My colleague Clare Nicholson of Osborne Clarke has put together a great presentation on the UK’s patent box regime – a tax efficient structure for holding patents in the UK. I thought you might find it interesting… Continue reading What you need to know about the UK patent box
More interesting developments in the Lodsys/app developers spat (more on that here): now Apple has got involved. Yesterday, Apple wrote to Lodsys asking it to withdrew its threats against a number of iOS app developers. You can read the full letter here.
Apple’s arguments were three-fold:
(1) The patent licences which Lodsys has granted Apple cover both Apple and its app developers – therefore Lodsys has no basis for arguing patent infringement by any app developers, because they already have the right to use Lodsys’ patents.
(2) Based on the limited evidence in Lodsys’ letters to app developers and on its site, all of the allegedly infringing acts take place via Apple products and services (e.g. the App Store), not on app developer products and services (e.g. the app developers’ apps).
(3) Lodsys’ claims are barred by the legal doctrines of patent exhaustion and first sale. Very basically, the argument here is that, once a product which contains your IP rights has entered the market, you lose certain rights to try to control how that IP is used. Otherwise, people who actually turn the IP into valuable products would forever be under the control of the IP owners (more detail here).
Overall it’s a very measured letter, which doesn’t issue anything like a threat to Lodsys but makes it clear that Apple is on the app developers’ side.
The ball is now ofc in Lodsys’ net. This letter doesn’t change anything in terms of Lodsys vs the app developers – Lodsys is still free to pursue legal action against them if it likes, or just to try to get a quick cash settlement from them. BUT, if that legal action were to go ahead, two things have now changed:
(1) The app developer can just adopt Apple’s legal arguments against Lodsys; and
(2) More importantly, if Lodsys was to take legal action against app developers there is a stronger possibility that Apple would join in on the app developers’ side (though that is far from clear).
This doesn’t really change the wider issues with software patents…
If Lodsys does now back down, it would largely be because Apple has demonstrated the weakness of Lodsys’ position – which is good for the affected app developers.
But what happens the next time someone comes along with a better software patent – perhaps one that hasn’t been licensed by Apple or one of the other mobile manufacturers? Or maybe one games company starts sending cease and desist letters to its rivals based on a patent it has just been awarded? In other words, I don’t think we’ve seen the last of software patent controversies in the mobile or games worlds just yet…
This post represents my personal views – not those of my employer.
Patents are suddenly causing problems in the mobile games industry – this is what you need to know about it.
What’s been happening: Lodsys vs the app developers
This year has seen a sudden spike in patent lawsuits/threats against businesses in the mobile sector, affecting both developers and platforms. Until very recently, patent infringement issues were confined to actions between the big beasts in the mobile world (like the ongoing battle between Samsung and Apple, for example).
However, last week patent issues suddenly became a real problem for app developers, when news broke that a US entity called Lodsys has been issuing warning letters to a number of app developers over patents which Lodsys claims it holds over in-app purchase technology. Specifically (as Wired reports):
“Lodsys is accusing the developers of infringing a patent related to the usage of an “upgrade” button that customers can use to upgrade from a free version of an app to a paid version, or to make purchases from within an app.”
We don’t know how many developers Lodsys is threatening to take action against. Lodsys has confirmed however that it is “seeking 0.575% of US revenue over for the period of the notice letter to the expiration of the patent, plus applicable past usage“. Lodsys claims that its patents have already been licensed by Apple, Microsoft and Google, but that this does not protect developers who then create apps in their ecosystems.
What is a patent?
Basically, a patent is a type of intellectual property right which “protects new inventions and covers how things work, what they do, how they do it, what they are made of and how they are made. It gives the owner the right to prevent others from making, using, importing or selling the invention without permission” (says the IPO).
Patents typically protect inventions like new medicines or industrial machinery. They allow you to stop others from exploiting your invention and can themselves be sold/assigned/licensed to a third party – which makes them valuable. However, they are limited in duration – they last up to 20 years and then the invention typically enters the public domain.
