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`Has Patent, Will Sue: An Alert to Corporate America - The New York Times
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`http://nyti.ms/16zhcwh
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`BUSINESS DAY
`
`Has Patent, Will Sue: An Alert to
`Corporate America
`
`By DAVID SEGAL JULY 13, 2013
`If you’re a corporate executive, this may be one of the last sentences you want
`to hear: “Erich Spangenberg is on the line.” Invariably, Mr. Spangenberg, the
`53-year-old owner of IPNav, is calling to discuss a patent held by one of his
`clients, which he says your company is infringing — and what are you going to
`do about it?
`
`Mr. Spangenberg is likely to open the conversation on a diplomatic note,
`but if you put up enough resistance, or try to shrug him off, he can also, as he
`put it, “go thug.”
`
`He demonstrated what that sounds like in a brief bit of role-play recently,
`sitting in the apartment he is renting for the summer in Paris near the Arc de
`Triomphe. His voice dropped, the curse words flowed, and he spoke with
`carefully modulated menace.
`
`“Once you go thug, though, you can’t unthug,” he explained, returning to
`his warm and normal tone. “Actually, you can unthug, but if you do that, you
`can’t rethug. Then you just seem crazy.”
`
`Mr. Spangenberg’s company, based in Dallas, helps “turn idle patents into
`cash cows,” as it says on its Web site. A typical client is an inventor or
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`corporation, with a batch of patents, demanding a license fee from what it
`contends is an infringer, usually a titan in the tech realm. His weapon of choice
`in this business — the brass knuckles of his trade, so to speak — is the lawsuit.
`
`In the last five years, IPNav has sued 1,638 companies, according to a
`recent report by RPX, a patent risk management provider, more than any
`other entity in the patent field. “To get companies to pay attention, in some
`percent of the market, you need to whack them over the head,” Mr.
`Spangenberg said. “In our system, you can’t duel, you can’t offer to fight in the
`street, which would be fine with me.”
`
`This combat readiness has made Mr. Spangenberg, a high-school dropout
`raised in Buffalo, very rich. He earns about $25 million a year, he says, which
`is at least a couple of million more than the country’s top bank executives.
`Until recently, he lived in a 14,000-square-foot home in Dallas; it is now on
`the market for $19.5 million. He often flies on a company jet, and at one point
`he owned 16 cars, six of them Lamborghinis.
`
`His clients, who pay IPNav a percentage of any recovery, contend that he
`earns every dollar and praise him as a hero.
`
`“Erich saved our bacon,” said Steve Dodd, a patent holder with a client
`company called Parallel Iron. “We were more than $1 million in debt and I was
`getting ready to file for bankruptcy.”
`
`Mr. Spangenberg’s opponents use less flattering terms to describe his
`work. Like shakedown artist. Or patent troll.
`
`There is debate about the definition of patent trolls, but the term broadly
`refers to people who sue companies for infringement, often using patents of
`dubious value or questionable relevance, and then hold on like a terrier until
`they get license fees. In recent years, patent trolls — they prefer “patent
`assertion entities,” or P.A.E.’s — have gone from low-profile corporate
`migraine to mainstream scourge.
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`This is partly because the number of patent infringement suits has more
`than doubled in recent years, to 4,731 cases in 2012 from 2,304 in 2009,
`according to that RPX report. The cost to businesses, which pass along the
`expense to consumers, is immense. One study found that United States
`companies — most of them small or medium-sized — spent $29 billion in 2011
`on patent assertion cases.
`
`“And only about $6 billion of that money wound up in the hands of
`inventors,” said James Bessen, a co-author of the study and a professor at the
`Boston University School of Law. “As for the other $23 billion, most of it goes
`to legal expenses, both for defendants and patent troll companies, with the rest
`going to operating expenses of the trolls — overhead and marketing — and
`finally, patent troll company profits. That’s why we call this type of litigation a
`tax on innovation. It discourages innovation much more than it encourages it.”
`
`The notoriety of trolls also arises from legal claims that, at minimum,
`sound absurd. Like the P.A.E. that last year mailed letters to companies
`contending it had a patent on e-mailing scanned documents and asking for a
`license fee of $1,000 per employee. Or the company that has sued for license
`fees from podcasters through a patent originally filed in 1996, long before
`podcasts were conceived.
`
`The inevitable counterattack on patent asserters has begun. In June,
`President Obama announced a handful of executive orders “to protect
`innovators from frivolous litigation.” Companies, large and small, are starting
`to vent and fight back, and figures as varied as Judge Richard A. Posner, of the
`United States Court of Appeals for the Seventh Circuit, and Marc Maron, the
`stand-up comedian and podcast host, have denounced trolling. Mark Cuban
`recently gave the Electronic Frontier Foundation $250,000 to help finance
`“The Mark Cuban Chair to Eliminate Stupid Patents.”
