Analysis: More than patent issues riding on Lodsys dispute

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A dispute over in-app purchasing could resonate far beyond the courtroom. As the legal strategies begin to take shape, app makers and other mobile analysts are trying to make sense of what the case could mean for the long-term future of Apple’s App Store—and how Apple’s involvement might affect the outcome.

The issue came to a head last week when Lodsys, a patent-holding firm, began contacting independent iOS developers, demanding royalties for their use of the in-app purchasing functionality built into Apple’s mobile operating system. In an FAQ on its Website, Lodsys contends Apple is already licensed for the use of its patents, but that the license does not extend to third-party developers. The company wants a royalty equal to 0.575 percent of US revenues from each developer, and says it’s “methodically selling its product […] in the most efficient means it can.”

However, the greater implications of Lodsys’s actions for both Apple and its mobile developer community are only mounting. And the situation has been even more complicated by Apple itself, which has, so far, remained silent on the matter.

Legal ramifications difficult to fathom

Obviously, a legal battle over in-app purchases could be costly for independent developers. According to Spyros J. Lazaris, an experienced patent attorney with Los Angeles-based Lazaris Intellectual Property, “even to defend a basic patent infringement claim, one can usually expect to incur legal fees of over $1 million.”

Those costs cut both ways, though, especially if Lodsys takes action against each developer individually. That would rack up some high legal bills for what, in the end, could amount to a very small payout on an individual basis, since many of the developers receiving claims from Lodsys have been small firms with modest revnue from the App Store.

Lodsys’s CEO Mark Small declined to be interviewed for this article in an e-mail to Macworld.

Developers could pool their resources to mount a legal defense. “Fighting Lodsys as a group in court could have advantages for the developers from at least a legal fees perspective, since they may be able to aggregate costs for some aspects of their defense,” said Lazaris. However, doing so would also lower Lodsys’s costs and increase their possible payout, making a quick resolution less likely.

A further option available to developers would be to have Lodsys’s patents declared invalid, a process that requires filing a petition with the U.S. Patent and Trademark Office. According to attorney Michael Wokasch, a patent expert with Quarles and Brady who discussed the case with Macworld via e-mail, developers could “mutually fund a reexamination request. This has the advantage of a much lower, predictable cost of between $20,000-30,000 for a good one. The requests can also be done is a pseudo-anonymous manner without necessarily identifying any single developer.” He added that this effort could be crowdsourced, and “might make for an interesting Kickstarter fund,” referring to the popular site for solicting pledges to fund tech projects.

Impact on developers’ business

While clearly concerned about the legal implications of the patent dispute, developers are especially worried about the effect that the actions of companies like Lodsys could have on the App Store ecosystem itself.

“This issue affects iOS developers of all sizes,” said Craig Hockenberry, a senior software engineer and principal of The Iconfactory, in an e-mail to Macworld. “If you’re a smaller operation, a much larger percentage of your workforce is going to be disrupted by legal action. Customer support and new product development come to a standstill while you’re talking to lawyers.”

The Iconfactory uses in-app purchasing in its popular Twitterrific app, and is one of the developers to have received a letter from Lodsys.

In addition to the immediate effects that a patent dispute could have on the developer’s operations, there are also larger issues to consider. “If Lodsys has success in getting smaller developers to license its intellectual property in the iOS developer ecosystem, then there will surely be others that follow,” said Hockenberry. “It’s only half a percent now, but who’s to say the next patent infringement isn’t going to be 1 percent or 5 percent or 20 percent?”

Noted anti-patent activist Florian Müller makes a similar point on his blog, noting that giving in to Lodsys’s demands could open the floodgates to a rash of other patent claims against iOS developers. “Lodsys could charge you even more if you are alleged to infringe the same patent in other ways than just an in-app upgrade button,” Müller wrote. “Once Lodsys and others know that you paid for this patent, you’re even more likely to be contacted by Lodsys and other patent holders.”

