. But no corporation or VC would put money into it. According to Medina, they were particularly annoyed when, during a meeting, an executive from IBM’s Lotus division rudely dismissed the idea of paying to use the concept. “He acted as if these kinds of patents were somehow laughable,” Lech says.
The two main inventors disagreed about what to do next. Lech still wanted a big company to buy the patent and nurture it into a popular product. He devised a legal strategy inspired by the movie The Hunt for Red October, in which a rogue Soviet submarine captain appears to be about to attack the US but is really just trying to defect. Lech thought that the team should sue a large company and in so doing lure it into purchasing the patent. “The idea was to feign a missile attack so they could defect and begin a marriage,” Lech says.
But Medina apparently had other plans: giving up on the idea of partnering with another company and instead starting his own business to license and litigate the patent.
Lech wasn’t crazy about this approach, but Medina did it anyway. Lech later learned that Medina had essentially cut him out of the decisionmaking process, giving himself controlling interest in the fledgling company. Lech walked away. “It was a matter probably of pride on my part,” he says. (Medina would later claim—and Lech does not deny—that Lech sold him the rights and that while he had given Lech the lead inventor credit as a courtesy for the original idea, he—Medina—was “the captain of the ship.”) In any case, Lech says, he has not received “even a penny” from any subsequent license fees and settlements.
And there would be plenty of those. Medina transferred the patents to a newly formed company called Millennium, based in the Cayman Islands. “From that time,” Medina would later say in a deposition, “Millennium became a patent-enforcement company.”
His former partner Lech puts it differently. Medina, he says, “was more inclined to be what has come to be known as a patent troll.”
When visiting great technology companies, you often see certificates marking patents, framed and hung in a grid or a long row spanning a hallway. Other times the achievements are commemorated with Lucite squares in an engineer’s office. For many years these trophies were regarded as badges of honor, tokens showing that innovators were advancing not just the fortunes of their employers but the public good as well.
But today those Lucite bricks bring to mind a different question: Who’s going to get hit in the head with them?
The past three decades of wanton patent-granting have created a disastrous environment for innovation. Today it’s practically impossible to build anything without violating a patent of some kind—and risking a multimillion-dollar lawsuit for your troubles. Once intended to protect lone inventors, patents now form a kind of shadow tech industry, in which billions of dollars are spent on amassing huge portfolios. (A recent New York Times article noted that Apple and Google, companies that define themselves by innovation, now invest more in patent acquisition and defense than in research and development.)
Why are companies spending so much money on patents? First, as protection. “Patents are like bullets,” law professor Chien says. “They’re cheap to acquire but can cause a lot of damage.” But if you have your own bullets, would-be assassins are less likely to target you. That’s the thinking behind RPX (Rational Patent Exchange), whose clients include Google, Microsoft, and IBM. RPX amasses patents, it says, to keep them out of the hands of lawsuit-happy competitors, and it vows not to sue anyone over them.
That’s traditionally been the spirit in which large companies have built their patent stockpiles, as a purely defensive measure. They were dissuaded from suing one another because they knew their target likely had patents that covered similar territory and they could be countersued quickly—the legal equivalent of mutually assured destruction. “Typically there’s a cross-license that keeps companies from having to assert literally 10,000 or 20,000 patents against each other,” Google general counsel Kent Walker says.
But that pact has been broken. What operated for years as an uneasy détente has descended into a Strangelovian shooting war.
