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Small iOS Developers Targeted over In-App Purchase Patents

[Update: On 15 May 2011, Lodsys posted quite a bit of information on the company blog, addressing a number of the previously unknown aspects of the situation. Rather than attempt to weave them into the existing article, I’ve added more thoughts at the end. -Adam]

James Thomson of TLA Systems was looking forward to the approval of PCalc 2.4 in the App Store when he received a FedEx package containing a 100-page patent infringement claim against the free PCalc Lite for using in-app purchasing. Talk about how to have a delivery ruin your day! Thomson wasn’t alone. Other iOS developers, including Patrick McCarron of mobileAge and some larger firms, also received similar patent infringement claims.

Neither Thomson nor McCarron would initially share the name of the company threatening the patent infringement lawsuit on the record, and both forwarded the legal documents they received on to Apple. Macworld confirmed, however, that the company in question is called Lodsys and owns four patents “directed to systems and methods for providers of products and/or services to interact with users of those products and services to gather information from those users and transmit that information to the provider.” Language only a
patent lawyer could love.

Although details are still becoming known, the problem should be entirely Apple’s for reasons that we will see.

Use of in-app purchasing is governed by the iOS Developer Program License Agreement, which makes it clear that the In App Purchase API is Apple’s intellectual property, and which is then licensed to iOS developers.

It can be interesting to follow the legal connections. First, Apple states the purpose of the iOS Developer Program License Agreement, which declares Apple’s ownership of the Apple Software.

You would like to use the Apple Software (as defined below) to develop one or more Applications (as defined below) for Apple-branded products running the iOS. Apple is willing to grant You a limited license to use the Apple Software to develop and test Your Applications on the terms and conditions set forth in this Agreement.

Next, Apple defines what is meant by Apple Software, including the Software Development Kit that developers use to write iOS apps.

“Apple Software” collectively means: (a) the SDK, (b) the iOS, and (c) the Provisioning Profiles, and includes any Updates to any of the foregoing that may be provided to You by Apple.

But what’s in the SDK? That’s defined as well — the key term here is APIs, or the application programming interfaces that developers rely on to make certain things happen in their apps.

“SDK” (Software Development Kit) means the Documentation, software (source code and object code), applications, sample code, simulator, tools, libraries, APIs, data, files, and materials provided by Apple for use by You in connection with Your Application development, and includes any Updates that may be provided by Apple to You pursuant to this Agreement.

Here Apple gets more specific, drawing a distinction between Documented APIs and presumably other APIs that Apple has not documented (and that developers should not use).

“Documented API(s)” means the Application Programming Interface(s) documented by Apple in published Apple Documentation and which are contained in the Apple Software.

Then we get to the heart of the matter, the definition of the In App Purchase API.

“In App Purchase API” means the Documented API that enables additional content, functionality or services to be purchased and delivered or made available for use within an Application.

Finally, Apple asserts ownership of the Apple Software, including the In App Purchase API, and requires developers to notify Apple of any claims against Apple’s intellectual property.

Apple retains all rights, title, and interest in and to the Apple Software and any Updates it may make available to You under this Agreement. You agree to cooperate with Apple to maintain Apple’s ownership of the Apple Software, and, to the extent that You become aware of any claims relating to the Apple Software, You agree to use reasonable efforts to promptly provide notice of any such claims to Apple.

That’s what Thomson and McCarron have done, and in fact, that’s all they’re allowed to do. Although Apple requires that developers be responsible for:

(iii) claims that any of the Licensed Applications and/or the end-user’s possession or use of those Licensed Applications infringes the copyright or other intellectual property rights of any third party.

and an indemnification clause protects Apple from developers breaching the agreement for a variety of reasons, including:

(ii) any claims that Your Application or the distribution, sale, offer for sale, use or importation of Your Application (whether alone or as an essential part of a combination), Licensed Application Information or metadata, violate or infringe any third party intellectual property or proprietary rights;

those requirements are immediately qualified by this statement:

In no event may You enter into any settlement or like agreement with a third party that affects Apple’s rights or binds Apple in any way, without the prior written consent of Apple.

