The team at Oddcast, a viral marketing firm founded in New York during the peak of the dot-com boom, has a special affinity for faces. In campaigns for blue-chip clients like McDonalds, Disney, Verizon and Ford, Oddcast created online games and promotions that allowed users to upload photos of themselves and create virtual avatars, digital composites that took their facial features and produced a likeness they could share with friends.
Oddcast was one of the small group of companies among hundreds of start-ups launched in 1999 to survive the bursting of the tech bubble in 2001. Over the next decade the company grew to more 40 employees and was able to secure a $4 million round of funding in 2004 from Union Square Ventures, one of the top V.C. firms in the nation. Little did they know that around the same time, a small, Fresno, Calif., firm called IQ Biometrix was securing several patents related to the creation of digital facial images. It wasn’t until 2009, when they received notice of a lawsuit over patent infringement, that Oddcast even knew IQ Biometrix existed.
A source familiar with the situation, who asked to remain anonymous because of the nature of the lawsuit, said the team at Oddcast felt like the victims of a practical joke. “Anyone who has owned a Mr. Potato Head understands the idea of taking different features and putting them together to make a face. Oddcast never competed with this company for market share, never saw a line of their code and never borrowed an idea from them to create their business.” But at the urging of their board members, lawyers and investors, Oddcast agreed to settle, rather than fight the lawsuit in court.
This story is familiar to anyone who has worked in software development. In 1998 the federal courts opened a Pandora’s box when they essentially legalized software patents for the first time. Since then the business of accumulating software patents and suing other companies has mushroomed into its own industry. Often the language of the claims is so broad that those patents can be potentially infringed by thousands of unrelated entrepreneurs.
In recent months, especially following a widely praised piece from This American Life on Nathan Myhrvold’s Intellectual Ventures, many outside the tech sector are becoming aware of the nightmare the software patent system in America has created for start-ups, inventors and even major corporations—an unfortunate development in a faltering economy where new jobs are scarce and much-needed.
The tech sector has been one bright spot in an otherwise faltering job market. Data from New York’s City’s Economic Development Corporation show that, between 2005 and 2010, companies in the tech sector grew at more than three times the private sector average.
But many of the investors and founders Betabeat spoke with said patent litigation was a costly expense, one that forced tech companies to spend money on lawyers instead of hiring even more employees. “We need to face the facts: patent law is killing job creation,” wrote billionaire tech entrepreneur Mark Cuban over the weekend. “If the current administration wants to improve job creation, change patent law and watch jobs among small technology companies develop instantly.”
And it’s not just small start-ups that are feeling the pinch. Big firms like Microsoft and I.B.M. have built up massive war chests of patents and now have as much interest in protecting the dysfunctional system as reforming it, even if Microsoft founder Bill Gates once said that “if people had understood how patents would be granted when most of today’s ideas were invented, and had taken out patents, the industry would be at a complete standstill today.”
“Intellectual property protection was meant to protect individual entrepreneurs,” says Mark Suster, a venture capitalist with GRP Partners. “But it was written for a world where the pace of innovation was much slower. Now it has become a way for legal bullies with a tenuous grasp on real technological claims to shake down start-ups.”
Mr. Suster said he recently funded an early stage start-up in Silicon Valley and shortly after was approached by a larger, established competitor about a business partnership. “Well, we turned them down, so they filed a patent lawsuit. I mean it would be funny if it wasn’t so sad. I asked the CEO why he filed, and he said, ‘I want you to buy my subsidiary.’ It was blackmail, plain and simple.”
The intellectual property fight between Oddcast and IQ Biometrix is just one Kafkaesque manifestation of patent law abuses. Large companies like Intellectual Ventures have been compared to The Mafia, a well organized group, often hiding behind shell companies to shake down tech companies for cash. By that standard, IQ Biometrix is a group of bumbling small-timers. If Intellectual Ventures is Don Corleone, prepare to meet Fredo.