In short, developers are stuck in a pretty bad fix: Either they pay up and risk finding themselves on the receiving end of increased royalty demands, or refuse to give in, and risk being dragged to court for what could be a very lengthy (and costly) battle, with no guarantee of success. Said one developer, who spoke with Macworld on condition of anonymity: “This would change my attitude towards development—not specific to iOS, Mac OS or any platform in particular. There’s nothing about this that couldn’t be repeated against other parts of the industry. To quote Lodsys, that would be ‘seriously uncool.’”

Apple’s options

One important piece of the puzzle is still missing: Apple has, so far, chosen to remain publicly silent on the matter. That’s not an unusual stance for the company, which takes a very deliberate approach to its public-relations strategy, but whatever actions it does eventually take—or not take—are likely to profoundly influence the future of this dispute. (The company did not respond to requests for comment from Macworld.)

Since Lodsys says Apple is already covered by a license, Apple could decide that this isn’t its fight, leaving third-party developers to reach their own accord with the patent holder. Even so, Apple has a definite business stake in the outcome of the dispute, observers say.

“Apple should seriously consider getting involved by coming to the aid of its licensed iOS developers, if it determines that Lodsys indeed has a valid patent infringement claim against them based on the in-app purchasing mechanism,” said patent attorney Lazaris. But, based on its agreement with developers, Lazaris adds, “I would guess Apple is not obliged to do so.”

Wokasch notes that Apple may also decide that its license does, in fact, cover developers as well. “If Apple is expending any legal resources now, it is probably reviewing the terms of that license agreement to determine whether that is true.” If that is the case, the company “could ask a court to make the same determination. […] If the court decides that Apple’s license covers the iOS developers, then there is no issue.”

Could Apple extend its existing license to cover iOS developers? Possibly, says Lazaris. “I am sure Lodsys would listen if approached by Apple, but my guess is that they will want a significant amount of money from [the company].” Besides, negotiating a deal with Lodsys could expose Apple to the same problem as iOS developers, and declare open season on the company for anyone with a patent that can be applied, however tangentially, to the technology that iOS makes available to programmers.

Patent expert Wokasch agrees, stating that Apple could seek what Lodsys refers to as an “eco-system wide” license: “These ‘eco-system-wide’ licenses are not an unusual type of license. In fact, they are generally preferred by companies. If the end users or developers are not covered by a license, it creates a situation in which a patent owner could extract more money by going after the end users because the end users will turn around and ask the company to pay anyway.”

There’s also the matter of the robustness of the iOS App Store. Apple has often touted the breadth and depth of products in its online store as one of the selling points for its iOS devices. That’s been particularly true as other platforms, such as Google’s Android, have emerged to challenge the dominance of the iPhone and iPad. If developers have to fend off legal challenges, that could have far-reaching effects that could trickle down to iOS device owners.

“These licensing costs will ultimately affect consumers, as well,” The Iconfactory’s Hockenberry said. “Your favorite product may get pulled from the App Store because the developer can’t afford the licensing fees. Or you may pay more for your software as the developers pass their legal costs onto the customer. Other developers may not bring their products to [the] App Store because it’s seen as a place filled with frivolous lawsuits.”

Of rocks and hard places

One way or another, there’s a lot more riding on this issue than just the claims of a patent holder. Developers are, understandably, unhappy about their prospects and concerned that this is the opening salvo in a war that could make it next to impossible for them to thrive in the App Store.

Which is why the next move might come down to whether Apple ends its public silence. Some developers may be trying to force the company to do precisely that—Ars Technica reports that developers are organizing a boycott of the in-app purchasing API to pressure Apple into responding to Lodsys’s patent claims. Other reports say that Apple’s legal department is looking into the matter.

Still, any action on Apple’s part may not stop Lodsys from litigating against developers as a way to increase pressure on the company itself. Said Wokasch: “If Apple did take some action, Lodsys may delay in filing suit while it awaits the outcome of those suits, but it does not have to wait. In fact, it is not uncommon for entities like Lodsys to send even more letters or take even more actions just before they believe their patent or claims will be invalidated.”

[Frequent contributor Marco Tabini is a an entrepreneur (and occasional developer) based in Toronto. He can be found on Twitter as @mtabini.]

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