So what it comes down to is that Thomson, McCarron, and other iOS developers are being threatened by Lodsys for using Apple intellectual property under license from Apple, in such a fashion that they may not even be able to settle without violating the iOS Developer Program License Agreement. They can’t legally agree that Apple’s In App Purchase API violates Lodsys’s patents, and no matter what, there’s no way Apple would give permission for such a settlement due to the chilling effect it would have on iOS development in general.

It’s unclear why Lodsys has chosen this approach — their lawyers have undoubtedly read the iOS Developer Program License Agreement and know that the iOS developers can’t settle. And they’ve chosen such small targets that there’s no way they could even cover their legal fees with what they could squeeze out. The only strategy that makes sense is that by targeting small developers, they put additional pressure on Apple to settle quickly.

Without knowing a lot more about the situation, it’s impossible to know if Apple is indeed on solid legal footing with in-app purchasing, or if Lodysys’s infringed patents are legitimate and Apple figured it would be cheaper to pay for forgiveness later than to ask for permission ahead of time.

Apple has yet to respond to our request for comment. But…

Late-Breaking Information — On 15 May 2011, Lodsys posted a series of blog posts aimed at answering many of the questions raised by the company’s efforts to enforce the patents it claims cover Apple’s in-app purchase technology. Some of this information was news even to the developers who had been initially targeted by Lodsys.

Lodsys claims that it is looking to license its patents to individual developers who use in-app purchasing to upgrade the app — presumably in contrast to those who use it for subscriptions, or to add game levels, or something like that. Most interestingly, Lodsys says that it’s not going after Apple because “Apple is licensed for its nameplate products and services,” whatever that means.

Plus, in a torturous comparison to the firms involved in building a hotel, Lodsys claims that it makes sense for the businesses who interact with eventual customers to pay for Lodsys’s patent rights. That’s like saying a hotel owner should pay royalties based on a patent for the hammers used in the construction of the hotel, well after the hotel is open for business.

It’s difficult to untangle such convoluted reasoning or to know how to interpret statements about the claimed existing license from Apple. Apple asserts ownership over the intellectual property covered in the iOS Developer Program License Agreement as “Apple Software,” and it’s customary, or at least advisable, to lay out any legal encumbrances that would materially modify the terms of a license agreement. Assuming that Apple was aware of Lodsys’s patents at all, I can believe only that Apple thought their existing license with Lodsys covered in-app purchasing for iOS developers, or that they thought that Lodsys’s patent rights weren’t in fact related. It simply makes no sense for Apple to have built in-app purchasing with
the knowledge that developers would have to pay an extra percentage to some third party.

One particularly interesting fact is that Lodsys has published the licensing fee they’re hoping to extract from iOS developers using in-app purchasing for upgrades: 0.575 percent of U.S. revenue. That’s not a particularly large number; for a developer bringing in $1 million in U.S. revenues, it would amount to $5750. That might explain why some very small developers were targeted — for the amount they’d pay, it’s not worth even talking to a lawyer, and if they agree to the payment, Lodsys can use that fact when targeting larger and thus more lucrative companies. And of course, nothing prevents Lodsys from charging a higher rate as they go after additional iOS developers.

In the blog posts, Lodsys comes off as extremely defensive, playing the victim after receiving negative press and hate mail, but it’s hard to have any sympathy for a company that sweeps into an established market and says, “Wow, look. You all owe us money.” And that for merely using tools that any reasonable person would have assumed were covered under the iOS Developer Program License Agreement. Finally, while it’s possible that the patents Lodsys bought are legitimate, it’s hard to argue that they in any way contributed to innovation, given that they’re being applied retroactively rather than being used to create an actual product or service.

Regardless of whether or not my reading of the iOS Developer Program License Agreement is accurate, and notwithstanding the new information posted by Lodsys, the next move needs to come from Apple Legal, who are actively looking into the situation.

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