OK, before I even get into this post, let me be clear: this is based on old news. However, it was news that no one seemed to pick up at the time, and when we discovered it, we thought it was quite interesting.

If you're unfamiliar with Lodsys, let's start with a history lesson. They're better known as the shell corporation offspring of a company called Intellectual Ventures LLC, a patent clearinghouse owned by a group of, shall we say, enterprising individuals. Their purpose? Buy as many viable tech patents as possible, and force major corporations into licensing (paying royalties) deals when infringement on any of these patents, which is actively searched for, is discovered.

So far, it's been estimated that IV has pulled in roughly $5 billion from the likes of eBay, Google, Microsoft, Apple, Intel, and others. The company has also taken on engineers and scientists for the purpose of developing its own patents in house, though Intellectual Ventures produces no tangible goods whatsoever.

Our own Supreme Court weighed in on the issue of patent trolls, at least Justices Kennedy and former Justice Stevens, in the seminal case eBay v. MercExchange:

An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees ... For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent.

eBay Inc. v. MercExchange, LLC., 547 U.S. 388 (2006) (concurring opinion).

Even some of our nation's highest appointed officials saw some degree of moral turpitude in the business practices of these companies, though their tactics and profit model have generally been condoned as perfectly legal.

When Lodsys began going after Android and iOS developers who used in-app "upgrade" purchasing systems, an idea Lodsys claims to own through a patent for a telephone-based ordering system, the internet community expressed outrage. Apple made some attempts at responding to Lodsys' action, but they've proven fruitless so far as we know. Google has yet to do anything about it. How could Google and Apple hang developers out to dry like that?

Apparently, Lodsys isn't asking all that much.

In fact, the company publishes what its royalty rates are right on its website, here. The rate is 0.575% of all United States revenue, including compensation for past revenue since the time in-app purchasing was implemented. For a patent, this is a very low rate. Royalties on patents range anywhere from 1%-4%, generally speaking, depending on what's being licensed.

The low rate is likely more a business decision than anything - Lodsys licenses patents to so many companies that it can afford to be a little more reasonable in its royalty rates. A lower rate also means potential defendants are much more likely to settle instead of fight, especially someone like a small app developer.

For example, let's say you're the developer of a free Android game that has a paid upgrade to a full version, and you get 15,000 paid upgrade purchases over the last year. You charge $4US for upgrading to the full version of your game. This means your total revenue was $42,000 (this is subtracting Google's cut, which is not part of revenue) for the year. If Lodsys puts you on notice, they'll demand that you immediately compensate them $241.50 (yes, that's it), and 2.3 cents in royalties on every upgrade thereafter.

It's possible Lodsys is also seeking additional money upfront from larger developers (for various reasons, including willful infringement), but for your average Joe, it's not exactly a ton of cash to lose. Of course, there's the argument that these kinds of patents could nickel-and-dime developers to death, but that's sheer speculation and, frankly, ignores many of the complexities of patent law and the seriousness of putting someone on notice for infringement.

The merits of the patent in question are still dubious in my mind, but until the matter is litigated (it sounds like Rovio and Lodsys may duke it out in court), we just can't know how courts will interpret it. Still, a little over half a cent on the dollar isn't the worst thing in the world if they're right, is it?

David Ruddock
David's phone is whatever is currently sitting on his desk. He is an avid writer, and enjoys playing devil's advocate in editorials, and reviewing the latest phones and gadgets. He also doesn't usually write such boring sentences.

  • skitchbeatz

    still too much.

  • JimJam

    Half a cent on 500million downloads equals?
    $2.5m? They should change the greedy pigs to greedy Llodys's in Angry Birds

    • Jon Garrett

      I see nothing wrong with what Lodsys is doing, this is how the free market works.

      Apple does the same thing, they buy companies and then sue competitors for using technologies before apple purchased it.

      If people really want to get upset about something, they need to get upset at how a company like apple can patent broadly vague ideas and sue anybody who makes a product better than theirs.

      • M.

        No - this is how the USA works. Or - as the case will be - will soon not work, when companies eventually decide to take their products to places where the costs of doing business is cheaper.