`
`Mr. Spangenberg has been called “a costly nuisance,” “one of the most
`notorious patent trolls in America” and many unprintable names in the
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`comments sections of Web sites like Techdirt. He has achieved a certain
`infamy.
`
`In his telling, he is protecting put-upon inventors. But he may simply be
`profiteering from a flawed and creaky legal system.
`
`Mr. Spangenberg speaks in rapid-fire clumps of words, usually while
`looking down and grimacing slightly, as though trying to lift a barbell. When
`we met, he was wearing what he calls “my uniform”: a pair of jeans and one of
`his 40 identical black, short-sleeve, mock-turtleneck Nike T-shirts.
`
`He doesn’t mind his public reputation as an ogre, and by all means, he
`says, call him a troll — though he thinks the name is a bogus effort to taint his
`profession.
`
`When it comes to work, he is focused to the point of being obsessive. As
`an associate at a corporate law firm — after taking the ACT test, he attended
`the University of Delaware and eventually earned a law degree from Case
`Western University — he once worked four days straight without sleep, and
`was taken to the hospital in an ambulance.
`
`“I had a mild seizure,” he said. “There’s only so much coffee and caffeine
`tablets you can take.”
`
`He stands about 5-foot-6 and was bullied as a child because of his height.
`He always fought back, he says, and he usually lost; his nose has been broken
`by an assortment of fists. This has given him a lifelong hatred of bullies, which
`explains, he says, why he wound up in a job where he often stands with a small
`company assailing a larger one.
`
`But IPNav doesn’t exactly fight using the Marquess of Queensberry rules.
`In a 2008 ruling, Judge Barbara B. Crabb of Federal District Court in
`Wisconsin, concluded that Mr. Spangenberg was involved in witness
`tampering — specifically, inducing a lawyer to “intimidate a witness on the eve
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`of trial.” The eviscerating 62-page ruling was in a case brought by
`DaimlerChrysler against a company owned by Mr. Spangenberg called Taurus
`IP. The carmaker accused Mr. Spangenberg of breaking a 2006 we-won’t-sue-
`you-again agreement over certain tech patents.
`
`It was a complex case, but here’s a quick summary: one company
`controlled by Mr. Spangenberg (Orion IP) was accused of having signed a
`settlement with DaimlerChrysler. Later, a different Spangenberg-owned
`company (Taurus IP) sued DaimlerChrysler with related patents. Mr.
`Spangenberg seemed to be trying a double dip — angling for two settlements
`from the same defendant. Tsk, tsk, said Judge Crabb, though she used tougher
`language and painstakingly enumerated the maze of companies in the
`Spangenberg empire. She ordered Taurus IP to pay DaimlerChrysler $3.8
`million to cover its legal fees and succinctly described Mr. Spangenberg’s
`business model this way: “to license patents through litigation: first file a
`lawsuit, then negotiate a licensing agreement as part of a settlement.”
`
`“It was a mauling,” Mr. Spangenberg said of Judge Crabb’s takedown,
`now under appeal. But weirdly enough, the ruling turned out to be terrific
`public relations.
`
`Soon after Judge Crabb’s decision, IPNav’s phone was ringing with new
`business. RadioShack, Bridgestone and other companies wanted to strike a
`variety of deals to monetize their patents. The mauling had laid bare Mr.
`Spangenberg’s aggressive business techniques. IPNav soon grew from five
`employees to 80, most of whom are patent specialists; it currently manages
`about 10,000 patents. (One of its many relationships, as it turns out, is as
`licensing agent for a company suing The New York Times Company for patent
`infringement.) It has offices in Shanghai, Tel Aviv, Dallas and Dublin.
`
`He calls the apartment he now rents “the Paris office” and says he spends
`summers there because the time zone is convenient for conversations with
`employees around the world. Mostly, though, he just loves Paris, as does his
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`wife, Audrey, and their son, Christian, 20. Mr. Spangenberg is particularly
`fond of the architecture, the food and the Impressionist art, which he and his
`wife collect. He doesn’t speak much to the locals, because he can’t.
`
`“I tried learning French with a tutor,” he said, “but after a few lessons she
`told me my accent made me sound retarded and that was the end of that.”
`
`In the patent world, Mr. Spangenberg says he has cultivated a reputation
`as a bit of carnivorous monster, but even his opponents say he can be perfectly
`reasonable. One, a lawyer named David Tsai, says IPNav’s lawyers dropped a
`case against his clients — Hulu, Amazon and Twitter — after he demonstrated
`that they were not infringing.
`
`“They agreed they had no standing,” Mr. Tsai recalled.
`
`But such comity may be the exception among companies in Mr.
