Patent Troll's Frivolous Attack On Startup Forces Startup To Sell Out To Another Patent Troll

Patents

from the fix-patents dept

Fri, May 15th 2015 8:04am — Mike Masnick

The folks over at the App Developer's Alliance (a trade group for app developers) recently posted the following video of Peter Braxton discussing his run in with a patent troll: In short: Braxton started a company called Jump Rope Inc., which made an app that would let you pay a fee to skip a line (first use case: pay your way to get into a popular bar ahead of the line). No matter what you might think of that kind of app, Braxton was quickly threatened and then sued by a patent trolling operation called Smart Options which has a patent (US Patent 7,313,539) on a "method and system for reserving future purchases of goods or services." In short, it's a patent on electronic options buying -- which should never be patentable in the first place. It's "take something that happens in the offline world (options buying) and put it on a computer" which isn't supposed to be patentable. Either way, the idea that line jumping violates a patent for options buying seems doubly ridiculous.

And, Braxton actually went to court to fight it, spending his own money to do so after returning his investors' money. As he noted, his investors had bought into a startup, not a lawsuit. Eventually, he not only won the case, but Smart Options was ordered to pay attorneys' fees under Rule 11 for filing a frivolous lawsuit (including never actually using the Jump Rope app and falsely describing its functionality in the lawsuit):

Despite Jump Rope’s warnings that its application did not meet the limitations of claim 1, however, Smart Options did not purchase a Jump or ensure that the basis for its claims was not “factually inaccurate” before continuing to pursue its infringement claims.... Smart Options’ failure to avail itself of the easy, inexpensive opportunity to actually test and analyze Jump Rope’s product, particularly after it received Jump Rope’s initial Rule 11 motion, is unreasonable....

Moreover, even if Baker had purchased a Jump or had sufficient information about Jump Rope’s application to compare its functionality to the ‘539 patent, Smart Options failed to reasonably construe the claim terms in order to allow for such a comparison....

[....]

Smart Options also could not have sufficiently compared its patent with Jump Rope’s product, not only because it did not have familiarity with its functionality, but because it did not construe the claim terms. Smart Options, therefore, did not conduct a reasonable pre-filing investigation and had no reasonable factual basis to file its complaint, or to refuse to withdraw the complaint during the safe harbor period after Jump Rope served its original Rule 11 motion and letter.....

For the foregoing reasons, the Court grants Jump Rope’s motion for sanctions. Specifically, the Court awards Jump Rope all of the reasonable attorney’s fees directly resulting from Smart Options’ frivolous complaint, including attorney’s fees incurred during the filing of the present Rule 11 motion.

Braxton discusses some of this in the video, but adds in another tidbit that is absolutely crazy. After that ruling above, Smart Options appealed and both sides went to mediation to try to resolve it (Braxton noted he had no money to continue the lawsuit). Here's how Braxton describes how that went in the video:

This is the first time that I met the plaintiff, after a year and a half of litigation. He waived confidentiality and he said: "Look, I'm going to make this real easy for you. This isn't a mediation. This isn't arbitration. This is what you're going to do. You're going to settle the lawsuit. We're not going to pay you any Rule 11 capital. We may or may not win this case," they said, "but what we are going to do when this case is over. We're going to sue you with another patent in our portfolio of patents and you're going to start this process all over again.

This kind of story is not that unusual. For years, we've pointed to the similar story of how IBM tried to shake down Sun Microsystems in its early years, threatening over seven patents. Sun's engineers and lawyers went through all seven showing how they didn't infringe and were then told:

"OK, maybe you don't infringe these seven patents. But we have 10,000 U.S. patents. Do you really want us to go back to Armonk [IBM headquarters in New York] and find seven patents you do infringe? Or do you want to make this easy and just pay us $20 million?"

Originally, after seeing that video, I was going to just focus on that threat to sue again with this post, but as I continued investigating the story, it turns out that it gets even weirder and more ridiculous. For what it's worth, Smart Options' lawyers claims he never made such a threat... but also in the next breath does claim that the company has other patents that Jump Rope violates.