        The US legal business is currently digging the grave of the US tech business.

      • Gill

        Your an Idiot! Do you take it in the butt, why the hell should I give a Conn artist any money for something he had absolutely nothing to do with. These are the same assholes that sucked the blood right out of this country. This is pyramid scheme, There not charging apple the license fee, there charging the developer the fee. That's me! my apps are legit and I worked hard to developed them.

  • vincentisdoinghisiphone

    I believe this was covered previously, but the outrage spawns from the fact that these companies do not produce anything and just sit on patents until they are infringed upon and then strike with a trollie vengence. They obviously own the patents so legally should be entitled to rape in the money, but ethically is intolerable. This is why people are outraged by these troll corps.

    • Edd

      I love the fact you said "rape" instead of "rake", as it's a lot more truthful...

  • HomerSp

    Damned patent trolls.

  • Travis

    Patent abuse (extortion?) is still wrong, even if it's only a small amount of money. If someone cornered you at gunpoint but only asked for $1, is it still armed robbery?

    • http://genesischess.com/ Micah

      Exactly. It doesn't matter how little or how much. It's still wrong. We desperately need patent reform in America. All it's doing is hurting innovation.

    • Scott

      The difference is that armed robbery is illegal, and this isn't.

      • ocdtrekkie

        But this *should* be illegal.

      • http://lavadip.com HRJ

        His point was that it is illegal even when only 1$ is robbed.

    • Erick

      This reminds me of mafia style protection rackets. "That's a nice app you got there, be a shame if something were to happen to it."

  • Yuriy

    I'm not paying a dime lol

  • kappo

    So how much is that if 10 patent trolls go after one product?

    I think everyone agrees that the model is stupid.

    Shut these companies down, IMO. All they do is stifle innovation and make products impossible to produce for someone who doesn't have craptons of backing.

  • Matt

    seriously, half a cent on the dollar or not, F!CK Lodsys and others like them

  • Chance

    Trolls!!!!!!! I personally despise them in all forms!! >:0

  • Synr

    Not only does it stifle innovation, but a business model that relies on wasting taxpayer dollars in court is absolutely wrong.

    I would like to know how much of our tax money have been used to hear cases made by Lodsys and other patent trolls. Or maybe I wouldn't.

    • David Ruddock

      Well, for Lodsys, I think the number is fairly small. The only costs incurred are the time of the judges, clerks, magistrate judges, and reporters. Lodsys doesn't litigate all that much, they settle before trial generally.

      For all patent trolls? Yes, I imagine the amount is substantial.

  • randy magruder

    The problem is, their licensing terms state that they can CHANGE the royalties. Once you started to pay, they can just jack up the rate, and you don't have a good argument not to pay the higher rate because, after all, you paid the lower one, which can be seen as a concession that the patent is lawful and should be paid. The small fee is the sucker punch to get you set for the knockout.

  • randy magruder

    The problem is, their licensing terms state that they can CHANGE the royalties. Once you started to pay, they can just jack up the rate, and you don't have a good argument not to pay the higher rate because, after all, you paid the lower one, which can be seen as a concession that the patent is lawful and should be paid. The small fee is the sucker punch to get you set for the knockout.

  • cosmic

    You guys have a really nice site here... For only 0.5% of ad revenue I'll leave you alone, but if you don't agree I'm suing and you put your house, car, and savings at risk.

    But its ok, its only 0.5%.

  • Dick

    Actually, they are asking the 0.575% for EACH of four patents they claim that in-app buy buttons infringe. Hence 2.3%. And it's of ALL revenues of the infringing corporation - not just specific sales of infringing software. So if you also made $100K consulting over that period, they want $2300 of that... Adds up fast...

    • M.

      Indeed. Not only is it old news well-known to anyone who has followed the case, it is also misrepresenting the issues in so many ways it is literally painful. I don't think - at least I don't hope - it is written with malicious intent, but it might as well have been.