`Spangenberg’s sights. Not long ago, Rackspace, a cloud storage company
`based in San Antonio, became an IPNav target, and Alan Schoenbaum,
`Rackspace’s general counsel, became Mr. Spangenberg’s most vocal critic.
`
`Mr. Spangenberg contends that Rackspace is infringing a patent held by
`his client Parallel Iron. Steve Dodd started Parallel Iron in 2001 with three
`friends in the tech and telecom world. Together, they began to draft patent
`applications for a data storage and retrieval system.
`
`“I worked on this in my basement for two years,” Mr. Dodd said. “We
`didn’t get into this to enforce patent rights. We got into it to build a storage
`system. But this was the end of the tech bubble. We couldn’t have timed it
`worse.”
`
`Mr. Dodd and his group were $1.3 million in debt when a consultant
`introduced him to Mr. Spangenberg. After sizing up the patents, IPNav agreed
`to pay Parallel Iron $250,000 for exclusive rights to monetize the patents for a
`fixed time, and to finance any litigation. Parallel Iron would keep 42.5 percent
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`of any settlement revenue and verdicts, with the rest split between IPNav and
`the lawyers it hired.
`
`As usual, Mr. Spangenberg would handle overtures to companies and
`negotiations. He considers this one of his specialties.
`
`“Love, fear or greed,” he says, citing the key human motivations that are
`his leverage when he approaches any company. “I always start with love.”
`
`That usually means an assertion letter, which may not sound very loving
`to recipients. In 2011, a judge in Wisconsin — not the one who mauled him —
`quoted from an IPNav assertion letter that included this sentence: “We are
`focused on addressing these issues without the need for costly and protracted
`litigation.”
`
`“The implied ‘or else!’ oozes from this letter like lye from lutefisk,” wrote
`Judge Stephen L. Crocker of Federal District Court, referring to a gelatinous
`dish popular in Nordic countries. And Wisconsin, apparently.
`
`Neither love nor fear worked on Rackspace, and the two companies were
`soon filing suits against each other. Going to court will cost Rackspace
`somewhere between $1 million and $5 million, Mr. Schoenbaum estimated. A
`license would have probably been a bargain by comparison, and he said
`Rackspace might have acquired one if it were infringing Parallel Iron’s patents.
`But the company’s lawyers decided it was not, and Rackspace became one of a
`handful trying to turn the tables on patent asserters.
`
`“The game is to extort license fees out of companies for less than defense
`costs,” Mr. Schoenbaum said in a recent phone interview, referring to IPNav.
`“We don’t want to encourage that behavior. We’ll just continue to be sued until
`we demonstrate that we can’t be pushed into a settlement.”
`
`The dispute in this instance revolves around Rackspace’s use of open-
`source software called the Hadoop Distributed File System. It stores, processes
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`and analyzes vast amounts of data. Facebook and LinkedIn — both sued by
`Parallel Iron — are among its many users.
`
`So, the key question: Does the Hadoop Distributed File System infringe
`Parallel Iron’s patents?
`
`David Pratt, the president of a company called M-CAM, agreed to weigh
`in. M-CAM is based in Charlottesville, Va., and performs what it calls “stress
`tests” on patents on behalf of banks that are making loans to companies with
`intellectual property. Mr. Pratt described himself as “patent-agnostic,” which
`is to say he came to this task without any particular bias.
`
`His conclusion was that Parallel Iron has a very weak case.
`
`“The problem is, these patents are severely challenged by what we call
`precedent innovation,” he said, using a fancy term for ideas that are in the
`public domain before a patent is granted. “What’s described in Patent No.
`7197662,” referring to Parallel Iron’s patent, “has been done a thousand times.
`I.B.M. has been doing it since the beginning of computers.”
`
`Mr. Pratt followed up by e-mailing a patent that predates Parallel Iron’s
`and which, he suggested, was quite similar. As Mr. Pratt put it, “There’s
`virtually no chance that ’662 and its family could survive a full-scale re-
`examination by the Patent Office, because there are a lot of things that could
`disable or destroy it.”
`
`Mr. Spangenberg was unimpressed by this analysis. Before he signs up
`clients, he spends $100,000 to $250,000 on experts who take a month or
`more to study both the validity of a patent and whether anyone is infringing it.
`The findings of these experts, he said, were highly encouraging.
`
`“Steve and his partners patented a very specific and very effective way to
`store and retrieve data,” he said. “It’s not the only way to do it. It just so
`happens that if you look at Hadoop and you look at Parallel Iron’s patents,
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`they’re practically identical.”
`
`It’s hard to say whether Mr. Spangenberg in this case is sticking up for
`outgunned inventors or wheedling a settlement that he and those inventors
`don’t deserve. And it’s the fuzziness of such issues that leads to the sort of
`knotty legal morass that companies pay to avoid. If nothing else, here, as with
`many other cases, Mr. Spangenberg has found the opening he needs.