The world saw this firsthand in last summer’s epic court battle between Apple and Samsung, the geek equivalent of the O. J. Simpson trial. Ostensibly a fight over whether the Korean electronics giant infringed specific Apple smartphone patents, the lawsuit was more appropriately seen as corporate warfare waged not in the marketplace but through the courts—a consequence of Steve Jobs’ vow to “go thermonuclear” on Google’s Android operating system, which powers Samsung phones. To be fair, the jury seemed to be swayed by evidence that Samsung had consciously copied Apple’s device, helping itself to the hard work performed in Cupertino. But the battle was fought over the patents themselves, some of which seemed obvious or overly broad: the “rubber band” function that bounces the names at the end of a contact list, the ability to tap and pinch to zoom on a phone, even the phone’s shape. In Apple’s previous patent case against Motorola, judge Richard Posner had dismissed the suit with a pox-on-both-your-houses air of disgust. (“As in any jungle, the animals will use all the means at their disposal,” he later elaborated to a reporter, “all the teeth and claws that are permitted by their ecosystem.”) This time the pox was on only one house: On August 24, Apple was awarded $1 billion in damages. Meanwhile, Apple is defending against several infringement claims. In fact, this year’s court docket resembles a high tech lineup of clashes reminiscent of the golden days of professional wrestling. Google versus Oracle. Apple versus HTC. Microsoft versus Google.
Unlike wrestling, though, this is no fun. The technology industry is rife with overly broad patents. Already too much energy and money is spent acquiring and enforcing them. Amazon “owns” the process that allows people to buy things with a single click. Apple now claims the exclusive right to sell rounded-edged, rectangular-shaped communication devices on which icons are arranged in a grid with a row of persistent icons at the bottom. And a small company in Tyler, Texas, once demanded more than $600 million from Google because of the design of the borders around its display ads. Recently companies have begun banding together to buy and share costly patent portfolios at the expense of a shared rival. In 2011, for instance, while telecom giant Nortel Networks was going bankrupt, it was valued at less than a billion dollars. But its patents ended up selling at auction for $4.5 billion to a consortium that called itself Rockstar Bidco. The group included Microsoft and Apple, two companies famous for their rivalry. Google, a third competitor, dropped out of the bidding at $3.14 billion. (Apparently, bidding the value of pi wasn’t enough to win the day.)
Of course, some patent suits are clearly justified—as Apple CEO Tim Cook said at a conference this year, infringing on a company’s patents is like stealing from a great artist. (Then again, he also said that patent litigation is “a pain in the ass” and that if everyone tried to collect on their patents, no one could afford to make a smartphone.) Cook didn’t mention that Apple has aggressively sought patents on practically every conceivable feature it builds into its products, as well as on some ideas it may never end up implementing. That’s not the equivalent of Picasso protecting his masterpieces. It’s more akin to some artist churning out sketches and storing them in his attic—then claiming theft when someone unwittingly paints the same subjects. (In fact, one of the many books written about how to use patents “to capture and defend markets [and] outflank rivals” is called Rembrandts in the Attic.)
The consequences of our current patent crisis reverberate far beyond Silicon Valley, straight into our wallets and pocketbooks. When companies are suddenly paying billions of dollars for patents, who do you think ultimately pays the tab?
But money is only part of the impact on consumers. What can’t be measured are the products that are never built—because taking on even bogus patents is too much of a hurdle for some innovators. When Google lost its bid for the Nortel patents, it made a number of public statements arguing that the patent system was being abused in a hostile, organized campaign against Android. Some called it sour grapes. But it would be difficult to argue with senior vice president David Drummond’s contention. “Patents were meant to encourage innovation,” he blogged in a cri de coeur, “but lately they are being used as a weapon to stop it.”
In February 2005, Flagstar Bancorp received a summons stating that it was being sued by Eon-Net, a privately held company based in the British Virgin Islands. Eon-Net, like Millennium, was a company that Medina had set up to protect his intellectual property. Already, with the help of a tireless New Jersey attorney named Jean-Marc Zimmerman, Medina had successfully demanded licensing fees from dozens of other companies for infringing on his patented process of extracting data from scanned documents. But in 2004 Medina was granted another patent, one of several follow-ups to the original. This patent took an even more generous view of his initial idea, covering the extraction of not just scanned data but any information that had been entered using a “multimode information processing system,” a term that was not in the first patent. Medina later requested a further tweak, changing 30 phrases to the broadest possible description of his invention—”a method of processing information.”
As Zimmerman interpreted it, this extended the domain of the patent to the realm of ecommerce. Under this theory, pretty much anybody who filled out an online form was supposedly infringing on Medina’s patents.
