A recently filed complaint is sending shock waves through the application developer community.  On May 31, 2011 Lodsys, LLC filed a complaint against seven application developers for iOS, Apple’s mobile operating system.  Lodsys seeks an injunction and treble damages for willful infringement of two of its patents (U.S. Patent Nos. 7,620,565 and 7,222,078) that are 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.  The wrinkle here is that Apple itself already has licensed the patents in dispute, and it contends that its license agreement with Lodsys extends to third party application developers.  While the most immediate impact of this litigation may be a delay in the development of iOS applications, there are several potential implications for Lodsys, iOS application developers and Apple.  The technology at issue is the “In-App purchase” functionality, which allows connection to the App Store on the application’s behalf and secure processing of payments from the user. This is typically used to offer upgrades, subscription renewals and extended features to customers from inside the application and is instrumental in providing supplemental revenue for the application developer after the initial software purchase.  For example, some application developers may offer an initial or trial version of an application for a given period of time or provide free-to-paid subscriptions. The published Lodsys patent portfolio consists of five issued patents, one of which is currently under Reexamination, and four applications.  While some bloggers contend that the claims of the Lodsys portfolio are directed towards “upgrade” products, this may be an overly narrow reading of the claims.  The claims may be broad enough to be construed to read on a variety of products offered by iOS developers, as well as other platform providers such as Google and Microsoft.  Broad interpretations, however, also leave these patents vulnerable to invalidity challenges. Another interesting aspect to this dispute is the public nature of the communications.  Before filing the complaint, Lodsys sent letters to numerous iOS developers seeking to engage in a licensing negotiation.  Apple published its response to Lodsys stating that there is no basis for Lodsys’s infringement allegations since Apple is licensed to these patents and the application developers are protected by that license since Apple is entitled to offer these licensed products and services to its customers and business partners, who, in turn, have the right to use them.  Apple contended that infringement could only be established based on the incorporation of Apple’s own components.  Accordingly, Apple asserts that Lodsys’s threats are based on the purchase or use of Apple products and services that are licensed under the agreement between Apple and Lodsys.  Consequently, Lodsys’s infringement contentions are barred by the doctrines of patent exhaustion and first sale. Lodsys has been equally public with its contentions.  In addition to the blog posts on its website, Lodsys sent a letter on May 31, 2011 to Apples detailing Lodsys’s legal position on the license interpretation and has granted Apple permission to publish that letter to allow developers to review the dispute and evaluate the risks with their own counsel.  Lodsys contends that the application developers are infringing by not independently securing license rights for their applications.  Lodsys cautioned application developers that those relying on Apple’s letter do so at their peril.  In an apparent attempt to appease the concerns of application developers, Lodsys has offered to pay $1,000 to each entity that receives an infringement notice in the event Apple’s existing license rights do extend to the application developers on Apple’s iOS.  Lodsys also provides an example of the licensing fee arrangement it is seeking from the third party application developers.  For an application performing an in-application upgrade Lodsys is seeking 0.575% of US revenue over for the period of the notice letter to the expiration of the patent, plus applicable past usage. With the parties girding for battle, risks abound not only for Apple and the application developers, but for Lodsys as well.  In fact, an online customer satisfaction and marketing company, Foresee Results Inc., has joined the dispute on June 7, 2011  by filing a request  in the Northern District of Illinois for declaratory judgment of non-infringement and invalidity of the Lodsys patents, as well as an injunction to prevent Lodsys from interfering with Foresee Results or its customers.  The filing of this request for declaratory judgment based on the notice letters sent to its customers (Best Buy, WE Energies and Adidas AG) preempts any Lodsys litigation against these parties and allowed Foresee Results to seek resolution of this dispute in a venue of its choosing.   Given the size of the application developer and merchant communities, and their common interest to avoid litigation, it is possible that the recipients of Lodsys’s letters will band together to pool resources in mounting a defense to the Lodsys portfolio.  The application developers may be in the best position to unearth potentially invalidating prior art given their technical proficiency, while the merchants may be able to bear a majority of the financial burden.  Additionally, or alternatively, the application developers may be able to leverage the invalidity arguments and any prior art asserted in the Foresee Results proceeding in their own defense.  Furthermore, Apple’s interests are aligned with the application developers given that a decrease in application development and sales would adversely affect Apple’s revenue stream.  While it is uncertain at this point what defense strategy Apple and the application developers will employ, their union of common interests provide a variety of options and the potential to combine resources to mount a strong validity challenge. That challenge could take place in the courts, as evidenced by Foresee Results request for declaratory judgment,  as well as in the PTO.  Requesting the PTO to reexamine the Lodsys portfolio could be an attractive option, but only if the defendants in the litigation could prevail upon the court to grant a stay.  However, the Eastern District of Texas will infrequently stay an action in favor of a pending patent reexamination.  In the event that the Northern District of Illinois were to first find the Lodsys patents invalid, the proceedings in the Eastern District of Texas would likely be stayed pending any appeal from the Northern District of Illinois holding. During Reexamination claims are reviewed under the lower standard of “broadest reasonable interpretation” and are not afforded a presumption of validity.  Given the breadth of experience that both Apple and the application developers have in this field, it is possible that they would be able to identify prior art which is material to the claims and not previously cited during prosecution of the Lodsys patents, thereby establishing the requisite substantial new question of patentability.  In this regard, the fact that Apple currently holds a license to the Lodsys portfolio does not necessarily indicate that the Apple has done an in depth analysis of the portfolio prior to obtaining the license, or that the patents are likely to withstand a validity challenge.  Furthermore, a licensee can challenge the validity of a patent without first breaching the license agreement.  See MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). The application developers may also seek to obtain a license to the Lodsys portfolio.  The 0.575% royalty rate, as advertised by Lodsys, is expressly limited to an “in-application upgrade” embodiment.  Thus, additional licenses and/or higher royalty rates may be required for applications offering additional functionality.  Further, the 0.575% royalty rate may only provide a license to a single patent, though a particular application may necessitate a license to the entire Lodsys portfolio.  Application developers interested in settling or avoiding litigation should consider how a settlement might spur other patent holders to file claims.  Conversely, settling may provide Lodsys a war chest to litigate with competitors.  In any event, looking to Apple for indemnity is likely a fruitless endeavor: in at least one publicly available license agreement, Apple has a limitation of liability of $50 total. Application developer s working on other operating systems are no doubt watching the litigation intently.  The infringement contentions in this litigation appear to apply equally to other platform providers (e.g. Google, Microsoft) as Lodsys contends that these providers have similar license agreements.  The entire application development community would be well-advised to monitoring the situation closely.  **  Stephen Kenny, an associate at the Firm, assisted in drafting this post.