The rationale behind patents is essentially that, if society grants inventors the exclusive right to exploit their invention for profit for a limited period, then inventors will be incentivised to keep inventing and society will benefit both from new inventions and from access to existing inventions which enter the public domain after their patent expires.
Patent law is very complex and each country’s laws differ, so I’m not going to try to explain everything here – as always, if you have queries then you should seek specialist legal advice (or contact me). That said, for current purposes here’s the key points (based on UK law as a model) which you need to understand about patents:
- To be patentable, basically an invention has to be new, has to involve an inventive step that isn’t obvious, has to be capable of being made or used and can’t fall into certain excluded categories (e.g. it can’t be a scientific/mathematical theory, or a musical work).
- The process of obtaining patents is long and complicated and territorial: a patent only protects you in the country in which it is granted, so often you have to obtain patents in each country where you operate.
- Broadly speaking, in some countries (above all the USA), you can obtain patents over software inventions, whereas in many other countries (especially Europe) it is possible but much harder/uncertain. Software patents are often pretty contentious in the tech industry (more on that later)
- Once you have a patent, in principle you could sue anyone who makes a product that you consider infringes your patent, whether they knew about your patent or not. In other words, if the other guy infringes your invention knowingly or unknowingly, you could in principle sue him – you do not generally need to prove that he knew about your prior patented invention. The test for patent infringement focuses much more on a close analysis of the two products and an examination as to whether the allegedly infringing product does actually infringe the patent.
- There are four main responses to a patent infringement suit:
(1) Agree to pay a licence fee to the patent holder (this can range from a one-off fee to a profit sharing agreement) — avoids litigation but means an extra business cost
(2) Fight the claim on the basis that your invention does not infringe the patent — leads to potentially expensive litigation
(3) Fight the claim on the basis that the patent is invalid or expired or otherwise doesn’t bind you — leads to potentially expensive litigation
(4) Do nothing and hope for the best — ultimately just leads to (1), (2) or (3) happening.
What can you do if you have patent infringement concerns?
There’s no wonder cure here I’m afraid, but if you’re concerned about patent infringement claims against you (or if you’re concerned that someone else is infringing your patents), then here are some tips to think about:
- Take legal advice early – patent infringement claims are complicated and can ruin your business, so take them seriously. As I say to my clients, a little legal advice early on usually saves you a lot of time and money down the line.
- Reach out to the patent holder. Find out what it wants, early on. And then work out what you can live with.
- Contact business partners who could help you, or other entities which might be affected (in the present case, the app platforms and other app developers)
- Check your insurance policy regarding its legal disputes insurance cover (it *could* help)
- Get vocal or keep quiet. In other words, either get everyone you know on board to try to put pressure on the patent holder to drop the claim or, if that won’t work or public knowledge of the claim would hurt you, lock down. If need be, get PR advisors involved.
- Make sure your business is a limited liability company. Actually this is really something you need to do before you face a claim, but it’s still important – a successful lawsuit against you, or a failed lawsuit by you against another guy, could bankrupt the business – which you can walk away from in the worst case scenario if the business is held in a company. You can’t walk away from being made bankrupt personally.
(Note: larger tech companies may well have other defences open to them – in particular, using their own patents portfolio to counter-sue the other guy (that’s one of the reasons that these companies acquire huge numbers of patents – as a shield to patent infringement claim from third parties).)
Lodsys, revisited: thoughts on what’s happening in the mobile world
So far, the Internets seem pretty angry about what Lodsys is doing (its blog even mentions death threats), on the basis that Lodsys is essentially claiming ownership of the patented in-app purchase functionality. I don’t have enough information or specialist patents expertise to comment in detail on the validity of Lodsys’ patents or its likelihood of ultimate success in any claims (though my friend Florian Mueller has expressed some trenchant views on this front at his Fosspatents blog).