It was a powerful claim. Medina and Zimmerman used it to sue more than 100 ecommerce companies. Some considered fighting the claims. A CEO of one ecommerce site was so outraged when he was first served by Eon-Net that he tried to mount his own homegrown defense. He didn’t have enough money to pay a legal team, so he drafted his own legal interrogatories. (One example: “Describe the method by which you sleep knowing that you are a scum-sucking pig.”) He also contacted the coinventor of several online markup languages to see how much it would cost to have him appear as an expert witness on his behalf. The answer: $25,000, exactly what Eon-Net was demanding in licensing fees, a price that made settling the only rational decision. Grudgingly, the CEO gave up. (He requested anonymity from Wired because he didn’t want to make himself a target for future lawsuits.)
Such was the situation facing Flagstar’s chief legal officer, Matthew Roslin. Flagstar was a bank that prided itself on its technological prowess—it claimed to be one of the first to use the web to expedite mortgage applications. Now it was being sued for just that innovation. “The case was laughable,” Roslin says.
Still, logic dictated that he should settle. Eon-Net was asking for less than $100,000—a pittance compared with how much a lawsuit would cost. But the summons rubbed Roslin the wrong way. Flagstar was not a software company—where such suits abounded—and he felt disinclined to submit to what seemed like bullying. He felt that taking a stand would discourage future trolls from filing suit against Flagstar. And the bank—at the time a successful national mortgage lender with billions in assets—could afford the battle.
Flagstar hoped to mitigate costs by sharing its defense with some of the several companies Eon-Net had sued at the same time, in nearly identical suits. But almost all of those firms preferred to pay a settlement and make the problem go away. Only two ecommerce sites agreed to join with Flagstar: drugstore.com and CoolAnimalStuff.com.
The companies successfully petitioned to move the lawsuit from New Jersey to Washington state. Nathan Garnett, drugstore.com’s associate general counsel, believed that the inconvenience of fighting a case across the country would discourage Eon-Net. But Eon-Net did not drop out as he had hoped. Soon CoolAnimalStuff.com decided to settle. Its CEO, Richard Leeds, felt the lawsuit was bogus but now calls the settlement amount “a steal” compared with what he would have had to pay for litigation.
Drugstore.com was also doing the unpleasant math. “We felt if we could settle for a reasonable amount of money, we’d do it,” Garnett says. “It’s absolutely offensive to pay off someone like that, but you have to put your feelings aside.” In April 2006, drugstore.com paid Eon-Net, and Flagstar was alone.
In preparing its defense, Flagstar seized on the lack of rigor in Eon-Net’s filing. The law required plaintiffs to specify precisely which of a defendant’s products infringed on their patents. Flagstar argued that Eon-Net hadn’t done that, charging simply that the bank was infringing without going into much detail. “One of our major allegations was that they had no idea what they were suing us about,” says Kristina Maritczak, associate general counsel at Flagstar (who has since left the company). “They didn’t do due diligence or research on any of the products that we had used.”
Even as the case progressed, Eon-Net continued its broad approach to litigation. By Flagstar’s count, since its own case began, Eon-Net had filed at least 25 more lawsuits. Barnes & Noble. Burlington Coat Factory. D’Agostino supermarkets. Delta Air Lines. Foot Locker. Gristedes foods. Hammacher Schlemmer. J.Crew. JetBlue. Jos. A. Bank Clothiers. J&R electronics. Liz Claiborne. Somethingsexyplanet.com. Sony Corporation of America. Walgreens. The Wine Messenger.
Over the next few months, district court judge Marsha Pechman came to a conclusion. In August she issued a summary judgment throwing out Eon-Net’s case. Two months later she took the rare extra step of sanctioning Eon-Net for filing a frivolous suit, finding that it had made claims that were “wholly without merit … in hopes of a quick settlement.” “Indicia of extortion are present in the case,” she wrote. She directed Eon-Net to pay Flagstar’s legal fees. And she ordered Eon-Net to send a copy of her judgment to every other defendant that it was suing. “Eon-Net has chosen filing over investigation and nuisance settlements to avoid the merits,” she wrote. “Eon-Net’s conduct violates the rules and other defendants should be made aware.”