The story starts in the mid-1990s in Montreal, Canada, where a young man named Pierre Cote, fresh out of school with a one-year degree in international law, was working to design what he describes as a fun, educational tool that would help fight crime. “It all began, literally, with hundreds upon hundreds of pieces of paper that I collected inside a cardboard box, each containing drawings of eyes, noses, chins and so on. I would mix and match them together and make faces,” wrote Mr. Cote, recalling his founding moment. “The key was to turn all that into a highly sophisticated software that used actual photographic facial features.”
FACES, the software that emerged from this work in 1995, didn’t get anywhere near photographic facial recognition or composition. It was a simple toolbox that contained 4,500 hand-drawn eyes, ears, noses and more that could be assembled and tweaked into a face. You could do things like raise the hairline, lower the nose or slightly widen the eyes.
When that business failed to take off as a stand-alone game, Mr. Cote headed to the 1998 Las Vegas Comdex exhibition and distributed free CD-ROM copies of FACES to just about every law enforcement agency in North America. The event went so well he decided to move south. Mr. Cote applied for several U.S. patents, incorporated the company in Delaware and moved its headquarters to Fresno. The company claims to have sold 160,000 licenses to police departments and even to the F.B.I..
Yet in 2002, Mr. Cote merged the company with JV Web, a public shell company run by Greg Micek, a failed dot-com entrepreneur. Mr. Micek believed that 9/11 and the War on Terror would provide a new market for the Faces software. Mr. Micek told Betabeat that for three years he tried and failed to revive the company’s fortunes. “Law enforcement just wasn’t ready for our technology.”
He did not upgrade the software, but in 2004, Mr. Micek did restart the process of applying for the patents originally filed by Mr. Cote in the late 1990s, patents that were never approved. Two patents, 6,731,302 B1 and 7,289,647 B2, laid claim to a system and method for creating and displaying digital faces. “Our patent portfolio allows us to control any online face building and facial-image transmission,” Mr. Micek explained. The company was staking a claim that would cover, by its own estimation, any website in the United States that featured virtual avatars or allowed users to create profiles with digital faces.
It doesn’t take a deep dive to understand the shaky ground for this patent. “That is an absolutely ridiculous claim. If this patent was filed today, it would almost certainly be rejected,” said Elliot Furman, a Manhattan-based patent prosecutor who has worked for firms like Gawker and BuzzFeed. Betabeat sent Mr. Furman a copy of the patent in question for evaluation. “It’s like they tried to patent a time machine, and they told you how big it was, and the color of the seats, but neglected to mention how it travels through time.”
The issue is a systemic one, says Mr. Furman, a former software engineer with a master’s degree from Stanford. “Many technical patents, and especially software patents, are just bad. The lawyers who wrote them don’t understand the history of computer science or the fundamentals of programming. They obscure that in legalese and it gets through the examination so the business thinks they have something great, like a patent on the entire avatar industry, when in fact what they have is a mess that probably wouldn’t hold up in court.”
At every instance the patent office bent over backward to allow IQ Biometrix to pursue its patent, despite numerous rejections on the grounds that the concept was obvious, that there was “prior art” and that the documents were technologically illiterate. After the first rejection in 2006, the IQ Biometrix legal team went back to the drawing board with new claims that referenced codes, values, screens, keyboards and processors, attempting to dignify the childishly simple act of reconstructing a face with an arsenal of technical gibberish. These claims were rejected outright a second time for being vague and indefinite.
Each time the patent was rejected, IQ’s lawyers went right back to work rephrasing the claims. “It’s a back and forth with the examiner,” explains Mr. Furman, “a feeling-out process to see what they can get approved.”
Eventually, in 2007, nearly a decade after Oddcast first went into business, the U.S.P.T.O. approved IQ Biometrix’s application. “By the time you get to that point, the claims are almost completely different from the original filing,” notes Mr. Furman. “My clients are looking for a patent that will hold up in court. I wouldn’t be comfortable taking money from them and then handing them this crap.”
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