When it comes to litigation, Erich Spangenberg, well known for running a network of patent-holding companies, is usually a plaintiff. Now, though, he's on the other side of a lawsuit, having been named as a third-party defendant in a dispute between patent-holding company DataTern and its former lawyers at Foley & Lardner.
DataTern—a spinoff of an operating company, Firestar Software—made news last year when it settled a closely watched East Texas patent infringement suit against open source software leader Red Hat Inc. The settlement was considered novel because of the protection it offered to Red Hat's developer community. At the time, the parties kept financial terms of the settlement confidential; it has since been revealed that $4.2 million changed hands. (See Red Hat's press release on this settlement; analysis of the agreement at Groklaw; IPLB profile of Red Hat lawyer Richard Fontana.)
Foley & Lardner, which represented DataTern in the suit, claims it is still owed more than $1.5 million in fees for its work on the case. But rather than paying up, DataTern filed suit against Foley in January, essentially saying the firm did such poor work on the matter that it should be the one doing the paying. With the litigation now heating up, Foley has named Spangenberg, his wife, Audrey, and several related companies as defendants in a third-party complaint filed on October 1.
There is some logic to Foley's move, given that Spangenberg's consulting company, IP Navigation Group, wound up with most of the money Foley seeks. Court documents show that IP Navigation, which DataTern hired late in the Red Hat litigation, collected about 80 percent of that $4.2 million settlement.
Spangenberg says Foley should not be dragging him or his company into a billing dispute that doesn't involve him. In an early October e-mail to Foley & Lardner, he said that if the firm didn't drop him from the suit by October 12, "IPNav will be required to recount numerous instances—all supported by references—of Foley's culture of bad conduct, poor judgment, and nonchalance regarding professionalism, which contradict Foley's vastly overrated claims of superiority and excellent client service."
When Foley didn't drop the complaint, Spangenberg acted on his threat by filing counterclaims against the firm in which he and his lawyers say Foley is unfairly interfering with his consulting business.
"IP Nav is the deep pocket here," says Spangenberg, speaking from his office in Dallas on Wednesday. "It's a new role for me. As IP Nav enjoys tremendous success, you become a target."
In the IP Nav brief, Spangenberg says: "Foley's bad judgment here is typical, however—typical of Foley's bad decision-making that has it frequently in the news for all types of malfeasance, including sexual discrimination, racial discrimination, trademark abuse... legal malpractice—including revealing client confidences, and fraud." The allegations are accompanied by footnotes that cite newspaper articles and blog posts about a variety of contentious matters Foley has been involved in. Those matters include a sexual discrimination claim brought against the firm in the Seventh Circuit and a suit in which patent-holding company SPH America accused Foley of revealing its trade secrets—a suit that was recently resolved in Foley's favor. Read the full IP Nav answer and counterclaims [PDF].
Spangenberg says all the allegationss are fair game because Foley boasts in its suit against him about its professionalism and the high regard in which it is held in IP litigation circles. Beyond that, Spangenberg maintains that Foley badly mishandled the Red Hat suit, and even goes so far as to say that opposing counsel Kilpatrick Stockton was "mopping the floor up with them." For example, Spangenberg says, less than two months before the Markman hearing, the Foley lawyers on the case hadn't deposed any witnesses.
"It's a poorly managed firm," says Spangenberg, who resents being pulled into the dispute between Foley and its former client: "How much money DataTern owes Foley — that's not my fight. Erich Spangenberg gets into lots and lots of scrapes, this is not one of them." And, he says, DataTern was better off once it hired him: "Love me, hate me, I understand IP, and I know how to monetize it."
In emailed statement, a firm spokesman said "Rather than focus on the merits of the claim, IP Navigation has dredged up and distorted irrelevant and erroneous allegations with no apparent purpose other than trying to discredit our firm. Not only has [Spangenberg] been unjustly enriched by the valuable work we provided on this case, but he has interfered with our right to be fairly compensated for our efforts." Any holdups in the case were the results of FireStar's inability to pay and reluctance to make key decisions, like authorizing the hiring of experts, the firm stated in court documents.
How did Spangenberg and Foley end up here? Here's a brief history of the underlying patent dispute, with new information gleaned from recent court documents.
In 2006, FireStar Software, an operating software company based in Massachusetts, and Amphion Innovations, an investment firm with 15 percent stake in FireStar sued Red Hat for patent infringement. At issue: an open-source database product called Hibernate that Red Hat acquired when it bought JBoss in a transaction announced in April of that year. FireStar and Amphion said Hibernate infringed FireStar's Patent No. 6,101,502, which makes broad claims to linked databases. The firm hired Foley & Lardner to prosecute the lawsuit.
