Commercial Litigation and Dispute Resolution Blog

EAST TEXAS - On February 25, 2015, Apple Inc. was found liable for patent infringement on three patents owned by Smartflash LLC and ordered, by an East Texas jury, to pay Smartflash LLC the princely sum of $532.9 million dollars in damages for the infringement.

Smartflash LLC owns patents that cover methods for digital rights management over songs and software, and methods of paying for songs, games, and other forms of data. These are not patents for the hardware, as such, but more for the processes encompassed by the software. In the context of this case, Smartflash made clear that it believes it is owed money for essentially the entire world of paid digital content. The claims against Apple assert that not only do the iTunes Store and App Store infringe on its patents, but so do any product that connects to those stores, including iPhones and iPads.

To be clear, the plaintiff, Smartflash LLC does not sell software, or hardware, or indeed anything at all. It is, rather, a company known as a “Non-Practising Entity”, a “Patent Assertion Entity” or, less charitably, a “Patent Troll”. NPEs, PAEs, or patent trolls, do not make products, but instead acquire patents, often assembled into a portfolio, and “leverage” them for royalties. In practical terms, this equates to suing companies for alleged patent infringement and, usually, extracting a settlement in the form of damages and future royalty payments, often in the face of the threat of injunctions that would stop the defendant from utilizing the key technology in dispute for an indeterminate amount of time.

East Texas is known for many things: bayous, Janis Joplin, and for being an extremely favourable jurisdiction for patent lawsuits, with a well-earned reputation for speedy trials and plaintiff-friendly juries. Smartflash LLC, whose business consists entirely of licensing seven patents, has its office in Tyler, Texas, just down the street from the courthouse.

The case had some intriguing elements. In support of its (successful) claim that Apple had wilfully infringed its patents, Smartflash LLC pointed to a 1999 meeting that its founder, Patrick Racz, had with an executive who ended up being a senior director at Apple. In addition, Smartflash LLC is an atypical patent troll; it appears that it did at one time actually intend to manufacture products, even going so far as to sponsor a European tour by Britney Spears as promotion for its intended music player. The tour was reportedly cancelled in the aftermath of 9/11. The music player or service never materialized.

The specific reasons for the verdict may never be known. As it was a jury verdict, written reasons are unavailable. Rather, the jury, with a succinctness some would find impressive and others terrifying, answered the question: “Did Smartflash prove by a preponderance of evidence that Apple infringes the following claims of [the following] patents?” with one word: “Yes”, and the question as to damages as follows:

Q: What sum of money, if paid now in cash, do you find from a preponderance of the evidence would fairly and reasonably compensate Smartflash for Apple’s infringement of Smartflash’s patents?

A: $532,900,000.000

The not-so-detailed decision can be found here.  Part of the reason for the existence of patent trolls can be found in the breadth of ideas for which patents are granted. There has been much criticism, particularly in terms of patents regarding software, or processes, that the wording of the patents is too vague and broad, so that instead of patenting an invention, the patent holder has gained a monopoly over an idea, e.g.: paying for music that one can download.

Many countries struggle to balance the need to reward innovation and protect novel and useful ideas, with the need to provide a transparent and understandable system that does not allow one entity to claim ownership over a concept. Reform efforts are, ironically, often stymied by those who suffer the most from the onslaught of patent trolls. For example, large technology companies also accumulate patent portfolios beyond what they themselves have developed, effectively weaponizing them in order to use them against competitors. Together with Blackberry, Ericsson, Microsoft and Sony, Apple is itself a member of a consortium known as Rockstar Consortium Inc., itself a Non Practising Entity, created to hold and licence a number of patents from the bankrupt Nortel. Rockstar was listed by Business Insider in 2012 as the “third most fearsome patent troll” around. What is sauce for the goose is apparently sauce for the gander.

Recently, in Canada, it was companies such as Cisco and Blackberry who opposed proposed legislative reforms  that were intended to make it more difficult for patent rolls to bring claims (and extract settlements) from targets large and small. In the U.S.A., the Innovation Act, specifically introduced to try and curb frivolous lawsuits brought by patent trolls, died in committee in the Senate, as the Judiciary Committee had “heard concerns” that the measures would have “severe unintended consequences on legitimate patent holders who employ thousands of Americans.”

Sometimes, reform efforts go hilariously wrong. In 2001, Australia rolled out a system that would allow for “innovation patents” that incorporated a simplified application process, removing the necessity of having a lawyer or patent agent prepare the application. One individual decided to emphasize the potential for abuse of this new system by applying, and receiving an innovation patent for, a “circular transportation facilitation device,” a.k.a.: the wheel.

Large technology companies often victimized by patent trolls are also not above seeking patents for apparently broad and obvious inventions. For example, Apple is the proud holder of a patent for “The Ornamental Design for a Portable Display Device,” describing how a tablet or phone might have rounded edges.

In Canada, we have largely been spared the scourge of patent trolls. Two commonly cited reasons for this are the fact that a portion of legal fees are shifted to the unsuccessful party in a lawsuit, unlike many jurisdictions in the U.S., and the fact that injunctions are much harder to come by in Canada than south of the border. The threat of such an injunction, which seeks to prevent a defendant from making its product or using a process, pending trial, is significant leverage with which to seek a settlement. In 2006, Blackberry, facing an injunction in the U.S. which would have shut down its entire messaging service (and, by extension, a large portion of the U.S. Government’s mobile devices, affecting 300,000 workers) agreed to settle a suit with an NPE for USD $612 million.

However, in Canada, and specifically in Federal Court where most patent litigation takes place, an applicant for an injunction to restrain alleged violation of a patent must show that it will suffer “irreparable harm” if the injunction is not granted. Irreparable harm is generally defined as harm for which monetary damages will not be a sufficient remedy. The fact that a patent troll is, usually, specifically seeking damages, in the form of royalties or a licensing fee,  significantly undercuts an argument for irreparable harm. Accordingly, it is that much more difficult to obtain an interlocutory injunction, and thus, the same kind of leverage.

That is not to say that Canada is entirely without patent trolls. In the last few years, one company, Dovden Investments Ltd. has accounted for an impressive 42 actions for patent infringement – approximately 1/3 of the patent infringement actions filed. None have been pursued actively in Court, let alone gone to trial, and the majority appear to have settled, or at least been discontinued. Dovden does not make or sell products to the public but instead is an NPE, with an ostensible business model of seeking to license the patents it holds using the threat of patent litigation. Certain of its software patents relate to the transportation sector and a number of municipal transportation authorities have been sued. However, in 2013, the Canadian Urban Transportation Association filed its own suit against Dovden, going on the offensive in seeking a declaration that Dovden’s patents are invalid. In this case, turnabout does not appear to be considered fair play. As of February 18, 2015, Dovden does not appear to have participated in the suit, and a hearing for default judgment is set to be heard in June.

Meanwhile, in East Texas, Apple has said that it plans to appeal the verdict. Historically, East Texas jury awards are reduced substantially on appeal. However, Smartflash LLC, buoyed by its success, will likely now pursue lawsuits it had previously filed as against Samsung, Google, and Amazon.  Apple is also in Smartflash LLC’s crosshairs once again –  the day after it received the $532.9 million jury award, Smartflash filed another lawsuit against Apple in respect of the iPhone 6, iPhone 6 Plus, and the iPad Air 2. There is no word yet on whether Smartflash LLC has sought to renew its sponsorship of Britney Spears with its newfound wealth.