But, the crazier part is in a NY Times article that tried to follow up on this story. The reporter, Daivd Segal, heard Braxton's story, and called up Erich Spangenberg, one of the world's most notorious patent trolls, who definitely has experience with situations like the one above. In fact, Spangenberg once got hit with a ruling saying he had to pay $4 million for suing the same company with the same patent twice, despite an earlier settlement promising not to do so.

Spangenberg's response to the questions about Braxton's situation? He smelled blood in the water and agreed to invest in Braxton's company -- basically buying low, with a promise that he could then strong arm Smart Options into going away. Really:

A free consultation quickly became the beginnings of a negotiation. Mr. Spangenberg offered to take an equity position worth $500,000, in exchange for solving all of Jump Rope’s legal problems.

“I’m going to invest as well,” Mr. Spangenberg said. “Peter, what do you need to get this back up while we raise money from people with lots of money?”

“About half a million bucks,” he said.

“That’s what I figured,” Mr. Spangenberg replied. “So we’d fund that.”

And Spangenberg knows that he's buying distressed assets here:

“Look, I’ll get $500,000 in equity for taking the legal piece off his plate,” he said. “It’ll cost me $100,000 to make the lawsuit go away.” He promised to locate “pressure points” on either Smart Options or Hugh McNally, its C.E.O.

“I get to make a great investment on great terms,” he said. “Then I let Citadel” — a large hedge fund that had expressed interest in funding Jump Rope — “put a big chunk of money into it and I go off and do something else.”

The article notes that Spangenberg has now invested in about 25 similarly "distressed" companies -- distressed by other patent trolls playing the same game that Spangenberg perfected. And, even the terms mentioned above weren't good enough. In the end, the article reports, Spangenberg's IP Nav bought 40% of Braxton's company for merely $200,000.

The story tries to play this out like a "patent troll done good," but it's horrifying. It's one patent troll beating up on a startup, and then allowing a second one to come in and vulture up the leftovers. It's certainly not good for innovation in any way.

People fighting against the patent reform bill that's currently making its way through Congress keep insisting that the bill is designed by big tech companies to harm startups. But that's ridiculous. The bill would have significantly helped Braxton, allowing him to get out of the lawsuit faster and for less money, and likely awarding attorneys' fees in a simpler and faster process. In fact, it's more likely that Smart Options never would have sued in the first place if the PATENT Act were law at the time.

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Filed Under: erich spangenberg, line jumping, options, patent act, patent trolling, patents, peter braxton, shakedown
Companies: ip nav, jump rope, smart options

15 Comments

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Ninja (profile), 15 May 2015 @ 7:41am

The mere fact any pseudo-patent can be used to sue a starting company out of existence is enough evidence that the system is broken. So we have a scenario where there are a few huge behemoths that have the claws to stomp the vultures who dare to try them or can sustain some damage as if it was nothing and a decaying base of the ecosystem that's basically dead at their infancy with few exceptions. We all know in nature that the base of the pyramid is what gave birth to the developed organisms and it's not different here.

How does that foster innovation again?
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Anonymous Coward, 15 May 2015 @ 8:54am

The inevitable
At some point in the not too distant future, the combination of IP laws, ISDS, and various human rights efforts are bound to reach a state of international gridlock. There will be contradictory court rulings, confiscation of funds, and restrictions of activity that will effectively bring worldwide financial markets to a complete halt.
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Agonistes, 15 May 2015 @ 8:56am

This was good, because I was prepared to have to do a lot of technical thinking and braced myself to be bored or not understand all of it. It was pretty easy to let the disgust and hate flow through you listening to what this dude had to go through, so if I can hate the prick he was talking about and the system that allowed it to happen...you can too.

+1 would hate again!
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Anonymous Coward, 15 May 2015 @ 9:10am

when is someone going to make a patent on the process of breathing so they can sue everyone all the time.
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DogBreath, 15 May 2015 @ 9:28am

Re:
Don't leave out the patent on not breathing, so your estate can be sued after you're dead. Not going to be getting out of the lawsuit that easy.