Eon-Net appealed to the Federal Circuit court.
And to the horror of Flagstar, the appeals court backed Eon-Net.
Pechman, the justices opined, had been too hasty. As a matter of fact, Eon-Net’s culpability shouldn’t have been reached via summary judgment. Eon-Net should have its day in court. “It was enraging,” Maritczak says. “Here was this completely frivolous case, and the federal circuit is telling me that my company has to spend another $500,000 to prove that it’s a frivolous case—when a federal judge had just ruled that it was a frivolous case!”
Medina, clearly ecstatic, posted end-zone-dancing comments to a few patent-related blogs. “I have been in the patent enforcement business for 25 years,” he wrote on one. “I have never seen a worse judgment than Pechman’s: wrong on the facts, wrong on the law, and wrong on procedure.”
The flaws of the patent system are most vividly exposed by the rise of trolls. The term, inspired by the stunted opportunists of myth, came from an Intel vice president who had been sued for calling a lawyer a “patent extortionist” and needed another expression. It refers to a company that doesn’t make products but exists solely on the revenue of its patents. In the parlance of today’s patent ecosystem, trolls are known as nonpracticing entities, or NPEs.
Trolling may be frowned upon, but it can present an irresistible business model. It costs a few thousand dollars to secure a patent, which can easily bring millions through litigation. That helps explain why trolling has exploded since the turn of the century. In 2011 NPEs brought 5,842 suits, with a direct cost of $29 billion in legal and settlement fees—more than four times the haul in 2005. (And these sums do not include indirect costs to defendants—like the time and energy spent on a court case that could have gone toward building and selling new products and services.) Apparently many of those claims are baseless—a congressional study found that when defendants fought the trolls, they won 92 percent of the time. But there’s no way to know, because the overwhelming majority of patent cases never make it to trial, ending instead in a quick settlement. It is usually more expensive to win a case against a troll than to just settle. In other words, the legal system favors the troll. That has helped make trolling a multibillion-dollar industry, albeit one that doesn’t benefit consumers in any way.
Perhaps the most famous patent-troll case came in 2006, when an NPE charged that Research in Motion’s BlackBerry infringed on patents covering wireless email. RIM had asked the Patent Office to reexamine the patents, but before it could reach a decision, the judge had to decide whether to grant an injunction, which could have shut down RIM’s entire business. Fearing the worst, RIM settled for $612.5 million. In a final insult, not long after the case was settled, the Patent Office ruled that many of the disputed patents were indeed invalid.
That labyrinthine process, combined with the intricacies of the court system, have made trolls more powerful than ever. NPEs have nothing to lose. Because they don’t create anything, they can’t infringe on anyone else’s patents, no matter how overblown. That means they can’t be countersued. This isn’t mutually assured destruction; it’s asymmetric warfare.
The system has its ardent defenders, prime among them Nathan Myhrvold, the former Microsoft CTO who now runs a company called Intellectual Ventures. It conducts periodic invention sessions—Bill Gates often participates—and every year files an average of 500 patents resulting from those discussions. Some of the patents eventually become products, but others may never move beyond the patent stage. Intellectual Ventures also makes money by snapping up patents from individual inventors, which it then licenses or litigates.
Myhrvold has been held up as the poster boy for patent abuse, but he says that by paying inventors for their ideas he is spurring innovation. (He claims to have shelled out more than $300 million to individuals.) He also sees a societal value in a liquid market for patents, which he says can help fund future inventions.
But what’s galling is that often, in the wider marketplace, patents aren’t valued because of the innovations they might foster. Instead, they are assessed on their potential to exact tolls on existing companies that have veered unintentionally into territory covered by the often bloated claims of the patent holders. Still, Myhrvold believes that despite some overly broad patents, the system is working. “Of course there are bogus patents—just like there are bogus companies listed on Nasdaq,” he says. “If you make the proposition that there’s lots of bogus patents, then there should be an objective test by which we can measure them. I’ve looked. There isn’t any.”
