'Patent trolls' put brakes on S.F. transit app Extortionist lawsuits as business model shouldn't be legal

Smart Ride President and CEO Aaron Bannert was working on a new version of his transit app when he was threatened and then sued by a firm notorious for lawsuits related to vehicle-tracking technology. Smart Ride President and CEO Aaron Bannert was working on a new version of his transit app when he was threatened and then sued by a firm notorious for lawsuits related to vehicle-tracking technology. Photo: Lea Suzuki, The Chronicle Photo: Lea Suzuki, The Chronicle Image 1 of / 7 Caption Close 'Patent trolls' put brakes on S.F. transit app 1 / 7 Back to Gallery

At the outset of 2013, things were rolling along for Aaron Bannert's app.

Smart Ride, which provides real-time transit information like the arrival times of San Francisco Muni buses, was growing by 20 percent a month. The free, ad-supported service wasn't profitable but it was finally covering operating costs. And Bannert was logging long hours in his North Beach home to rush out a new version he believed would outpace his rivals, adding trip planning features and a number of new cities, including New York.

Then in late March, a FedEx package arrived filled with a stack of paperwork, topped with a letter threatening to sue his company for patent infringement. It was from a company with ties to Martin Kelly Jones, who holds a series of patents claiming ownership of technologies for tracking vehicles and providing users with electronic updates.

A handful of affiliated companies, including ArrivalStar and Melvino Technologies, have threatened or sued hundreds of organizations in recent years, from small entrepreneurs like Bannert to large corporations like American Airlines. They've filed a flurry of cases against cash-strapped transit agencies in numerous cities, including Monterey, and even went after the U.S. Postal Service.

ArrivalStar filed more than half the patent lawsuits in South Florida federal courts last year, according to the South Florida Business Journal.

As far as anyone on the outside can tell, this is their sole business model: leveraging patents not to build competitive products, but simply to strong-arm others into forking over money when they create something that stumbles into the broadly worded language of the intellectual property protections.

The nicest phrase for such outfits is "non-practicing entity." But most people call them "patent trolls."

Defense pricey

Many of the patents might not hold up in court, but it can easily cost $1 million to mount a defense. For a company whose business model is filing lawsuits, the only incremental cost of each new case is the filing fee - about $500.

With decks stacked like that, most organizations simply surrender, often settling for tens of thousand of dollars.

"It's a shakedown, it's extortion, but it's legal," said Julie Samuels, an attorney who is the Mark Cuban Chair to Eliminate Stupid Patents at the Electronic Frontier Foundation. "It's easy to be a troll, it's cheap to be a troll, and it's totally unethical. It's exploiting a loophole in a broken system."

Inquiries from The Chronicle to Jones and attorneys who have worked on these lawsuits were ignored. But early last year, ArrivalStar attorney Anthony Dowell defended the practice of going after transit agencies to Joe Mullin of Ars Technica, who has produced revelatory work on patent troll cases.

"Just because an entity is funded with taxpayer dollars doesn't give them the right to steal property," Dowell said. "My client now owns 34 patents that are being infringed, and what else is he to do?"

In a phone call following the arrival of the package, Bannert was told his legal troubles could go away for a figure that happened to be nearly twice the revenue the app brought in during 2012. Since he still hadn't eked out a profit, that cash would have come out of his own pocket.

He was confident the patents in question were bogus, loose legalese describing obvious ideas. Moreover, the service that he received his data from, NextBus, already had a license to use those patents.

But he was frightened by the threat of a lawsuit.

He discussed the matter with every lawyer he could find, including one who had done corporate work for his business and various friends of friends. But he was bootstrapping the startup himself and living off of his savings. He didn't have the cash to hire a patent specialist who could do the deep research required to contest the validity of the patents.

'Super freak-out mode'

He tried ignoring the problem, but in late April his company, Codemass, was named in a lawsuit in the Southern District of Florida. He was served in early May and had 21 days to respond.

"So now it's super freak-out mode," he said.

He tried to get the word out about his case, in the hope of finding pro bono attorneys, but the clock was ticking.

"I had no choice," he said. "I had to cave in to bullies."

Here was the cost to Bannert: more than $10,000 for legal expenses that he would have otherwise invested in the business. He also lost months of time and progress on the app. He still hasn't been able to launch the new version, even as competitors have continued to make strides.

He declines to discuss details of the settlement, including whether there was a settlement. He can only say that he now has a license for the relevant patents.

ArrivalStar will demand as much as $200,000 for a license, according to reports in other publications.

The good news is that the impact of patent trolling has become so obvious that politicians have started to get serious about the problem.

Obama's plan

In June, the White House announced plans to take five executive actions to curb the practice and called on Congress to pursue a series of legislative reforms.

During a Google+ hangout in February, President Obama signaled his concerns in surprisingly strong language, as the site TechDirt noted: "They're just trying to essentially leverage and hijack somebody else's idea and see if they can extort some money out of them."

In recent months, a handful of federal and state lawmakers have proposed various laws that go further than the watered-down patent overhaul passed in 2011, which in some ways made the problem worse.

"None is a silver bullet, but they all make it a little harder to be a patent troll and a little easier to fight back," Samuels said.

Meanwhile, nonprofits like EFF have tried to fight back against the most notorious patent trolls.

This summer, the San Francisco digital rights group and the Samuelson Law, Technology, and Public Policy Clinic at UC Berkeley helped significantly narrow the scope of one key ArrivalStar patent, after filing a request for re-examination.

In the hope of helping others entangled in these cases, EFF has also published more than 30 examples of what it considers "prior art," instances where similar technology was in use before the patent was granted. To qualify for a patent, or maintain the 20-year protection, patents must be "novel and non-obvious."

In a study released last year, Boston University researchers James Bessen and Michael Meurer found that the direct cost to businesses from patent suits by non-practicing entities in 2011 was $29 billion.

The mean settlement cost for large corporations was $7.27 million, while small or medium-sized businesses coughed up $1.33 million.

Society's costs

As high as the legal expenses were for Bannert, he thinks the bigger toll from patent trolling is the indirect cost to society, the products and innovation that don't make it off the drawing board.

"For every Smart Ride out there," he said, "there are dozens of brilliant ideas that were never pursued simply because the kid who thought of them was afraid of the patent boogeyman."