The Prior Art

With $4.5 Billion Bid, Group Led by Apple and Microsoft Claims Nortel Patents

In a patent auction unprecedented in size and scope, a consortium of high-tech heavyweights banded together to buy Nortel Networks Corporation's trove of more than 6,000 remaining patent assets for a record-shattering $4.5 billion.

The winning bidder, a team of six tech companies that called itself Rockstar Bidco LP, consists of Apple Inc., Microsoft Corp., Research in Motion Ltd., Sony Corp., Ericsson AB, and EMC Corp. The consortium will take control of the patents, which cover everything from online search and tablet computers to social networking and 4G LTE mobile technology, pending approval from U.S. and Canadian bankruptcy courts.

Google, the only contender whose identity was known when the auction kicked off on Monday, came away empty-handed. The search behemoth, eager to ward off would-be patent infringement plaintiffs and bulk up its relatively modest patent portfolio, had entered into a “stalking horse” agreement with Nortel to supply the minimum auction bid at $900 million.

Google was advised on the bidding process by lawyers at Wachtell, Lipton, Rosen & Katz, including lead counsel Philip Mindlin, corporate partners Adam Emmerich and Benjamin Roth, antitrust partner Ilene Gotts, and restructuring and finance partner Gregory Pessin.

"This outcome is disappointing for anyone who believes that open innovation benefits users and promotes creativity and competition," said Kent Walker, Google's senior vice president and general counsel, in a statement. "We will keep working to reduce the current flood of patent litigation that hurts both innovators and consumers."

Cleary Gottlieb Steen & Hamilton managed the auction for Nortel, which took place at the firm's New York office from June 27 through June 30. Leading the Cleary team on the bankruptcy aspects were partners Lisa Schweitzer and James Bromley. Partners Paul Shim and Paul Marquardt provided M&A advice, partner Craig Brod assisted on corporate matters, and counsel Daniel Ilan helped on IP matters. Partner Jeremy Calsyn provided antitrust advice. (All are in New York except Marquardt and Calsyn, who are in Washington, D.C.)

David Berten, whose Chicago-based Global IP Law Group was selected by Nortel to advise it on monetizing its patents, noted that the $4.5 billion selling price was unprecedented. "I don't know of any other stand-alone patent sale that's been higher than a billion dollars," he says.

Ericsson, which contributed $340 million to the transaction, was represented by Paul, Weiss, Rifkind, Wharton & Garrison partners Marilyn Sobel, Stephen Shimshak, Peter Rothenberg, Joseph Simons, Charles Googe Jr., and Lawrence Witdorchic, according to the firm.

Apple was advised on the auction by lawyers at Weil, Gotshal & Manges, including partners Marcia Goldstein, Kyle Krpata, and Ronit Berkovich, according to a person connected to one of the other firms involved in the auction.

No further information on which firms advised the other members of the winning consortium was available as of Friday afternoon.

Many observers expected Microsoft to stay on the sidelines given its position that existing licensing agreemens with Nortel already gave it access to the patents on the block. Along with several other companies, including Hewlett-Packard Co. and Nokia Corp., the software giant had filed objections to the auction before the U.S. Bankruptcy Court in Delaware earlier this month. Those objections have yet to be resolved.

But Berten says that it's not unusual for licensees to become buyers--an opportunity that Microsoft apparently didn't want to pass up. "Lots of times there are advantages to owning patents that a licensee doesn't have," he says. "They can do their own licensing, for example."

A hearing on the auction results is scheduled for July 11 in Delware bankruptcy court. Should the court bless the outcome, the deal is expected to close in the third quarter of this year.

 

 

Hangover Cure: Warner Bros. Settles Copyright Suit Over Tyson Tattoo

By Andrew Goldberg

It looks like the tattoo on Ed Helms's face in The Hangover Part II is there to stay after all. 

Warner Bros. has inked a deal to settle the copyright infringement suit brought by S. Victor Whitmill, the tattoo artist who claimed that the body art encircling the left eye of the character played by Helms in the movie duplicates the one that Whitmill designed for the same spot on boxer Mike Tyson's face. 

