So, some BIG news in mobile marketing: a federal District Court in Illinois recently granted summary judgement dismissing claims brought by Helferich Patent Licensing LLC (Helferich) against The New York Times, CBS, JCPenney, Bravo and G4 Media. Helferich alleged that the defendants’ products and services infringed upon Helferich’s patents that, according to Helferich, covered the sending of hyperlinks in text messages via mobile devices. The District Court granted summary judgement based on the defendants’ affirmative defense of patent exhaustion. This decision has powerful ramifications for customers: companies can now freely send text messages via mobile devices that include hyperlinks, as Helferich does not have the right to seek licensing fees from content creators like the New York Times.

So, how did we get here? What is Helferich? What’s going to happen next? What does this ruling mean for mobile marketing?

Great questions – here’s everything you need to know:

“Patent trolls” and Helferich Patent Licensing LLC

Patents are part of the United States’ DNA, and an important protection for innovation. The United States Patent and Trademarks Office (USPTO) has handed out patents for three centuries to make sure that inventors receive proper compensation for use of their ideas.

The past twenty years, however, have brought significant changes. In the mid 1990’s, the Federal Circuit held that algorithms used in general purpose computers could be patentable. Consequently, a flood of software patents hit the market. Initially this was good news as the government received an influx of revenue from patent applications, but problematic due to scalability issues. Some context: in 2012, the USPTO had an application backlog numbering in the millions, averaged 18-20 hours for each evaluation and issued 40,000 software patents by year’s end (that’s 110 complex innovations signed off on per day).

Putting aside whether the USPTO can responsibly evaluate applications at high volume (one argument why not), another related development is the type of company seeking to enforce patents issued by the USPTO. Today many “non-practicing entities” (NPEs) (commonly referred to as patent trolls), which do not make or sell any products or services, obtain patents. They use them to then threaten, or resort to lawsuits against, other companies to receive royalties.

The reason for this “troll” reputation has to do with the economics of NPEs’ business practices. According to PatentFreedom, legal fees for patent disputes average $1 – $5 million. Unfit to take on this monetary risk, many companies settle with patent trolls outside of court, agreeing to pay royalties instead of litigation costs. No value created, just money transferred from an active company to an entity that exists only to sue companies, not actually practice the inventions claimed in its patent portfolio. As stated by judge Richard Posner, “A patent blocks competition within the patent’s scope and so if a firm has enough patents it may be able to monopolize its market. This prospect gives rise to two wasteful phenomena: defensive patenting and patent trolls.”

Helferich, a patent troll, is unfortunately not alone. In 2012, 61% of all patent lawsuits filed through December 1 originated from NPEs, up from 45% in 2011 and 23% in 2008. According to a Boston University study, patent trolls have cost businesses $500 billion since 1990 and $29 billion in 2011, which amounts to 10% of funds (not) invested into research and development. In the words of Lee Cheng, chief legal officer and corporate secretary for Newegg, “[Money given to patent trolls] is protection money. It’s extortion.”

A Big Win For Companies Sending Hyperlinks In Text Messages Via Mobile Devices

Such was the prevailing negative sentiment toward Helferich for bringing suits against so many different types of companies that allegedly infringed upon patents supposedly covering the inclusion of hyperlinks in text messages. On one hand, “links in text messages” seems too commonplace to patent, and on the other, Helferich has no intention of actually building anything with the technology in question.

Helferich’s approach was to first seek compensation from mobile device manufacturers. Afterward, the company started after retailers and media brands. As of August 2012, an estimated 100 companies had settled with Helferich for a reported $500,000 to $750,000 licensing fee, resulting in total earnings in the neighborhood of $50-$75 million.

Some companies threatened with lawsuits decided to fight back. The most notable being The New York Times, which when sued, asked the USPTO to review Helferich’s patents to analyze their efficacy. After the court system consolidated the New York Times case with similar lawsuits filed by Helferich against CBS, JCPenney, Bravo and G4 Media, the companies argued on summary judgement that, because Helferich had already provided licenses for its entire patent portfolio to mobile device manufacturers, Helferich had exhausted its right to sue the defendants for its patents under the “Exhaustion Doctrine.” This law states that patent owners do not have the right to receive double compensation for an invention. Said differently, if a patent owner licenses its patent to Company A, it cannot then go and accuse Company A’s customers of patent infringement.

The District Court agreed with the defendants, holding that because Helferich licensed its technology to cell phone manufacturers, Helferich cannot seek compensation from other content creators farther down the value chain. The New York Times, CBS and every other company sending text messages with hyperlinks via mobile devices can operate freely without having to obtain a license from Helferich. The District Court noted that, “[t]he doctrine of patent exhaustion is designed to avoid double recovery by a patentee, promote the orderly administration of patent rights, provide an efficient method for determining the termination of a patent monopoly, and promote fair competition. To permit Helferich to recover multiple times on the same patent by selling licenses to the patents piece by piece (or claim by claim) is contradictory to these policies.”

The Decision & Its Aftermath

Two outcomes seem likely certainties as a result of this decision:

  1. Mobile messaging investment and innovation will increase
  2. Helferich will respond

With respect to the first outcome, this decision against Helferich has very positive implications for customer SMS, MMS, Facebook and other forms of mobile marketing. Without the threat of a lawsuit from Helferich, companies will commit more dollars creating better mobile campaigns that seamlessly link messaging, apps and the web. A higher quality of service, and a more user-friendly experience for customers, should follow. Said Casey Oppenheim, consumer- and privacy-rights attorney and co-founder of Disconnect, “This ruling is good for consumers. Forcing businesses to license a technology as commonplace as sending a link in a mobile message stifles communication. The application of the patent-exhaustion doctrine reaffirms its crucial role in protecting downstream purchasers from patent owners seeking to extract duplicate royalties.”

With respect to the second outcome, according to patent attorney Paul E. Godinez from Bailey Duquette P.C., Helferich will probably appeal. Grounds will likely be that the scope of the Helferich licenses to mobile device manufacturers does not apply to downstream content providers, or that Helferich can reserve claims from its patent licenses to ensure it can later take actions against content creators. Both grounds for appeal may not carry much weight given that the District Court relied heavily on the Supreme Court’s decision in Quanta Computer vs. LG Electronics, which may preclude such arguments. Helferich might also attempt to circumvent the ruling by suing any mobile device manufactures that have not already acquired a license from Helferich (if any exist), or those content providers interacting with customers on any mobile devices from that set of manufacturers. As a last resort, Helferich could try to threaten lawsuits based on other patents in its patent portfolio, a problematic argument due to Helferich’s own licensing terms to the mobile device manufacturers quoted by the District Court.

This case demonstrates a monumental decision not just for mobile marketing, but also for the patent troll economy. Company and industry resources applied toward legislative initiatives like the SHIELD Act in congressional committee (which includes provisions that would require plaintiffs to pay all defendant legal costs if patent lawsuit fails) may make a significant difference. Waterfall is playing a key role in the mobile messaging industry’s efforts to defend intellectual property rights; our CMO Matt Silk is co-chair of the MMA’s Patent Abuse Task Force. We’ll continue to keep you posted here at Mobile Demystified and please post any questions or thoughts to the comments.

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