Blackbird Technologies, Buzz, CloudFlare, Drama, Lawsuit, Matthew Prince, newegg, security, TC

The hunted becomes the hunter: how Cloudflare’s fight with a “patent troll” could alter the game

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 in Delaware against Cloudflare?

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 US Patent No. 6,453,335, a patent filed 18 years ago by the owner of a Web hosting company in Augsburg, 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 cofounding 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 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.

But when it asked Newegg for $34 million in damages, the company didn’t try to settle. Not only might the amount have destroyed the company, which is now 16 years old; Newegg, which viewed Soverain as a band of extortionists, decided against settling out of fear the decision would only invite future patent suits.

Instead, Newegg fought Soverain, alongside seven other retailers that it sued using the same patent. Each which ultimately settled. Not Newegg, though. 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 — and in the end, a jury determined that Newegg needed pay only $2.5 million in damages.

Some companies might have left things well enough alone. Newegg did not. It 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 other potentially dozens of other e-tailers.

Cheng today counsels other companies on how to combat patent trolls, and while he’s not advising Cloudflare, he thinks Cloudflare’s approach, which has taken on a life of its own, is among the smartest he has seen.

Rabbit at Rest

Sitting in a conference room on a sunny 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 and even better 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 they learned could be more lucrative work by switching sides.

Soverain, for example, was also cofounded 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 law firms, Kirkland & Ellis and Weil Gotshal & Manges, respectively, to become what some critics have called patent trolls.

Indeed, because firms like Blackbird and their ilk can operate more cost-effectively than patent trolls who must pay for outside legal help — they need only invest their time in research and pay a $1,000 to file a lawsuit — Prince sees Cloudflare’s primary mission as figuring out how to increase Blackbird’s costs.

Says Prince, “We thought, if it’s asymmetric,” meaning because it’s exponentially easier and cheaper for Blackbird to sue a company than it is 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 a a model going forward if it has the intended effect.

Part of that campaign involves highlighting the backgrounds of Blackbird cofounder Wendy Verlander, who worked previously for Wilmer Hale, as well as her cofounder, 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 attorney  has to 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.

Representative Keith Wheeler of Illinois has since 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 on them if they are not 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, arguing that most of the discovery for the case would need to take place in and around its headquarters and that its witnesses mostly reside in the Bay Area. (It would also increase Blackbird’s costs as they aren’t licensed or practice in California.) Prince says he’s hopeful but acknowledges it’s “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 filing a complaint with the ethics committee of the Federal Bar Association and, 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.

Toward that end, 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 already amassed a quality prior art for half of Blackbird’s patents. Its next move will be to send 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 into Blackbird, but Verlander recently 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 she said it employs “a similar arrangement.”

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, the outlet published a photo of Freeman standing with a bridge behind him in the distance.

Meanwhile, Cloudflare’s strategy includes involving as many reporters as much as possible in its fight, including talking with numerous media outlets about the case in recent months; 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 they had filed against people who allegedly downloaded pornographic movies online — films to which the attorneys had themselves purchased or filed copyrights. They were charged late last year for running an extortion fraud scheme.  Two of the firm’s founders have also been disbarred.

It’s an extreme comparison, but according to Cheng, a student of the case, the firm made “millions of dollars before someone who they went after [for damages] said, ‘I’m coming after you and defending myself.’ Whether what it 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 lawyer’s disbarment.

“[Is Blackbird] doing anything thing 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.

Featured Image: yogysic/Getty Images

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