Myhrvold is right that there’s no quick, infallible test to distinguish between valid infringement claims and mere trolling. But the current system—requiring a complicated legal process to toss out even the fishiest claim—makes it easy to file lawsuit after lawsuit, always settling before the underlying patent is exposed to the most rudimentary scrutiny.
After the appeals court sided with Eon-Net in overturning Pechman’s ruling, Flagstar had good reason to drop the case. On the eve of the mortgage loan crisis, the fortunes of the family-run bank were slipping and clearly about to get much worse. (Indeed, today the bank is controlled by an equity firm, and its share price has dropped more than 99 percent from its high in 2004.) But this had become a moral issue. “The fortunes of the company turned, but I still viewed it as money well spent,” says Roslin, Flagstar’s former chief legal officer.
Medina, meanwhile, seemed to have thrived. While his lawyer was busy sending infringement notices to dozens of companies, collecting millions of dollars in licensing fees or settlements, Medina was spending much of his time in Kenya. A secular Jew who turned to Christianity in 1973, he had established a ministry there. (He says he has six academic degrees, including a doctorate in theology from Vision International University.) He also got involved in politics (“I am, in effect, the James Carville of Kenya,” he told his high school’s alumni magazine) and founded an NGO promoting computer literacy, apparently with the proceeds of his litigation and licensing. He and his wife, a Filipino doctor he met in New York City, began to work with a Kenyan professor to develop medicines derived from local flora for the treatment of AIDS. He also started to make videos, including a 64-part series of the life of Jesus that he posted on YouTube. Only rarely did he speak publicly about his lawsuits.
But on June 23, 2008, Medina found himself answering questions under oath. As part of the continuing Eon-Net case, Flagstar had the right to depose him. Accompanied by his wife and lawyer, Medina appeared at the offices of a neutral New Jersey law firm to submit to seven hours of questioning that struck some of the viewers as one of the more unusual depositions they’d ever witnessed. “It was like an acid trip,” Roslin says.
Medina set the tone early. When Flagstar attorney Melissa Baily asked him whether he had prepared for the deposition, he answered, “Not really.” (Baily, who had joined the Flagstar case as an associate, had worked on it for so long that by this point she had made partner.) She asked whether he had prepared even a tiny bit. “I thought a little bit about it,” he said. And what, Baily asked, did he think about? “How much of an inconvenience and a bother this is,” Medina said.
Not all of Medina’s comments were so flip. He proved capable of detailed technical descriptions at times. But when Baily tried to press him about the origins of his idea—and tease out just how a patent about scanning documents had transmogrified into a claim that encompassed almost all commercial activity on the web—he spoke in lofty terms. “It was sort of Athena coming fully clothed from the mind of Zeus, except she wasn’t really clothed,” Medina said. “It took us a while to clothe her, but it was there from the beginning.” When Baily asked why he was unable to provide papers or notes from the invention process indicating that he had the slightest premonition about the Internet or electronic commerce, he told her he had long ago tossed out his notes and files. “I don’t save anything so I don’t have to look,” he said. “There is nobody else to ask and no place else to look.” In any case, he admitted that while his team had built an admittedly crude prototype of his original scanning idea, he hadn’t done so for the web-based claims he was pursuing in this case. No need to. “We believe broadly that websites implementing ecommerce more than likely infringe our patents.”
Did he really think that practically every instance of ecommerce infringed on his idea? “That is a belief I hold,” he said. And he didn’t think he needed to bother even analyzing an ecommerce website to conclude that it infringed his patent? “That is 99 and 44/100 percent true,” he said. He and his lawyer simply browsed the Internet, looking for “people doing electronic commerce, which there is a near infinitude,” he said. It was all due, he implied, to the almost otherworldly brilliance of his vision many years ago. “This invention was sort of a prophetic flash as to what the future of computing would look like,” he said. “And we were fortunate enough that the logic of that inspiration came to dominate the market.”