The suit was closely watched in the open source community because it was one of the first brought by a non-practicing entity or "patent troll" against a major open-source software product. Among the noteworthy facts and figures to emerge about the case from recent court document:
- FireStar/DataTern/Amphion and Foley apparently had no written contract. Foley says it was understood that the firm would bill by the hour, and that its lawyer had only agreed to discuss the possibility of future contingent-fee work. DataTern lawyers, meanwhile, claim the lawyers "agreed to agree on a contingent fee arrangement," or a hybrid hourly/contingent model, but that the lawyers delayed drawing up an agreement spelling that out "so they could continue to overwork the case" and charge "enormous, unreasonable hourly fees."
- In October 2006, in the lawsuit's early stages, FireStar told Red Hat it wanted $100 million to settle its patent claims—and Red Hat said "there was nothing left to discuss."
- FireStar, Amphion, and their Foley lawyers worked out a litigation budget of $4.4 million to take the case against Red Hat to trial in Marshall, Texas. According to Foley's filing, FireStar and Amphion said they would be willing to spend a total of between $5 million and $10 million on the litigation.
- FireStar hired an unnamed PR firm that advised the company to act like "a reluctant plaintiff, acting solely to protect its intellectual property rights" in order to "avoid being perceived as 'patent trolls.'" Doing so, the PR firm counseled, would "maintain FireStar's credibility as a product developer." That is why FireStar only sued Red Hat.
- FireStar and its lawyers discussed the pros and cons of going after Red Hat customers and "other users of Hibernate" — some of whom were, the lawyers noted, were Foley clients that the firm could not sue because of "ethical conflicts." Ultimately FireStar didn't go after other defendants because it didn't fit the "reluctant plaintiff" pose it was trying to strike. (DataTern ultimately did. See below.)
After the case was underway, FireStar apparently tired of the patent litigation game. The company was reluctant to make engineers available for deposition because, Foley's brief states, they "were focused on product development rather than the Red Hat case and as a result were not sufficiently responsive." By December 2007, the bankers at Amphion had agreed to take the suit off FireStar's hands by creating DataTern, a shell company solely focused on patent enforcement that acquired the patent in early 2008. (Amphion also agreed to compensate FireStar for employee time spent on the litigation.) At about the same time, DataTern stopped paying Foley's bills, and turned to IP Nav and its lawyers to press the suit.
Those lawyers—Texas solo Dan Perez and Michigan-based Patrick Anderson, both of whom frequently work for Spangenberg and his patent companies—quickly hammered out the $4.2 million settlement. The figure, Foley notes, was lower the total litigation budget it had agreed to with FireStar. If the plaintiffs were willing to settle for so little, Foley lawyers Michael Lockerby and Greg Neppl write, a deal could have been struck "without the expenditure of much in the way of legal fees."
Overall, Foley's complaint against Spangenberg portrays the firm as representing an operating entity in the Red Hat matter. That scenario, the firm argues, only turned into something with the typical markings of "patent troll" suit—keeping litigation costs low and ultimately settling for a figure in line with those costs—because of a major change of strategy by the patent-holders.
Spangenberg says that if Foley has qualms about handling litigation that morphs into a patent-troll suit, it simply shouldn't take on such cases. And, he notes, they can cause lots of conflicts with existing corporate clients. Like most big firms, he says, Foley is "ill-suited to do work for an NPE [non-practicing entity]."
One final note: Open-source software advocates may not know that Spangenberg considers himself a Red Hat fan. He considers the settlement between the company and DataTern "one of the coolest licenses ever," because it covers Red Hat's community members. Red Hat and Spangenberg might seem like strange bedfellows considering that Red Hat has asked the Supreme Court to use the Bilski case to wipe out software patents—the form of IP that Spangenberg has used to build his sizable fortune.
Spangenberg sees no irony in that. Red Hat, he says, is "not only a true believer, they're a true doer. I have never fought with Red Hat, and in the future I don't intend to."
- Datatern, Inc. et al v. Foley & Lardner LLP. 09-cv-00038, E.D. Texas.
- DataTern's Amended Complaint against Foley & Lardner [PDF]
- Foley & Lardner's Third-Party Complaint vs. Spangenberg and the "Plutus Parties" (Oct. 1) [PDF]
- Spangenberg's letter to Foley & Lardner on behalf of IP Navigation (Oct. 9) [PDF]
- IP Navigation Answer and Counterclaims (Oct. 12) [PDF]
- Datatern, Inc. v. Bank of America Corporation et al. 08-cv-00070, E.D. Texas, filed 4/21/2008 against 16 defendants. Settled 7/2009.
- DataTern, Inc vs Sun Microsystems Inc et al. 08-cv-00307, E.D. Texas, filed 8/05/2008 against 5 defendants. Settled 6/29/2009.
- Datatern, Inc. v. Oracle Corporation et al. 08-cv-00308, E.D. Texas, filed 8/05/2008 against same 5 defendants. Settled 6/30/2009.
- Datatern, Inc. v. United Air Lines, Inc. et al. 09-cv-00053, E.D. Texas, filed 2/17/2009 against 8 defendants.
- Datatern, Inc. v. The Allstate Corporation et al. 09-cv-00178, E.D. Texas, 6/02/2009 against 16 defendants.
Image: Taurus constellation by Johann Hevelius, via Wikimedia