`
`Given the time and money it takes to sort out patent claims, there is
`something a little insane about the American way of resolving these disputes.
`Germany has a specialized patent court, which streamlines the process. In the
`United States, there is talk of setting up patent markets, so that start-up
`companies could quickly find out what patents they need and whom to pay,
`rather than putting out their product and waiting to be sued.
`
`Mr. Spangenberg agrees that the United States system is deeply flawed.
`“We’re using the courts as a marketplace, and the courts are horribly
`inefficient and horribly expensive as a market,” he said.
`
`But as long as the system exists, Mr. Spangenberg is going to exploit its
`ambiguities and pokiness for all it’s worth.
`
`Ambiguity is written into many patents. In the 1990s, court decisions
`pushed the Patent and Trademark Office to become more lenient about filings,
`according to legal experts. Soon, software concepts were being patented, and
`you didn’t need to build an example of the concept in question. A broad draft
`and description would suffice.
`
`“If you’re an inventor, you want patents that are flexible and broad,” said
`Daniel Ravicher, president and executive director of the Public Patent
`Foundation, a nonprofit group that monitors abuses in the patent system.
`“You want language like ‘systems to do things with processes with widgets.’ ”
`
`Moreover, patent holders in recent years have become more brazen about
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`asserting claims on inventions that haven’t yet been conceived, according to
`Professor Bessen at Boston University. A patent granted in 1985, for example,
`and titled a “system for reproducing information in material objects at a point
`of sale location” was originally intended for retail kiosks to sell cassettes. But a
`company called E-Data acquired the patent and argued that “point of sale”
`could include a buyer with an Internet connection. Which meant that E-Data
`could sue companies selling products online, which it did.
`
`“E-Data collected about $100 million,” Professor Bessen said. “And that’s
`only a modestly successful troll.”
`
`Mr. Spangenberg learned just how potent such patents could be the hard
`way. In 1996, he was chief executive of a telecom company, SmarTalk, that was
`accused of patent infringement.
`
`“This guy sues us,” he recalled. “I brought in a law firm and they do a
`presentation about how we’d litigate, which will cost us something like $3
`million to $5 million. I know it’ll be way more than that.”
`
`So he called his adversary, who invited him to his office on Wilshire
`Boulevard in Los Angeles.
`
`“It’s like walking into Versailles,” Mr. Spangenberg recalled. “This
`enormous space, and these puffy chairs you sit in and your feet don’t touch the
`floor. I said: ‘I get it. I love the setup. I took a psychology course. What do you
`want?’ ”
`
`In minutes, they shook hands on a deal in which SmarTalk would pay
`$500,000 for a license.
`
`The experience provoked an epiphany: Patents, which are often
`considered a cost for companies, can also be a hugely valuable asset.
`
`Mr. Spangenberg started IPNav in 2003. He and his wife subsequently
`acquired a portfolio of 14 patents from a company called Firepond. As money
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`poured in, he went through an acquisitive phase that he characterized as a
`combination of “nouveau riche on steroids” and midlife crisis, which is how he
`ended up with 16 cars and a mansion with a gold leaf ceiling and a Baccarat
`chandelier. He snapped out of it a few years ago, after he bought so much wine
`at a Christie’s auction that it was delivered in an 18-wheel truck. His son said
`he’d need to live to 200 to consume all of it.
`
`He and his wife have since moved into an apartment, a 2,000-square-foot
`two-bedroom in Dallas, and he sold off all but one of his cars, a Ferrari. But
`he’s hardly depriving himself; he’s currently in the market for a Monet.
`
`The constant in his life has been incessant work, and you need a few
`spreadsheets to chart the 50 or so companies that he either owns or co-owns
`as a patent asserter. One of those spreadsheets is for Parallel Iron, which, with
`an assist from IPNav, has won just under $10 million in settlements, according
`to Mr. Dodd, the inventor. Whether these companies believed that they were
`infringing, or were merely avoiding a drawn-out and costly lawsuit, is hard to
`say. The settlements all come with confidentiality agreements.
`
`Still in progress for Parallel Iron are suits against Google, EMC, Hitachi,
`Adobe and others. Which is just a sliver of Mr. Spangenberg’s work. Some 100
`other patent campaigns on behalf of other patent-holding companies
`partnered with IPNav are under way.
`
`That means a lot of phone calls from a guy who might go thug, and
`enough litigation to keep a battalion of lawyers busy for years.
`
`A version of this article appears in print on July 14, 2013, on page BU1 of the New York edition
`with the headline: Has Patent. Will Sue.
`
`© 2015 The New York Times Company
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