At one point Medina expressed his irritation and impatience at the indignity of having to explain why Flagstar should do what almost every other defendant had already done: pay him thousands of dollars in settlement fees. “I tell you I am so sick of this stuff by now,” he told Baily. “Especially this haggling over the stupidities and trivialities which is the name of the game in litigation.” Instead he suggested that Baily simply put him in touch with a principal at Flagstar with decisionmaking authority so he could quickly persuade them to pay up. “Why are we playing ring around the rosy with this lawsuit,” he asked, “when Flagstar is a money-losing bank that spent a multiple of our license fees on this litigation which (A) it is not going to win and (B) is quixotic at best?”
But that decision would be left to the judge, who would have to determine whether Medina’s patent did in fact apply to Flagstar’s website. On October 27, 2008, Eon-Net’s attorney, Jean-Marc Zimmerman, approached the bench at a Seattle district court to make the case to judge Ricardo Martinez. (Although this was a continuation of the initial lawsuit, Pechman had recused herself after her summary judgment was bounced by the appeals court.) But before Zimmerman could launch his argument, Martinez posed a question that gave some indication of how he felt about Eon-Net’s claims. “Before we get started, I’m just kind of curious,” Martinez said. “From your perspective, can you tell me what this invention is?”
“Sure,” said Zimmerman.
“I mean, what are we talking about? Are we talking about a software system? Are we talking about a hardware system? Are we talking about the method of configuring the computer? What are we talking about?”
It was not the first time this question had come up. At an earlier hearing with Pechman, Zimmerman explained his thinking. “There’s no product per se,” he had told her. “It’s a system method. It’s a system patent. The claims are system claims comprised of steps, and if those steps are performed, there’s an infringement.”
“That leads me to a question,” Pechman said. “If you are correct, and you have patented a system—”
“Yes,” Zimmerman said.
“Then you own the web,” Pechman concluded.
Martinez was not swayed by this reasoning any more than Pechman had been. On March 4, 2009, he ruled that the original patent couldn’t be extended to cover every online form. The ruling essentially ended the case. (It also made one wonder whether the millions of dollars that Eon-Net had already collected were based on unjustified claims.) Within a few weeks, both parties stipulated to a judgment of noninfringement.
But things were not over. A couple of months later, just as Pechman had done before him, Martinez further ruled that Eon-Net’s case had been baseless and unjustifiable. Its attitude toward litigation was “cavalier.” Martinez held Eon-Net responsible for abusing the court and ordered it to pay Flagstar’s legal fees.
Eon-Net kept fighting. When Flagstar submitted its expenses, Zimmerman went over them line by line, questioning many of them—and losing every time. Of course, Eon-Net appealed the ruling.
But this time the Federal Circuit Court of Appeals affirmed every bit of the decision. In fact, the ruling read like a brief attacking the tactics of trolls in general, citing the high cost of litigation and the tortuous process that defendants have to bear before a meritless case can be dismissed.
When the Supreme Court refused to consider Zimmerman’s subsequent appeal, the case was finally over. It had taken more than seven years, but the troll was denied.
The rise of trolls came as a result of a court system that seemed to favor them every step of the way. The vagueness of the underlying patents, the ridiculous ease with which plaintiffs could file a suit, the high costs defendants faced, and the unthinkable consequences of losing—all created an environment in which trolls were routinely rewarded for filing frivolous suits. But by the late 2000s, courts and the legislature began slowly chipping away at these factors. In 2003 a company called MercExchange successfully sued eBay over the provenance of its Buy It Now button. When eBay appealed, MercExchange took the common step of asking for an injunction against the defendant, which would have barred eBay from using the disputed technology as long as the case remained open. This was intended to prevent firms from profiting unfairly from someone else’s invention. But all too often it further pressured companies to settle quickly so they could go back to business. Courts could be quick to grant such injunctions, but when the issue came before the Supreme Court in 2006, the justices determined that more care should be taken with that drastic step. This precedent made it harder for challengers to threaten a defendant’s entire business.
The federal legislature is also waking up to the problem. Last year Congress passed a patent reform bill, the Leahy-Smith America Invents Act. Though patent activists label it timid, the law does provide some speed bumps for trolls. It has been difficult and pricey to get even the most blatantly abusive infringement case thrown out. But now, thanks to a new inter partes review petition process, the Patent Office itself can rule on egregious claims, throwing them out before defendants are forced to go through the pain and expense of a full trial. When the new process was unveiled on September 16, a flood of challengers poured into the Patent Office.
