Two Bites at the Apple? – Apple to Defend App Developers in Infringement Suit

A special thanks to Daniel Parrish for the following post:

Last week, an Eastern District of Texas judge granted in part Apple’s motion to intervene in Lodsys’s patent infringement suit against eleven application-developing entities.  Lodsys filed the suit in late May 2011 (amended July 2011) and Apple filed its motion to intervene only nine days later.  After ten months, the court granted Apple permissive intervention: “Apple is permitted to intervene in this suit, but such intervention is limited to the issues of patent exhaustion and licensing.”

The summary in the public record states:

“SEALED MEMORANDUM OPINION and ORDER – Apple has satisfied each of the four requirements for intervention as a matter of right under Rule 24(a)(2). The Court finds that permissive intervention is also appropriate under Rule 24(b). To avoid any potential prejudice to Lodsys rights under the License Agreement such intervention shall be and is hereby limited to the issues of license and patent exhaustion. Apples Motion to Intervene is GRANTED-IN-PART to the extent and as specified herein. Motions terminated: [4] MOTION to Intervene filed by Apple, Inc.. Signed by Judge Rodney Gilstrap on 4/12/12. (ehs, ) Modified on 4/12/2012 (ch, ).”

Apple’s interest in this suit extends beyond gratuitous defense of its application (app) developers.  Apple has an economic interest, having already paid licensing fees to Lodsys for rights to the disputed patents.  Apple asserts that the licensed rights cover developers who create apps which are sold and distributed from Apple’s App Store.  The developer typically retains 70% of the app’s revenue, while Apple takes 30% for payment processing, hosting services, and content management.  Apple contends that its rights extend to developers, giving them the freedom to create applications using Apple’s licensed technology without worrying about claims of patent infringement.  Thus, a judgment in favor of Lodsys would give them “two bites at the ‘Apple’” by generating licensing revenue from Apple and infringement damages from Apple’s app developers.

This is the essence of patent exhaustion theory, upon which Judge Rodney allowed Apple to intervene in this suit.  Patent exhaustion means that an initial sale of a patented invention severs the patent owner’s rights to that item.  More complex issues arise with respect to licensing.  A typical example is an upstream supplier licensing a patent such that downstream firms do not have to.  This is efficient from both cost and administrative perspectives, but much depends on the language of the license itself.  Here, Apple is the “upstream supplier” and the developers are the “downstream firms” that Apple claims to cover.

Apple hopes to succeed in this litigation, as much of its success can be attributed to the “There’s An App For That” culture it fosters.  In February 2008, Apple released a software developer’s kit (SDK), opening its iOS operating system for third party app development.  Recent figures from Apple illustrate how successful this strategy has been.  To date, over 25 billion apps have been downloaded, from the currently available 650,000 apps by 150,000 active developers.  This enables Apple to distribute not only apps that nearly every user downloads (e.g. Facebook, Skype, etc.) but also apps that are narrowly tailored to few users (e.g. app for users of the Hennepin County Library).  It does so by lowering some of the technical barriers to entry, namely by allowing developers to “copy and paste” certain software objects from Apple into the app itself.  For example, if an iPhone app requires a user to type on a keyboard, the app developer is not required to write the code for a keyboard.  Rather, the developer can simply “paste” Apple’s keyboard-object into the app.  This not only simplifies app development, but increases uniformity across app interfaces.

This is the essence of the Lodsys dispute.  Some of these software objects are supposedly patented by Lodsys and licensed to Apple, for example the “App Store” button in the Labyrinth app illustrated in Apples motion to intervene.  Lodsys contends that only Apple (and not third-party developers) is covered by the license.  Apple disagrees, asserting that its licensed rights protect third-party developers from suits like this one.

Although the outcome of this dispute likely depends on the exact terms of the licensing agreement, some industry watchers believe that a Lodsys triumph this would be a major blow to app developers.  Albeit a distinct possibility, Apple would most likely renegotiate its licensing agreement with Lodsys.  App developers and Apple have a symbiotic relationship wherein each depends on the other for mutual financial gain.  Apple is in a much stronger position to negotiate licensing agreements than an individual developer.  If Apple allowed Lodsys (or other similarly situated companies) to obtain judgments against developers, this could limit the very innovation that contributed to Apple’s success.  Apple is too smart to kill the goose laying the golden eggs and will most likely continue to defend its app developers.

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