      - The percentage demanded is for all revenue generated by your company. It does not matter whether it is revenue is generated in the US or not, from before you allegedly infringed their patent or not, from sales or ads (which are certainly not part of the patented technology), or - as in the example - from consulting. They want a percentage of everything, for all of their patents (whether you infringe them or not).

      - The royalty can be changed by them at any time. Good luck trying to challenge the license once you've signed it. Even better, if they do this to you, you are not even allowed to mention it to anyone - part of the terms of the license.

      - They can demand an audit of your company at any time - at your expense.

      - The patents are bogus, and will most likely be wholly or partially revoked once the re-examination process started by Google has been completed. If you've signed a license you're out of luck, though - no one is going to come and pay you back what you have laid out.

      To anyone who gets contacted by such trolls. Do your research first, be very careful whose advice you take, and consult a lawyer.

  • Ian

    WOW!!! They're trolling even harder then this article is... ;)

  • Mike

    Half a cent per download is still a million times what Lodsys deserves. I don't see how what they're doing is still legal. Congress needs to throw some heavy restrictions on things like that, to limit the exorbitant fees that they charge.

  • Chris_oo

    Nice article David. I also worry about other unintended consequences... This and the other surges in litigation is clearly driving up the market value of IP (see Nortell patent purchase). At what point do companies with weak balance sheets or market outlook, but OK IP, cut their losses early, start layoffs and become trolls(effectively liquidating their IP)? Scary for not only the individual developers, but also for ones working at larger corporations.

  • iMi

    Given the time and age, the whole patent system needs to be overhauled and new laws and regulations put in place.
    Human thinking and idea capacity has reached very high levels where an idea on one side of the world is the same as an idea on the other side of the world even though these people haven't met.
    In my opinion, patent the process and not the idea. That way people can be more innovative and creative.
    This capitalism needs some sort of control.

  • TheBlackCat

    "Google has yet to do anything about it. "

    This is simply not true. Google is currently in the process of trying to get the patents all invalidated, and seems to be having some success at it.

  • IAmTheK

    Yes we all hate the trolls and I hate them even more for the way they go about it.

    But the patent system needs reforms to protect innovation theft from big companies that just infringe on purpose because they can, just in the same way as it should allow others to innovate without fear of litigation.

    Imagine a small team of engineers developing a novel way of communication and they submit a patent which is granted. They dont have the money to make the product yet and Big Bad sees the patent and decides because team of engineers have not made tangible goods they can just go ahead and use it their idea. Wont be fair will it?

    Its the system allowing VERY broad ideas to be patented that need fixing. If you have an idea so broad, keep it to yourself until you can develop it something more precise. You cannot be allowed to patent an idea that I could equally have had and probably had before you. I can name a few ideas i had as a child that i see in many products today, shame i did not know about the patent system earlier. I could be swimming in money.

  • JustADev

    You can argue that the amount Lodsys wants from indy devs on this go around is no big deal, but the bigger problem is the precedent it sets for trolls to shake down the little guy with junk patents. Not only does a one man shop not have the resources to go to court, they also don't have the resources to research and create work-arounds for every junk patent there is out there.

  • Joe Nobody

    so, how much did Lodsys pay you for this article, and does it feel good to get money from a patent troll that raped it off the backs of developers or actual products?

  • Matt

    Well I suppose it's ok if they're only getting a small percentage of the money they shouldn't be getting in the first place..

  • Falconator

    I'm not surprised that Lodsys's practices aren't considered a monopoly of some sort. And to make matters worse, no production of any kind? Same garbage that Microsoft, Sony and Nintendo went through with there controllers and how the company that sued them for patent infringement has a generic commercial webpage but no products to sell or offer...just an imagination.

  • Christopher

    Great article......I wonder if they'll try to patent making love, or eating next.....thanks lodsys for doing absolutely nothing.

  • Rich

    The main problem with the 0.575% is that the agreement they ask you to sign allows them to change this percentage at any point. Once you agree the lower percentage then it's very hard to not pay if they increase it since you have already accepted the validity of the patent and license agreement by paying the first time. It's very hard to turn around once the price goes up and say you no longer need the license.