Nothing in this world is certain, but Death, Taxes and Patent Troll lawsuits.
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Anonymous Coward, 15 May 2015 @ 9:59am

Re:
I'd patent patenting unpatentable stuff ... I'd get rich in no time :D
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neghvar (profile), 15 May 2015 @ 10:18am

I do not believe software should be patentable at all. The flaw in software patent exists in this example. In simplest terms:
Company A invents: “Method of creating output of 20”
Company B invents: 10+10=20
Company C invents: 4*5=20
Company D invents: 40/2=20
Company E invents: 21-1=20
Company F invents: Sqrt(400)=20

Companies B – F all use different functions and values to create the same output. However, because Company A filed as a broad method instead of specific formula, Company A can will sue all the other companies claiming patent infringement.

On the physical side of patents,
Company A: “Method of relieving pain via oral ingestion.”
McNeil Consumer Healthcare: C8H9NO2 / acetaminophen / Tylenol
Bayer: C14H14O3 / naproxen sodium / Aleve
Pfizer: C13H18O2 / Ibuprofen / Advil
Knoll: C18H21NO3 / Hydrocodone

The Patent office never would granted Company A’s patent. It is not specific and overly broad. In the pharmaceuticals, specific formulas are patented, not concepts or methods.
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John Fenderson (profile), 15 May 2015 @ 10:48am

Re:
I agree. Software patents are awful for two main reasons. First, they discourage the creation of new and innovative software because they dramatically increase the risk of your business being destroyed overnight. Second, they are effectively patenting algorithms and math, which are not supposed to be patentable at all.
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JP Jones (profile), 15 May 2015 @ 11:18am

Re:
It's simple then...require them to patent the code used to accomplish the task.

Oh, wait, there's a problem...different languages can have the same results. So instead, require them to submit everything in compiled assembly, on written pieces of paper.

Then watch and laugh at the patent office try and figure it out. I wonder how long before we'd lose software patents?
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Anonymous Coward, 15 May 2015 @ 11:43am

and Congress etc, who not only allow this to happen, actually did the ridiculous thing of starting this sort of thing in the first place by not having the balls (and having the ever sponge-like bank accounts to suck up more campaign contributions!) to do what is should have and outlawed this kind of thing while protecting the newbies. what do they expect to happen in the future? that progress grinds to a halt in the USA, because of the trivial lawsuits, while the rest of the globe advances without it?
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Atkray (profile), 15 May 2015 @ 11:56am

Re: Re:
"I wonder how long before we'd lose software patents?"

It wouldn't happen. The current system is built to handle this, they just make people re-apply an indeterminate amount of times until they rubber stamp it.

Then if there are multiple patents that appear similar, let the courts sort it out, everyone wins system functions as expected.

What needs to happen is for the public to finally decide to point the gun back at the maximalists and say either roll all IP law back to where it was originally or we will abolish it completely.

The funny thing is, as much as the maximalists hate and fear that decision, I'm pretty sure that they are going to keep pushing so hard that when the public finally does rise up, the roll back option will be off the table.
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New Mexico Mark, 15 May 2015 @ 1:42pm

Patent office quote
The apocryphal patent commissioner quote of 1900 was, "Everything that can be invented has been invented." That may never have been said, but we're quickly reaching a point where someone could legitimately say, "Everything that MAY be invented has been invented."
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Sunhawk, 15 May 2015 @ 3:01pm

Hmm... I wonder what the rules are in mediation for bringing along a tape recorder.

Although, to be honest, if they lose to the point of being told to pay attorney's fees and then repeat with another patent, I suspect the judge may smell a rat.

A notarized statement that "yes, under penalty of perjury I declare that this is what he said" may or may not help... particularly if notarized *before* the revenge suits.
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Chris in Utah (profile), 16 May 2015 @ 10:12pm

Law is Wal spelled backwards.

Support people not Laws.

Have a nice day,
Anarchist
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Pino, 24 May 2015 @ 8:28am

Unlike copyrights, patents expire
Patents expire after 20 years. All this will do is force inventions onto a 20-year business cycle.
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