"Warner Bros. and Whitmill have amicably resolved their dispute. No other information will be provided," Whitmill's attorney, Geoff Gerber, said in a joint statement with the studio, according to NBC News. 

Hollywood, Esq. reports that the confidential deal was reached on Friday during an all-day mediation session attended by Whitmill, his lawyers and the Warner Bros. legal team, which included attorneys from Schiff Hardin.

Previously, the studio said that if a deal could not be reached by the time the movie ended its run in theaters, it would digitally alter the tattoo in the DVD version of the movie. 

Although the terms of the settlement were not disclosed, Whitmill's bargaining position was probably not hurt by news that The Hangover Part II just became the highest-grossing R-rated comedy ever.

This Week in IP: Apps, Tats, and Patent Reform Hits a New Snag

By Andrew Goldberg

Apple Steps in for App Developers

Good news for app developers and iPhone users! Apple has decided to intervene on behalf of the seven iOs app developers sued for patent infringement by Texas-based patent-holding company Lodsys.

In its motion to intervene, filed late Thursday in the Eastern District of Texas, Apple argues that it should be permitted to participate in the case because it has a financial stake in its outcome.

"Apple's rights will not be adequately protected by the current defendants in the case, because Lodsys has chosen to assert these claims against Developers who are individuals or small entities with far fewer resources than Apple and who lack the technical information, ability, and incentive to adequately protect Apple's rights under its license agreement," Apple's lawyers--Eric Findlay, of Tyler, Texas, firm of Findlay Craft, and by lawyers at Simpson Thacher--write. [Download Apple's Motion to Intervene].

Along with its motion to intervene, Apple also filed a proposed answer and counterclaim, asserting that its license to Lodsys's patents also covers its independent app developers. "Because Apple is licensed to offer products and services that embody the patents in suit to its Developers, under the patent law doctrines of exhaustion and first sale, Developers are entitled to use, free from infringement of the patents in suit, those products and services to which Apple is licensed," the company's lawyers argue. [ Download Apple's Proposed Answer and Counterclaim].

For more on the Lodsys litigation, see The Prior Art's earlier post, App Backwards: Lodsys, Texas Troll, Targeted in Patent Suit.

Tattoo Removal Gets the Hollywood Treatment

How do you remove a really costly tattoo?

As the legal wrangling continues between Warner Bros. and S. Victor Whitmill, the tattoo artist who designed Mike Tyson's famous face art, over the allegedly infringing tattoo that found its way onto the face of the character played by  Ed Helms in The Hangover Part II, a resolution to the Hollywood copyright fight could ultimately turn on... special effects.

Hollywood, Esq, The Hollywood Reporter's legal blog, reports that if the parties are unable to reach a settlement by the time the movie is released on DVD, the studio has offered to digitally alter the tattoo that encircles Helms' left eye in the movie.

"Warner Bros. does not intend to make any use of the allegedly infringing tattoo after the film ends its run in theaters because Warner Bros. will digitally alter the film to substitute a different tattoo on Ed Helms’s face," lawyers from Schiff Hardin, counsel for the studio, wrote in a brief opposing an expedited trial in the case.

As The Prior Art previously reported, Whitmill sued Warner Bros. in April for copyright infringement, alleging that the tattoo in the movie is a duplication of the distinctive design he created on Mike Tyson's face. While Whitmill sought an injunction that would have kept the film out of theaters, a Missouri federal district court judge declined that request but allowed the infringement suit to proceed.

Even if the famous Tyson tattoo is ultimately replaced by a different design in the DVD version of the movie, Whitmill is sure to ask for a substantial sum in damages. The blockbuster sequel, which opened over the Memorial Day weekend, has already grossed close to $350 million at the box office.     

A New Hurdle for Patent Reform

In early March, not long after the U.S. Senate passed patent reform by a vote of 95-5,  Patent and Trademark Office Director David Kappos told The Prior Art in an interview in his suburban Virginia office that he was "off the charts optimistic" that a similar bill would come out of the House. "[House Judiciary Committee] Chairman [Lamar] Smith has already stated that a bill will be coming out this month-- the month of March," he said.

