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Matthew Prince knew what was coming. The CEO of Cloudflare, an internet security company and content delivery network in San Francisco, was behind his desk when the emails began to trickle in, slowly at first, then in bursts. College classmates-turned-defense attorneys, including from the University of Chicago, where Prince had nabbed his law degree years earlier, were reaching out to say hello and to ask: did Prince perhaps need help to fight a lawsuit they’d seen filed against Cloudflare in Delaware?
The paperwork would itself arrive shortly after from a registered agent in a thick white envelope. The claim: patent infringement. The firm going after Cloudflare: Blackbird Technologies, a three-year-old, Boston- and Chicago-based firm founded by two former attorneys with white-shoe law firms who’d previously litigated intellectual property cases on behalf of some of the largest tech companies in the world.
Blackbird has since amassed a portfolio of roughly 37 broad-seeming patents that it has so far used to file more than 100 lawsuits, including against Asics, New Balance and Lululemon over a sports bra, and Amazon, PetSmart and Walmart over a bicycle pet carrier.
Blackbird’s specific lawsuit against Cloudflare accuses it of violating U.S. Patent No. 6,453,335, a patent filed 18 years ago by the owner of a Web hosting company in Germany that describes providing a “third party data channel” online and whose original owner, Oliver Kaufmann, doesn’t seem to have tried using it to create anything.
Kaufmann hasn’t responded to a request for comment for this story, but a patent record shows he sold the patent last October for $1 plus “other good and valuable consideration” to Blackbird, which is also using the patent to sue another startup called Fastly.
The Cloudflare suit is fairly typical. So-called non-practicing entities — or holders of a patent for a process or product that they don’t plan to develop — often use them to sue companies that would sooner settle rather than pay what can add up to $1 million by the time a case reaches a courtroom. Prince calls Blackbird uniquely dangerous because its founders’ law backgrounds make it even easier for the outfit to sue companies like Cloudflare; they needn’t pay an attorney to represent their interests.
Even more unusual, however, and potentially more meaningful for other companies, is Cloudflare’s response to the suit. Indeed, when Prince was handed that envelope on a sunny March afternoon, he saw it as a moment he’d been waiting for since co-founding Cloudflare seven years earlier. As far as he was concerned, this was war, and he was ready for it.
Rabbit redux
In many ways, what has transpired since resembles a battle that began brewing exactly 10 years ago, when the online computer and electronic retailer Newegg was hit with a lawsuit by Soverain Software, a non-practicing entity that has attacked major tech companies for more than a decade. (One of its most recent complaints was filed against Apple.)
Back in 2007, Soverain had alleged that Newegg was infringing on patents that included an online shopping cart. As Newegg’s former chief legal officer, Lee Cheng, recalls it, Soverain had begun with bigger companies like Amazon, which agreed to pay the company $40 million, then the Gap, which settled for an undisclosed sum, before working its way down to smaller retailers.
When it asked Newegg for $34 million in damages, it might have imagined extracting some amount of money from the company easily. But Newegg decided immediately not to settle. Not only might the amount have destroyed the company, which is now 16 years old, Newegg, which viewed Soverain as an extortionist, opted against settling for fear the decision would invite future patent suits.
Newegg began its fight against Soverain alongside seven other retailers that were sued using the same patent. Over time, each ultimately settled, except Newegg. It went to court and it argued that its shopping cart did not infringe on the patent of Soverain — which has itself never made a sale. In the end, a jury determined that Newegg needed pay only $2.5 million in damages.
It might have left things well enough alone at that point. Instead, Newegg famously appealed that decision, and not only did it win — the award was vacated — but using prior art, which is evidence that an invention was already known to the public before a patent was awarded, Newegg convinced a three-judge panel to invalidate Soverain’s shopping cart patent claims, preventing Soverain from using them against potentially dozens of other e-tailers.
Rabbit at rest
Sitting in a Cloudflare conference room on a bright Friday afternoon recently, Prince seems to relish the battle that Blackbird has brought to Cloudflare. He admits readily that publicly taking on this “dangerous new breed of patent troll” — a fight that Cloudflare has blogged about extensively — is good for business. It’s also good for recruiting talent into the company, which has 250 employees at its headquarters and runs smaller offices in Boston and Champaign, Illinois, among other spots.
Prince also seems legitimately offended, horrified, even, by the small but growing number of Blackbirds in the world — meaning firms launched by attorneys who’ve been on the other side of the table, were presumably well paid by their prestigious firms, yet who left to pursue what can apparently be even more lucrative work, chasing after their old clients.
Soverain, for example, was also co-founded by an attorney, Katherine Wolanyk, formerly of Latham & Watkins. Several years ago, two other top patent-defense litigators, John Desmarais and Matt Powers, also left their respective law firms, Kirkland & Ellis and Weil Gotshal & Manges, to become what some critics have called patent trolls.