Clearly though, this dispute could end up raising some pretty important issues the future of in-app purchase functionality in the mobile world. On that front though, a lot more still needs to happen before this really gets interesting. The app platforms need to make their position public (especially Apple, from which a number of app developer have sought assistance). The app developers and Lodsys also need to clarify their positions as against each other. And, ultimately, Lodsys will need to either put up (i.e. start legal action) or shut up.
If we see lawsuits afoot, it will get very messy, very quickly. Lodsys would need to pursue its claims against the app developers/platforms through legal avenues – potentially even trying to shut them down. As I said earlier on, the app/developers will need either to reach financial agreement with Lodsys, or fight the claim, or just try to play for time. If a big cat in the mobile world gets involved and funds a big legal fight, we could see the validity of Lodsys’ patents being challenged.
Ultimately, if Lodsys succeeds then it can in principle expect to receive substantial royalties from the licence agreements it could demand, while the app platforms may also decide/be forced to change how their technology works in order not to infringe these patents. This would cause a lot of difficulties in the mobile world – for app platforms, developers and customers. On the other hand, if Lodsys’ claims were defeated then it would send a strong message regarding the use of software patents to pursue these kinds of claims in the mobile world.
Of course, even if this claim does go away, I don’t think the idea of software patents being used in games or mobile or other parts of the modern tech industry will go away – look at Zynga’s reported patent applications regarding virtual currency, for example.
Watch this space.
Wider thoughts on Lodsys and software patents
More generally, my view is this debate is really about whether we should have software patents at all, and it just happens on this occasion to arise out of Lodsys’ software patents regarding in-app purchases in the mobile sector. As I said earlier, software patents are often very contentious. The arguments in favour of software patents are the same as arguments in favour of patents generally:
- Patents promote development (especially the increasingly large R&D that expensive new software requires)
- Patents mean that the public will eventually obtain public disclosure and free use of the invention (after the 20 year monopoly has finished)
- Patents represent a great deal of hard work, which deserves protection
- Patents are always subject to legal challenge if the patent holder has gone too far
- Copyright doesn’t go far enough to protect inventions – patent protection is therefore needed
However, opponents of software patents have their own arguments too:
- Software patents are a minefield in the modern software industry, where you can very easily but unknowingly infringe someone’s software patent, or at least open yourself to a speculative lawsuit. Or, to put it another way, how are you supposed to know you have infringed a software patent and what are you supposed to do if you have infringed one?
- Software patents are useless #1: no software innovation will ever retain its value for the 20 years of a patent’s life.
- Software patents are useless #2: a decent software developer could probably engineer a way around the patent anyway, so why bother having them?
- Software patent protection actually stifles innovation by shutting up new inventions and preventing open and free innovation (especially in the Internet age where we are used to free/fast information exchange)
- Permitting software patents just encourages patent trolls to take legal action against legitimate software developers for a quick return
- Other branches of IP law, like copyright or trade mark law, already provide sufficient protection
These are the arguments which underlie the current debate as to whether Lodsys is acting properly or not in threatening patent infringement actions against developers allegedly infringing its patent in-app purchase functionality.
I’ll let you make up your own mind as to which you prefer. However, to some extent these policy arguments for and against software patents are besides the point: like it or not, in some jurisdictions it is just a fact that software patents are permitted and will generally be protected by the courts.
UPDATE: Sony was able to lift apparently all restrictions against it and LG was ordered to pay it substantial damages. More here.
Sony and LG are set to go to court in Holland tomorrow over a court order apparently obtained last week by LG for the seizure of reportedly tens of thousands of PlayStation 3s. This appears to be a separate strand to the patents battle ongoing between Sony and LG over the PlayStation 3 among other devices.
Florian Mueller over at Foss Patents has all the details. Here’s my view of the highlights:
- It seems that, at around the same time that LG secured a temporary ban on the importation of PS3s into Holland, it also obtained a seizure order over PS3s stores in a Sony warehouse in Holland. As I said, media reports suggest tens of thousands of PS3s may have been seized.
