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.”
In 2009 IQ Biometrix filed suit against FlowPlay Inc., Gaia Interactive Inc., UGO Entertainment Inc., Corbis Corp., Veer Inc. and Oddcast Inc. These are widely different businesses—a social network, a video game blog, a massive seller of stock photos and illustrations, and of course, a viral marketing firm in New York. Of the six claims, five were settled. Why, when it took a patent lawyer only a few minutes to see how shaky the patent claims were, did Oddcast and these other firms agree to a settlement, rather than fight in court?
“It’s become an institutionalized method of extortion,” said John Borthwick, CEO of the Chelsea-based betaworks, talking with Betabeat while waiting on line at the D.M.V. “Calling these people patent trolls is a misnomer because it makes them sound cute and small, when in fact they are savvy, well organized and hurting innovation in a very real way.”
Mr. Borthwick wasn’t familiar with the Oddcast case, but he was the defendant in a patent litigation suit after the sale of Fotolog, where he was CEO, in 2007. “The suit was from Marshall, Texas, and it was bullshit. They saw there was a company that had been acquired, knew the buyer escrows a certain amount of the value, say 10% for lawsuits, and they went after that. The deal for Fotolog was closed, everybody had moved on, the buyer has no economic interest in resolving it through a protracted legal process. They know they have us over a barrel. It’s frustrating to say, but we settled.”
Despite that experience, Mr. Borthwick says he can’t worry about patent trolls when deciding what businesses to build now. In the three years since he and co-founder Andy Weissman created the innovation lab, betaworks has built or invested in 35 companies, including Tumblr, Tweetdeck, bit.ly and Kickstarter. “What I’m trying to build at betaworks is a platform for unimpeded innovation, so we’re not going to spend time on a broken process,” said Mr. Borthwick. “We are iterating on six months cycles, not getting bogged down in legal fights that take years. The patent system was meant to protect individuals innovators and their ideas. Instead its become a club used by people who have created no products against companies that have found success. The system is completely distorted from its original intention.”
Having been in the internet and software business since 1994, Mr. Borthwick witnessed the evolution of the patent system and the explosion of infringement litigation. Before he built betaworks, he was working at AOL/Time Warner as the V.P. of technology and alliances. The media giant had raised its first venture fund and Mr. Borthwick was in charge of the group that went out to hear a pitch from Nathan Myhrvold and Intellectual Ventures, now the nation’s most infamous (alleged) patent troll.
“I remember being impressed by the collection they had in their office of early industrial artifacts. Things like the first standardized rail gauge that let all the railroad companies work together, or the first uniform attachment for a fire hose that allowed small-town fire departments to band together and be more effective in emergencies. The pitch they gave us, broadly speaking, was that they would bring the same kind of innovation and beneficial network effect to the software industry by creating a patent pool that would protect everyone.”
Intellectual Ventures explained that they would bring in some of the brightest minds from around the nation for “innovation sessions” where they would think up new ideas and then go out and patent them. “We ended up passing, although it was clear that a lot of the big tech companies were going to sign on to this.”
Mr. Borthwick explained why he passed: “We kind of scratched our heads at the thought of a couple geniuses in a room coming up with ideas to patent, because really, that is skipping the hard part. Ideas are worth very little in my opinion. Realizing them is what’s key. That is the whole point of betaworks, to get something from a notion on a napkin to a real product you can work with as quickly and efficiently as possible.”
Of course, if you ask the executive team behind IQ Biometrix, they will sing the same tune. “We have just an incredibly forward-thinking product,” says CEO William Scigliano, who worked for eight years at the attorney general’s office in British Colombia before deciding to try his hand at tech. “And more importantly, it’s helping cops and the F.B.I. and even ordinary citizens to put bad guys behind bars every day.”
Unlike highly organized and secretive patent outfits such as Intellectual Ventures, which, NPR reported, is suspected of filing lawsuits through multiple shell companies, the team from IQ Biometrix was eager to chat with Betabeat. Times have been tough recently for IQ Biometrix and their Faces software. “There just isn’t any venture capital out there to fund innovation,” says Mr. Scigliano, a strange observation given that venture capital is at levels not seen since 2007.
Of course, the Faces product might be part of the problem. “Our technology hasn’t really changed since the shrinkwrap copies we handed out in 1999. So the hope is to collect enough funds to launch a new version that will be available for download over the web, instead of as a mail order CD-ROM.”
Luckily for IQ Biometrix, as part of the settlement from its patent infringement lawsuit, Oddcast became partners with its former plaintiff. “Oddcast is a great partner. They helped us build the interactive game using our Faces software for the America’s Most Wanted website.” John Walsh, a friend of Mr. Scigliano, narrates the game and endorses the company among his law-enforcement connections.
Unfortunately A.M.W. went off the air this month. While IQ has worked out an affiliate deal with Microsoft Bing and still sells the occasional copy of faces, Mr. Micek estimates the company’s revenue is around $5,000 a month, trending downward for the last three years. Ever the scrappy entrepreneur, however, Mr. Micek says things are looking up.
According to the business plan Mr. Micek submitted to the website raisemecapital.com in March, the company had high hopes for continuing the lucrative business of legislation. The plan was looking for $500,000 to $1,000,000 in funding, and states that IQ Biometrix has a three-pronged revenue model: software, gaming and intellectual property. While the first two are estimated to be worth $1 million each, the company’s patent portfolio has an estimated worth, according to its own executive team of course, of $8 million to $10 million.
“Our assets have significantly matured in the past few years,” confirmed Mr. Micek. “And the majority of that comes from our I.P.”
The business plan lays it out. “We have successfully won judgments against a first round of defendants. We are about to embark on a new round of litigation with a current target list of over 40 potential infringers. We are also identifying licensing opportunities to pursue.” It’s a compelling pitch from a start-up with technology it says makes the world a safer place. Given the opportunity to make money from software patents, what investor could resist?
Betabeat confronted Mr. Micek by phone, explaining that we considered IQ Biometrix to be a patent troll: a company that had not improved its technology in over a decade and which, by its own admission, was banking on litigation as its primary business.
“You’ve got it all wrong, I’m a good guy,” explained Mr. Micek, who pointed us to his active participation in the Houston Inventors Club and Young Inventors Showcase. “All the big patent trolls, Intellectual Ventures, Acacia Research Group, they all tried to buy our patents and we refused.”
Betabeat acknowledged that IQ Biometrix was far from an well organized holder of numerous patents like Intellectual Ventures. But they had filed litigation against a company created almost a decade prior to their patent, who did not use their technology or compete for the same market. “Kirkland and Ellis came to us,” said Mr. Micek, naming the firm who represented them against Oddcast. According to Mr. Micek, Kirkland and Ellis offered to allow IQ Biometrix to retain ownership of their patents, but litigate on their behalf, with the two parties splitting the cut from any settlement. “I’m a bystander in this whole thing.” (Betabeat has reached out to Kirkland and Ellis for comment).
Mr Micek says that IQ Biometrix has had a change of heart since they published their business plan they published in March. He says the litigation against Oddcast filed in 2009 was a one-time thing. The money from the litigation, says Mr. Micek, is being used to improve the decade-old Faces software. “Sometimes you just need a little lipstick on the pig.”
The new plan, says Mr. Micek, forgoes litigation in favor of a sale. But IQ Biometrix haven’t stopped relying on patents in lieu of a real business model. “We had a patent approved two months ago being issued later this month. It’s a fascinating patent, which puts our I.P. into the cloud. It does not really further our business, but it makes a very attractive acquisition to a larger player.”