Three months later, that bill still hasn't reached the House floor. What's behind the hold up in the House?

The latest hurdle, according to Politico, appears to be Republican infighting. Just this week, two powerful Republicans--Appropriations Committee Chairman Hal Rogers and Budget Committee Chairman Paul Ryan--sent a strongly worded letter to Smith demanding changes to the patent reform bill. Their gripe? The bill would give the PTO the power to collect and spend its own fees, thereby insulating it from Congress's appropriation power.

The Republican objections, couched in terms of the deficit, threaten to scuttle a planned vote on the measure before the July 4 recess.

“Putting PTO funding on auto-pilot is a move in exactly the wrong direction, given the new Republican majority’s commitment to restrained spending, improving accountability and transparency, and reducing the nation’s unparalleled deficits and debt,” Rogers and Ryan wrote in their letter. 

Even David Addington, a former top aide to Vice President Dick Cheney and longtime advocate for the expansion of executive branch authority with regard to Congress, weighed in this week, authoring a Heritage Foundation memo on patent reform that also took issue with the provision that would make the PTO self-financing.

“Neither the junior most clerk in a federal agency nor the President of the United States may spend a dollar from the Treasury for any purpose unless Congress has by law appropriated that dollar for that purpose,” he wrote.

But most observers agree that the huge backlog hampering innovation at the PTO exists largely because the agency is underfunded, in part because Congress doesn't allow it to hold onto the money it collects in fees.

As it turns out, Kappos was right to add a caveat to his optimism about getting patent reform out of Congress. "If there’s anything I’ve learned here in my 18 months in Washington, D.C., it’s that prognosticating on Congressional cycles is a very, very risky thing to do," he said after the Senate vote.  "It’s easier to predict whether the Yankees are going to have another great season this year and win another pennant."

App Backwards: Lodsys, Texas Troll, Targeted in Patent Suit

By Andrew Goldberg

Lodsys, the litigious patent-holding company that filed suit in the Eastern District of Texas last week alleging that several independent developers of software applications used on mobile devices infringe its patents on in-app purchasing, is now on the defensive and facing a patent infringement suit of its own.

ForeSee Results, a Michigan-based company that designs online customer-satisfaction surveys used by many businesses, brought an action Tuesday in the U.S. District Court for the Northern District of Illinois seeking a declaratory judgment that its product does not infringe Lodsys's patents.

In its complaint, the company contends that Lodsys’s patents are invalid and argues that the patent-holding company, which has threatened to sue ForeSee customers including Best Buy and Adidas over their use of ForeSee's surveys, should be enjoined from pursuing such legal action [Download Foresee Results Complaint].

Although ForeSee's lawsuit is not directly related to mobile device apps, it does implicate two of the same patents at issue in Lodsys's suits against Apple iOS app developers. As a result, a decision by the Illinois district court to invalidate Lodsys' patents could potentially throw a wrench into the holding company’s strategy of hauling app developers into court in Texas.

For its effort, ForeSee has tapped the kind of legal firepower that small app developers most likely can't afford in their fight with Lodsys. The survey company is being represented by lawyers at McDermott, Will & Emery. For its East Texas suits, Lodsys, which is based in Marshall, Texas, is being represented by the Seattle-based firm of Kelley, Donion, Gill, Huck & Goldfarb and The Davis Firm in Longview, Texas.

Among those presumably rooting for ForeSee to prevail in Illinois are the seven iOS app developers--including the makers of such iPhone apps as Twitterific and QuickOffice and the games Mega Poker Online Texas Hold ’Em and Hearts and Daggers--that have already been sued by Lodsys in East Texas [Download Lodsys v. App Developers]. That dispute hinges on the functionality that enables users to make purchases from within an app.

Lodsys claims it's litigating in Texas against the little guys in lieu of going after Apple directly because the tech giant already licensed the patent at issue as part of a mass licensing deal it struck with Intellectual Ventures, the patent-holding company that owned the patents in question prior to Lodsys.  App developers, according to Lodsys, are not covered by that licensing agreement.