- Sony was not given advance notice of the seizure (apparently because the judge ruled Sony the opportunity to move its PlayStations out of that warehouse ahead of confiscation). However, Sony was given permission to appeal against the seizure – which is now set for a court hearing in The Hague tomorrow (10th March).
- Sony will of course be wanting to have that seizure order overturned, whereas LG will want to extend it – much like the position regarding the temporary importation ban (no news on that, by the way).
- The court documents filed in support of this seizure order set out interesting details about LG’s explanation why this litigation started up in the first place.
- Basically, it seems that LG and Sony were in discussions late last year about giving each other licences over technology underlying a whole range of products. LG wanted to give Sony only a licence over Bluray technology (and leave the other products for another licence(s), but Sony wanted a licence to cover everything.
- LG says that, when these discussions failed, Sony then launched legal action in the US and LG responded with its own legal action in Europe and the US.
So, what’s the current state of play?
(1) Sony and LG will go to court tomorrow over the seizure order – watch this space for more. In the meantime, bear in mind that the seizure order does not mean conclusively that LG was right and Sony was wrong. It simply means that the judge felt that LG’s case is sufficiently convincing to warrant the seizure ahead of a full court hearing – but the judge won’t have been able to come to a full decision yet.
(2) The temporary ban on importing the PS3 into Holland is still in place but I suspect is soon to run out – which will mean another court hearing soon.
(3) What impact will the seizure of the PS3s have on PS3 stocks in Europe? Will it change analysts’ assessments that stocks won’t run low anytime soon?
(4) If in due course a judge finds that LG was wrong to have obtained the importation ban or the PS3 seizures, it would in principle be liable to pay potentially substantial compensation to Sony.
(4) We’ve yet to hear Sony’s side of the story…
The big news in the console world last week was LG obtaining a temporary ban on the importation of PlayStation 3s into Europe. I spoke with BBC Radio 4 about this issue (you can listen here at 42 mins if you’re keen!) and wrote a feature on Gamesindustry.biz, now reproduced below:
This case is a ‘first’ for the games industry in several respects: the first time a patent has been used to obtain a console importation ban; the first time a console has been blocked from entering Europe; and the first time a (modern) outside electronics manufacturer has sued over a console. I’m going to discuss why this lawsuit came about, what practical consequences this might have for Sony (though talk of a ‘loophole’ is misguided – more on that later) and what might happen next. Lastly, at the end I set out some key points from this case for all businesses in the games industry.
THE STORY SO FAR
The rivalry between Sony and LG – both of whom are of course Asian giants in electronic consumer products – has been going on for some time. But it really came to the fore when, in December 2010, Sony took legal action to block the importation of LG mobile phones in the US. LG has since responded with legal action in both the US and Europe, alleging that Sony has infringed a number of LG patents over Blu-ray DVD technology, including the Blu-ray tech in the PS3 – which is what has led directly to this battle.
WHAT’S A PATENT?
A patent is a form of intellectual property right – it is essentially a temporary monopoly over the exploitation of a new invention. The legal rationale is that if you have created something useful for society, you are rewarded by the exclusive right to profit from that invention for a limited period of time – provided that afterwards anyone can use that invention freely.
Broadly speaking, in Europe patents are awarded over hardware/physical inventions, not over software. They are therefore mainly of interest to hardware manufacturers, such as console or peripherals manufacturers in the games industry.
Technology companies like Sony and LG tend to amass large portfolios of patents for two key reasons: (1) patents are valuable in their own right; and (2) they can be a useful shield in any patent case brought against you.
That last point needs a little explanation. Let’s say Company A and Company B are both in the electronics industry and both own several patents. Company A sues Company B for patent infringement. Because Company B also owns a patent portfolio, it may be able to use that portfolio to bring its own patent infringement claim against Company A. Hence why owning a patent portfolio can be a shield in patent cases – in fact, having your own portfolio might even stop your rival from suing you in the first place, for fear of an immediate counterclaim.
However, this logic doesn’t work all the time – clearly in this case there has been enough at stake for Sony and LG to go to litigation despite the inevitable counterclaims on either side.
