The long answer for what New Zealand, Netflix, and the eastern part of the largest state in the continental US have in common is that using cloud computing to do business may get you sued by patent trolls - as recently happened in a real-life legal drama in the District Court for the Eastern District of Texas. Allow me to explain.
Netflix being sued
In late 2016, Netflix introduced a new feature allowing users to download content from its servers onto a user’s device, allowing them to watch content offline later. It took a mere two months for Netflix to get sued for patent infringement over its new feature. The plaintiff, a company called Blackbird Technologies, claims they own a patent titled “method and system for supplying products from pre-stored digital data in response to demands transmitted via computer network”. The patent was filed in 2000. In simpler terms, it is a system used to process online orders for the delivery by mail of digital content burnt onto a CD or DVD.
The irony here is that Blackbird’s patent seems to describe Netflix’s initial business model: DVD rental by mail, which Netflix started in 1997 and continues today. Not only does that cast doubt on the validity of the patent, it is difficult to see how Netflix’s current activities would fall within the scope of that patent.
Patent trolls on the prowl
Patent trolls, however, do not let themselves get bogged down with such minor details. Whether their case for patent infringement is strong or not is irrelevant. "Patent troll" is a pejorative term given to individuals or companies whose primary activity is to assert or threaten to assert patent rights in court against other companies. This is often through hardball tactics. These companies rarely exploit the patent themselves, and are also often called Non-Practising Entities. The sole reason for the operation of these companies is to make a living by negotiating financial settlements and licensing deals.
Over the past few years, cloud computing has become a fertile hunting ground for patent trolls. They are going after both service providers and users. Cloud computing is currently a booming industry, and this why patent trolls are becoming rampant. Cloud computing also relies a lot on open source software, as is illustrated by the case against Netflix. The patents for business methods or software can be very wide in scope; the inconsistency in the United States Patents Office’s approach to patent eligibility for business methods and software - and that of the US courts - has also created uncertainty and caused questionable patents to be granted over the years.
Kiwi innovators exposed to patent trolls
A client of James & Wells which offers cloud-based software services in the US was recently sued for patent infringement. The plaintiff was a notorious patent troll. Our client was one of several software companies that were being sued simultaneously. The plaintiff also had initiated around a dozen similar lawsuits against other software companies in recent years.
After a preliminary assessment, we were confident that there was no infringement. However, when we requested assistance from one of our associate firms in the US to represent our client, they gave it straight to us and our client:
- Preparing and filing a substantive response to the infringement claim alone would cost around US$50,000.
- Patent proceedings in the United States cost an average of US$2.5 million to defend.
- You cannot recover legal costs from the plaintiff if you are eventually successful.
- They expected a realistic settlement to mean a payment of about US$75,000 to the plaintiff.
To our US associates, this was nothing new or surprising, and in fact was something they treated as business as usual.
Our client was lucky, and thanks to great work from our US associates, the case was settled for US$15,000. Legal costs are likely to have cost at least the same amount, too.
With the above in mind, it is easy to see how patent trolling has been described as extortion, and the best evidence that pure evil does exist in the world.
Fortunately, in New Zealand, our legal system makes it is financially unviable for patent trolls to operate. For businesses in the US, however, patent trolls have become part of the cost of doing business. An example of this is that Microsoft recently started offering an indemnity against patent trolls, to users of its cloud computing platform Azure. They see this protection as a selling point.
Risks can be reduced by seeking competent professional advice proactively. By conducting freedom-to-operate searches, relevant patents, including those only remotely relevant but owned by notorious patent trolls, can be identified. This puts Kiwi innovators in a much safer position when they are informed of such risks before entering the US market.
My advice is to prepare for the worst, but hope for the best.