The trend represents a dangerous new twist in the patent wars. Because firms like Blackbird and their ilk can operate more cost-effectively than patent trolls that must pay for outside legal help — they need only invest their time in researching which patents to buy from brokers who deal in such things, then pay the roughly $1,000 it costs to file a lawsuit — they can do more damage.
It’s for this reason that Prince sees Cloudflare’s primary mission as figuring out how to increase Blackbird’s costs. Explains Prince, “We thought, if it’s asymmetric,” because it’s so much cheaper for Blackbird to sue than for a company to defend itself, “how can we make it more symmetric? And every minute that they spend having to defend themselves somewhere else is a minute they aren’t suing us or someone else.”
Toward that end, Cloudflare has launched a multi-pronged attack, the likes of which Silicon Valley has never quite seen before but that other companies may well use as a model going forward if it has the intended effect.
Part of its campaign involves highlighting the backgrounds of Blackbird co-founder Wendy Verlander, a litigator previously with Wilmer Hale, as well as her co-founder, Chris Freeman, formerly of Kirkland & Ellis, to “pro innovation” state legislators in both Massachusetts and Illinois, where Blackbird has offices.
Its argument to these individuals: that every lawyer must pass an ethics exam that states it’s a violation for an attorney to “acquire a cause of action,” then to go and sue someone over it. The same ethics exam precludes attorneys from splitting their fees with non-attorneys.
The argument has gained some traction. Representative Keith Wheeler of Illinois recently introduced a bill called the “Ethics in Patent Litigation Act” that would make it the public policy of the state that attorneys should not be able to buy patents themselves for the purpose of suing others if they aren’t in the business of any other productive activity. In Massachusetts, where Verlander is based, Cloudflare has also found a receptive audience with State Senator Eric Lesser, who has specifically targeted patent trolls in a bill he introduced earlier this year.
Cloudflare is further fighting to have the case moved from Delaware — where Cloudflare is incorporated — to California. Prince notes that most of the discovery process for the case would need to take place in and around its headquarters, and that Cloudflare’s witnesses mostly reside in the Bay Area. (That it would also increase Blackbird’s costs, as they aren’t licensed or practice in California, is no accident, though Prince acknowledges the manuever is “not a slam dunk,” even with a unanimous Supreme Court ruling in May that determined that companies can be sued for patent infringement only where they reside or where they have a regular and established place of business.)
Cloudflare is also, perhaps most interestingly, crowdsourcing prior art to invalidate not only the patent that Blackbird is using to sue Cloudflare and Fastly, but with an eye toward invalidating all of Blackbird’s patents.
It could become the most powerful tool in its arsenal. Already, Cloudflare has created a $50,000 prior art bounty — one matched by an anonymous donor who has pitched in an additional $50,000 — that it will begin paying out in several weeks, says Prince. He suggests that Cloudflare has so far amassed prior art for half of Blackbird’s patents. Its next move is to begin sending requests for ex parte reexaminations to the United States Patent and Trademark Office. In other words, it will ask that Blackbird’s patents are reexamined. “Our goal is nothing short of invalidating every single one of them,” says Prince.
Rabbit, run
Neither Verlander nor Freeman responded to interview requests sent to Blackbird last week and yesterday, but Verlander told Fortune in May that Blackbird is not a law firm and that it doesn’t use contingency fee arrangements for the patents it buys, though it employs “a similar arrangement,” she said.
Talking with Crain’s Chicago Business more recently, she characterized Blackbird as a defender of small inventors, saying that the “mere fact that these folks don’t have a lot of money shouldn’t make their patents worthless.”
As part of the feature, Crain’s published a photo of Freeman, standing with a bridge behind him in the distance.
Whether or not it was a subtle dig at Blackbird, one final and powerful piece of Cloudflare’s strategy seems to involve talking with as many reporters as possible about the injustice it’s facing. It’s the kind of public opinion campaign that’s been used with great success in the past.
In one example well-known to those in the world of intellectual property, a Chicago-based law firm had collected about $6 million from legal settlements in copyright-infringement lawsuits it filed against people who allegedly downloaded pornographic movies online — films the firm’s founders had themselves purchased or copyrighted. The attorneys were charged late last year for running an extortion fraud scheme. Two of the them have since been disbarred.
It’s an extreme comparison, but according to Lee Cheng — who today advises companies on their patent woes and is a student of the case — that Chicago firm made “millions of dollars before someone who they pursued [for damages] said, ‘I’m coming after you and defending myself.’
“Whether what the firm was doing was illegal was hard to say, but the press caught wind of it, and it so shocked everyone” that it set in motion the chain of events leading to the firm’s demise.
“[Is Blackbird] doing anything that is illegal or unethical?” continues Cheng. “For the most part, it’s unethical. But it’s probably not illegal.”
Now, to see if that’s enough.
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