THE PLAYSTATION 3 BAN
As I said, once Sony had started the ball rolling, LG commenced legal action in the US and Europe over Blu-ray tech in Sony products – in particular the PS3. So far, we haven’t seen any substantial reported action on the US front.
However, LG was able to score a big win in Europe by going to the Dutch legal authorities and obtaining this temporary ban (for those who are interested, LG used an EU law on customs action against goods suspected of infringing intellectual property rights).
Why Holland? Reports indicate that PS3s are brought over in container ships from the manufacturing base in Asia to the European distribution base in Holland, from which onwards distribution to the different European national markets is organised. So, by obtaining the temporary ban in Holland, LG has disrupted Sony’s European distribution network.
As to the practical impact of the ban on Sony, opinions on this differ. Some reports suggest that, since most retailers have 2-3 weeks supply of PS3s already, the impact would be muted. On the other hand, the longer this drags on, the greater the potential for it to become a real problem.
In the meantime, it’s not completely plain-sailing for LG for two reasons:
(1) The ban is only temporary – typically ‘up to ten days’ under the normal rules in these cases. LG will need to go back to the Dutch legal authorities if it wants to extend the ban, while Sony will of course be seeking to end the ban.
(2) If a judge later finds that LG was wrong to seek the ban in the first place (ie its patent infringement claim is wrong), then it will in principle be liable to Sony for financial damages to compensate Sony for the harm caused by the ban – quite apart from the PR blow that LG would suffer.
On the other hand, if a judge ultimately rules in LG’s favour, then in principle Sony would be liable to pay LG effectively to compensate it for Sony’s patent infringement.
IS THERE A LOOPHOLE FOR SONY?
Some press reports suggested that there is a loophole for Sony, ie the temporary ban applies only to Holland and therefore Sony could simply get the PS3s into Europe through other ports. This is technically correct legally because the current ban only applies to Holland, but I suspect a ‘loophole’ is unlikely in reality:
(1) It is much easier said than done for Sony to change its entire European distribution network. It takes weeks for container ships to reach Europe, then they have to be sent to the right kind of port, which also has to have on-shore distribution facilities. All of that is currently set up in Holland and it can’t be easily replicated elsewhere. I suspect it would be difficult to fly substantial amounts of PS3s into Europe on any economic scale.
(2) In any event, even if Sony was able to make alternative temporary distribution arrangements, that would be treating the symptom (the Dutch ban) not the cause (the dispute with LG). LG could potentially just go to each European port and seek a similar ban (albeit we don’t know if they would have the same success). One last point: the Daily Mail reported yesterday that the PS3 importation ban has been extended to the UK, but that has not been corroborated so far as I’m aware by HMRC, Sony or LG.
SO WHAT’S NEXT?
It’s impossible to predict the twists and turns a lawsuit can go through, but some things are clear:
- The case may or may not settle at any time of course, if the parties are able to resolve their differences. If it doesn’t, Sony and LG will need to go back before the Dutch legal authorities regarding the current ban there in the next few days.
- If LG wants to pursue its patent infringement case in Europe further, it will likely need to do so in each European country – there isn’t a simple pan-European patent framework for it to rely upon.
- The legal action in the US is ongoing and could catch up with Europe at any time – which could cause headaches for both LG and Sony.
- If the lawsuit does drag on, and if stocks of PS3s are affected, then it could quickly affect everyone in the PS3 supply chain – from Sony to its developers to the consumer.
KEY TIPS FROM THE CASE:
- Hardware manufacturers should pay attention to this case and consider how well their intellectual property rights, particularly their patents, are protected.
- Don’t just look at your home market(s) – issues in other European countries can quickly affect you too.
- Don’t assume that your legal issues will occur just within the games industry itself.
- Everyone should be aware that these kinds of bans/freezing orders aren’t restricted to patent infringement – they can in principle be obtained where there has been other IP infringement or possibly even if there is just a contract dispute.