LevelUp, Mass. AG Coakley Take Aim at “Patent Trolls”

LevelUp, a Boston-based mobile payments startup bankrolled by Google Ventures, is joining with the attorney general of Massachusetts to scold the people behind frivolous patent lawsuits and join growing calls for changes to U.S. intellectual property laws.

Seth Priebatsch, LevelUp’s CEO, noted that his young company has been sued over patents four times so far this year, including three lawsuits that have been filed since mid-September.

“We’ve spent probably nearly $1 million defending against patent lawsuits,” he said, money the startup could have used to hire between 10-20 more people.

The barrage of legal problems spurred Priebatsch to contact state Attorney General Martha Coakley to ask if there was anything Massachusetts officials could to do help combat such lawsuits, which Priebatsch said have amounted to extortion for his company.

One lawsuit, he said, involves a claim about technology for attaching text messages to a credit card, so the message can be printed on receipts.

“Kind of an interesting idea, totally irrelevant to LevelUp,” Priebatsch said. “The patent troll knows it’s irrelevant to LevelUp, but knows the imbalance of costs—that for us to pay them $150,000 to go away is much cheaper than paying $1.5 million to prove that this in fact has nothing to do with us.”

At the pair’s Wednesday press conference, Coakley said she was in the early stages of investigating what her agency could do to help Massachusetts-based startups repel frivolous lawsuits.

Coakley encouraged people worried about the issue to contact federal elected officials, since patent issues largely are matters for federal law. She also said state officials are ready to work with the Federal Trade Commission as it investigates the issue of patent trolling.

But state officials also might be able to take advantage of local laws banning unfair business practices, she said, citing efforts by regulators in Vermont and Nebraska to tamp down on frivolous lawsuits.

“We are looking at whether we have avenues to bring lawsuits to stop this behavior,” Coakley said. “And of course, if we do lawsuits, it also is the basis to say we need to change the law, because we don’t want this behavior to continue.”

Startups, early stage investors, and the larger technology industry have grown increasingly vocal about the perils of the current intellectual property system, saying it allows overly broad claims that—especially in the case of rapidly evolving software and other tech innovations—can spawn essentially empty lawsuits.

One prominent flashpoint in the debate comes from within the tech industry itself: the Seattle-area patent licensing firm Intellectual Ventures, which has amassed a huge trove of patents in a bid to earn licensing fees. The company was started by former Microsoft technical chief Nathan Myhrvold and claims prominent Boston-area venture firm Charles River Ventures among its investors.

The growing controversy over patents has even attracted the personal attention of President Barack Obama, who ordered a series of reforms this summer aimed at curbing patent trolls.

Wednesday’s discussion in Boston illustrated the old adage about politics making strange bedfellows—Coakley, a Democrat who is running for governor, was speaking in an office that prominently displays a poster of libertarian icon Ayn Rand’s novel “Atlas Shrugged” in its foyer.

In her remarks, Coakley seemed to acknowledge the startup world’s general cultural aversion to too much government interference.

“We do need government that is able to come in on a problem like this and say, `Wait a minute. This is predatory behavior … that interferes with fair competition, that interferes with the way the business system should work,’” Coakley said.

Court records show that two of the ongoing lawsuits against LevelUp were filed by people who appear to be lone inventors looking to collect fees.

One of those cases, filed in mid-September, concerns a patent on scanning graphic codes linked to a payment or identity card. The patent was applied for in 1995, leaving just a couple of years until its 20-year legal protection runs out. The inventor, Albert John Freeman of San Francisco, also has recently sued Starbucks, Delta Airlines, and Walgreens over the same patent.

Another revolves around a 2004-era patent on a system for making financial transactions using a “unique identifier.” It is owned by Jack Barron of Southborough, MA.

A third case available on public court databases actually involves LevelUp going on the offensive, suing a Chicago-area company called eCharge, seeking invalidation of some “universal credit card” patents.

Priebatsch said LevelUp filed that suit after eCharge’s lawyer sent notice claiming LevelUp was infringing on its patents, including a request for the company’s “financial results and projections through 2014.”

The fourth patent lawsuit—ironically, it was filed just a day before the press conference, Priebatsch said—was too fresh to be uploaded on the court system’s website at the time of publication.

“We’re lucky to have great backers … who are willing to bankroll us in defending correctly against patent trolls,” said Priebatsch, whose company has raised nearly $50 million in investment cash over its lifetime. “But there are lots of other companies that are smaller that can’t handle the legal bills.”

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