In a blog post on its website about Apple, Lodsys wrote: “The scope of their current licenses does NOT enable them to provide ‘pixie dust’ to bless another (3rd party) business application," adding,  "From Lodsys’ perspective, it is seeking to be paid value for rights it holds and which are being used by others.” Specifically, the company is demanding .575% of all U.S. revenue from any app that uses its patents.

But Apple general counsel Bruce Sewell disputes Lodsys' contention, arguing in a letter, sent two weeks after Lodsys's notice to developers, that "there is no basis for Lodsys' infringement allegations against Apple 's App Makers."

"I believe that your letters are based on a fundamental misapprehension regarding Apple's license and the way Apple's products work," wrote Sewell. "Under its license, Apple is entitled to offer these licensed products and services to its customers and business partners, who, in turn, have the right to use them."

For anxious app developers, of course, Apple's letter is only a start. Indeed, as the Electronic Frontier Foundation put it, "Even careful developers who hire lawyers to do full-scale patent searches on potential apps surely would not expect to investigate the technology that Apple provides. Instead, they would expect (with good reason) that Apple wouldn't provide technologies in its App Store that open its developers up to liability – and/or would at least agree to defend them when a troll like Lodsys comes along."

For the developers' sake, it's worth wondering whether there's an app for indemnification.

 

Supreme Court Rules Against Microsoft in i4i Case

By Andrew Goldberg

In a unanimous decision that won't be well-received by tech industry heavyweights, the U.S. Supreme Court ruled this morning against Microsoft in the closely watched Microsoft v. i4i case, rejecting the software giant's argument to lower the evidentiary requirement to invalidate a patent.

The decision, which upholds the $290 million verdict against Microsoft won by the small Toronto-based i4i software company in the Eastern District of Texas, solidifies existing precedent and leaves intact the 28-year-old standard applied by the Federal Circuit in patent infringement cases.

"Congress specified the applicable standard of proof in 1952 when it codified the common-law presumption of patent validity," Justice Sonia Sotomayor wrote for the Court. "Since then, it has allowed the Federal Circuit's correct interpretation of §282 to stand. Any recalibration of the standard of proof remains in its hands." [ Download Microsoft v. i4i Supreme Court Decision]

Thomas  G. Hungar, a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher, argued the case for Microsoft.  Seth Waxman, a partner in the Washington, D.C. office of Wilmer Cutler Pickering Hale and Dorr represented i4i, which was represented at trial by McKool Smith and before the U.S. Court of Appeals for the Federal Circuit by Finnegan, Henderson, Farabow, Garrett & Dunner. Microsoft was represented at trial and before the Federal Circuit by Weil, Gotshal & Manges.

Microsoft, along with such heavy-hitting amici as Google, Apple, Verizon, and HP, had advocated for the adoption of the lower preponderance standard in patent cases, arguing that the heightened standard insulated "bad patents" from invalidity challenges and stifled innovation. The Obama administration backed i4i, which warned that a lower standard would too easily allow juries to overturn the wisdom of the experts at the PTO. Lower the standard for invalidating a patent, Microsoft and its allies argued, would level the playing field to give patent infringement defendants a fairer shake in litigation.

But the Supreme Court said it was up to Congress to weigh such considerations. "We find ourselves in no position to judge the comparative force of these policy arguments," wrote Sotomayor, adding, "Congress has amended the patent laws to account for concerns about 'bad' patents, including by expanding the reexamination process to provide for inter partes proceedings. Through it all the evidentiary standard adopted in §282 has gone untouched."

The legal battle between the world's largest software maker and i4i (which stands for "infrastructures for information") began in 2007 when i4i sued Microsoft for infringing its patented XML editing feature in Microsoft Word. Microsoft, the jury found, willfully infringed i4i's patent when it installed its own XML editing features in Word 2003. The six-day trial in Tyler, Texas resulted in a $290 million verdict for i4i, which, like the company's patent, was later upheld by the Federal Circuit.

Microsoft, which was also permanently enjoined by the district court from selling versions of Word that infringed i4i's patent, has since removed the disputed features from its software. Now, the software giant will have pay the damages.