And a new bill before Congress would further dampen troll activity. The Shield (Saving High-Tech Innovators From Egregious Legal Disputes) Act would require an unsuccessful plaintiff in an infringement suit to pay the defendant’s legal fees—just as Eon-Net was forced to do in the Flagstar case. “We think this would be a big disincentive,” says Oregon representative Peter DeFazio, who predicts that the legislation could pass in the next session.
Some companies, meanwhile, are taking individual moral stands against weaponized patents. Twitter recently introduced the Innovator’s Patent Agreement. It grants its employees some control over the patents that bear their names. This means that Twitter can’t file an infringement suit unless the original inventor gives permission—even if the company changes hands or sells off the patents. It may cost Twitter a bit in licensing fees, but it has helped the company in other ways; legal counsel Ben Lee says that its recruiters are already reporting that the program makes Twitter more attractive to prospective hires.
But if the system itself is to be put right, the most significant changes must come from the Patent Office, which helped create this whole mess. Director David Kappos is well aware that there are simply too many patents that never should have been granted. He is toughening the guidelines and retraining examiners on certain types of patents, and he says that the rate of rejection for those claims has begun to rise. (“As much as we’d like? No,” he says, “so we’re going to do even more education and training.”) Kappos is experimenting with crowdsourcing that will enable outside experts to air objections while patents are still under consideration.
Kappos also says that his office has ended one of its more vexing practices. “Merely putting a business process that existed in the physical world on the Internet is not patentable, and we should’ve never been issuing patents on that,” he says.
Still, even Kappos is not ready to argue that we’ve turned the corner on our patent problems. “What I am prepared to say is that a lot has been done,” he says. “There’s a lot under way, and there’s even more that we’re prepared to do. And we are not done.”
Mitchell Medina, who has sued more than 100 companies for infringing his patents, sees himself as a victim. “When Jobs and Wozniak or Hewlett and Packard start in a garage, they’re heroes and captains of industry,” he says. “If you apply for a patent first, you’re a troll.” Via email from Africa, he continues to attack the Flagstar decision, claiming that Martinez ignored key evidence and ruled incorrectly. (Medina felt it best not to talk by phone, because, as he put it, “I tend to speak my mind, and it would be unwise for me to do so without the self-censorship of writing.”)
“We did nothing improper,” he writes. “The judges in this case comported themselves like spectators in a Roman coliseum who wanted to see plenty of blood on the floor in the form of litigant’s money before they considered the show worthy of their interest.”
Medina says that his preference all along was not to file suits but to develop a product or, barring that, to get licensing fees for his patents, which he says “anticipated the development of ecommerce.” He says he even set low royalty fees, “because I did not want to unduly damage anybody’s business.” The main objective for all his activities was his charitable work, most notably “perfecting an herbal-based remedy for HIV/AIDS.” (He and his colleagues already have several patents on this.) Paying Flagstar’s legal fees—more than $630,000—has hurt this important effort, he says. “I hope the prevaricators and pettifoggers who made the Eon-Net judgment possible are proud of themselves,” he writes.
Surprisingly, for someone who seems to have done pretty well overall with the current system, Medina isn’t bullish on it. “The patent system is badly broken,” he says. “But it wasn’t broken by NPEs. The system is now a playground for the big boys, and the independent inventor can’t afford to play the game.”
Nevertheless, after Eon-Net he began a new company called Glory Licensing. The company, based in Saint Kitts and Nevis, filed at least a dozen more lawsuits against ecommerce companies. In 2011 a company called Content Extraction and Transmission began filing another set of lawsuits. Attorney Jean-Marc Zimmerman charged San Diego County Credit Union, Bank of America, Wells Fargo, and at least eight other companies with infringing patents whose family history tracks back to Medina’s dining room table.
Outrage may one day swing the pendulum back from patent madness to something resembling what the Constitution’s framers had in mind. Meanwhile, those defendants will probably continue to pay up. And so will we.