I didn't want to write a story about Lodsys, the patent holding company that's sending demand letters to small iOS developers asking for royalties on in-app purchasing technology. In fact, I've actively tried to ignore the story beyond some superficial research -- the unhappy novelty of targeting developers aside, it's ultimately a story about a patent troll asking for tiny amounts of money. It's small-time garbage. But there's a lot of misconceptions and confusing information out there, and I've gotten a lot of tweets and emails asking for some clarity, so let's dive in and see what's going on. As you might expect, it's pretty shady.

So! The basic timeline here is simple -- last week, Lodsys began sending letters to smaller iOS developers like PCalc makers TLA Systems, alleging that their use of in-app purchasing infringes one of Lodsys's patents. After a wave of justifiably negative press, Lodsys responded on its blog with an attempt to clarify the situation. Let's run down the basic facts:

  • Lodsys is apparently claiming that US Patent #7,222,078 reads on the use of in-app purchasing in iOS apps. The claims of the patent broadly cover gathering user feedback from many copies of an app in the field and sending them to a server, so we're not sure how that's being translated into in-app purchasing, but it does sort of explain why Lodsys can go after developers -- user interaction is a key part of the claims.
  • However, iOS in-app purchases (and store ratings, for that matter) are handled by Apple's code, so it's still strange that Lodsys is going after small developers instead of Apple directly -- legal demands are generally targeted at the biggest pockets available. That's not to say Lodsys can't go after devs if it thinks its patent is being infringed in their apps, but it's an odd move with tiny stakes: Lodsys says it wants .575 percent of US revenue until the patent expires in 2023. On an app that does $1m in sales revenue a year, that's $5,750. And some of the developers Lodsys is targeting don't even make that: PCalc dev James Thompson says a good IP attorney will wipe out PCalc's profits in a single day. So at least superficially, it seems like Lodsys isn't after a single major payday -- they're shaking people down for pocket change.
  • Use of iPhone APIs is governed by the iOS Developer Program License Agreement, which prevents developers from entering into legal settlement agreements that might affect Apple without Apple's consent. (More on this at TidBITS.) So the potential outcomes of all this are sharply limited by how Apple chooses to become involved.
  • Lodsys claims that Apple, Google, and Microsoft have already taken licenses on the patent in question, but that those licenses aren't broad enough to cover apps running on their platforms. This is where the story gets particularly interesting -- we'll dig deeper in a moment.
  • Lastly, and perhaps most importantly, Lodsys hasn't filed a lawsuit, or even sent out cease-and-desist letters yet. It's just opening royalty negotiations in a particularly bone-headed and asinine way. Their goal is clearly to collect royalties, not prevent the use of the allegedly infringing technology -- after all, if no one uses it, they don't get to collect any royalties, small as they are.

So that's the setup. Like I said, it's pretty low rent. The only interesting aspect is that Lodsys is targeting small application developers, which has potentially destructive consequences for the broader app market -- if Lodsys manages to get royalties, we'll see all kinds of trolls go after small devs, and that'll dampen the mobile development mood considerably. It's almost certain that Apple will eventually step in and help remedy the situation, and indeed, the Guardian says Apple Legal is already actively involved. But there's another, shadier, layer to the story -- and as usual, that's where all the fun is.

  • The '078 patent has a decidedly odd history. It was filed by original inventor Dan Abelow, and it wasn't the smoothest patent prosecution ever -- it's a continuation of three previously-abandoned patent applications. That doesn't mean it's not valid, but it's definitely curious.
  • Abelow assigned '078 to a company called Ferrara Ethereal LLC in 2004, which is a shell company for Intellectual Ventures, everyone's favorite patent-holding company. (In fact, the Lodsys website flatly says Abelow sold his portfolio to IV with no mention of Ferrara Ethereal whatsoever.) IV was started by former Microsoft CTO Nathan Mhyrvold with investments from a number of companies, including Apple and Google -- and Apple, Google, and Microsoft each have blanket licenses on the Intellectual Ventures portfolio of some 30,000 patents, presumably including '078. So that's probably why Lodsys says that Apple has a license: not because Lodsys managed to get Apple to pay up, but because Apple has a much bigger deal with IV.
  • Oh, but it gets weirder. In 2009, Ferrara Ethereal merged with a company called Webvention LLC, in the process signing over '078 minus any rights IV had already licensed to third parties. (Like the blanket licenses taken by Apple, Google, and Microsoft, for example.) Webvention LLC is run by -- surprise! -- Dan Abelow, and it made some waves back in November by hitting up huge companies like Dell, Visa, and Gamestop for $80,000 one-time licenses on a patent covering rollover images. No, we're not kidding.
  • Dan and Webvention have apparently done quite well in that effort, claiming that some 254 companies have licensed the rollover patent. That's around $20.3 million dollars -- no wonder he's trying again with '078.
  • We're still not done: in 2010 Webvention assigned '078 to Lodsys, which appears to be Webvention 2: Patent Troll Boogaloo. Just as with Webvention, Lodsys exists solely to collect royalties on Dan Abelow's patents -- it has three others in addition to '078.
  • Lodsys claims Dan Abelow isn't involved in the company at all beyond a fixed consulting fee, but he's prominently listed on the website as "the inventor" and the only other member of the company appears to be CEO Mark Small, who was a VP of sales for Websense before taking up with Lodsys. I have no idea why Lodsys and Abelow are distancing themselves from each other, but I can't imagine Abelow doesn't stand to somehow profit from any potential patent licenses. Let's call this one a mystery.

So now you know almost everything you need to know about Lodsys, Dan Abelow, and '078 -- he's a serial inventor with a number of patents, and he sets up shell companies to collect royalties on them. It's legit on paper, but it's definitely shady and disheartening to see Lodsys go after small developers for such tiny amounts of money. But it makes a certain kind of evil sense: Lodsys can't engage Apple directly because of Cupertino's existing '078 license, so it's going after app developers as a way to pressure Apple into re-working the agreement to cover apps. I would imagine that such an expansion will cost Apple a pretty penny, wouldn't you?

In that context, the single most critical factor in this situation is the exact scope of Apple's license to '078. It's entirely possible Apple's license already covers app developers and Lodsys is just trying to double-dip, but we simply can't know that without seeing the license and fully evaluating Lodsys's patent claims against Apple's code. I can only assume Apple's lawyers are busily investigating that right now -- and I'd imagine the various iOS developers that received letters from Lodsys are impatiently waiting to hear from them.

P.S.- I'm not the only one diving into Lodsys -- Florian Mueller has a great piece on the situation, and Patrick Igoe has a few good posts as well. And a hat tip to Wireless Goodness for alerting me to the Webvention / Lodsys connection.