More on Boston Communications
from WSJ via Pittsburgh Post-Gazette:
Lured by the potential returns, hedge funds and other institutional investors now are bankrolling businesses that buy up patent portfolios. More law firms, including some branching out from product-liability and malpractice work, are taking patent cases on a contingency basis. That means the law firms are paid a percentage of any damages awarded but little or nothing if the patent-holder loses.
Critics call the small litigants "patent trolls" and say they are parasites on successful businesses. "We finally built it up to where we started to make money at it, and the patent troll industry came along and said, 'We want a piece of that,' " says Paul Tobin, the 62-year-old founder and chairman of Boston Communications. "No one comes after you until it all works. They don't go after the failures."
(...)
The 48-year-old Mr. Fougnies says he worked in real-estate development and recreational-vehicle sales before getting into the cellphone business in 1990. Using $2,000 borrowed on his wife's credit card, he says, he opened a retail store in Phoenix selling cellphones and calling plans. Soon he had five outlets and became partners with Mr. Day. The former blackjack dealer and pit boss in Las Vegas had became a prosperous Phoenix insurance agent and was looking for an investment opportunity.
In 1994 Mr. Fougnies and Jack Harned, a Phoenix software engineer, filed for a patent covering a prepaid cellphone system. The patent describes in general terms a method for setting up such a system so that it can keep track of how many minutes users have left on their phones without requiring them to punch in a special access code. The system would be able to shut down cellphones that had run out of minutes.
At the time, prepaid phones were cumbersome to use because users typically had to dial a special number first and then type in a personal identification number before going on to complete their call. Companies were eager to offer prepaid calling because many people with poor credit couldn't qualify for regular cellphone plans.
Mr. Fougnies started showing the system to prospective customers, including GTE Wireless Corp. When GTE announced a prepaid plan based on a different system, his company filed a $500 million suit accusing GTE of stealing its trade secrets.
The suit went badly for Mr. Fougnies. In a deposition, he denied that he had ever stolen anything, only to be confronted later in the deposition by the record of a 1980s conviction for car theft. Mr. Fougnies says he never stole cars but in 1986 provided a ring of thieves with phony new-vehicle titles. The ring, he says, was renting cars in California and Las Vegas, reporting them stolen and driving them to Phoenix. Mr. Fougnies, who cooperated with the authorities, was convicted of a misdemeanor, which he says he thought had been expunged from the record at the time he was deposed.
The case against GTE dissolved after GTE presented testimony that another vendor was offering a similar prepaid technology. That suggested Messrs. Fougnies and Day didn't have any trade secrets that could be stolen. They eventually agreed to a settlement in which their company paid more than $90,000 to GTE for legal expenses, said GTE hadn't stolen any trade secrets, and agreed never to sue it again.
[Hmmm, was the GTE case a patent case or a trade secret case? If GTE presented evidence of prior art, showing the Fougnies work was not a trade secret, that prior art might also prove the Fougnies work was not patentable. If so, why didn't this approach work for Boston Communications (who seemed to rely on an inequitable conduct defense, which did not work. See text below, which still isn't the full answer. There must be more to this story than presented in the WSJ.]
With the prepaid-cellphone business bringing in little profit and hopes for expansion receding, Messrs. Day and Fougnies shut it down in 1999. Having recently received the patent they had sought, they decided to start a new company called Freedom Wireless Inc. focusing solely on patent litigation. They raised several million dollars by selling their retail stores and the subscribers, and several million dollars more by selling shares in Freedom to private investors.
Freedom bought a "patent-enforcement" insurance policy through Lloyd's of London, which covered up to $5 million of any litigation costs in exchange for a premium payment that Mr. Day says was less than 12 percent of that sum, or less than $600,000. The policy resembled an investment: If Freedom won its lawsuit or settled, the insurer would get back its original outlay plus a 25 percent bonus. A Los Angeles law firm, Quinn Emanuel Urquhart Oliver and Hedges, agreed to represent Freedom Wireless in part on a contingency basis.
In 2000, Freedom filed suit against Boston Communications and many of its customers, alleging patent infringement. After mergers and out-of-court settlements, the main defendants that remain today are Boston Communications; Cingular Wireless, which is owned by SBC Communications Inc. and BellSouth Corp; and Western Wireless Corp., which is being acquired by Alltel Corp. Boston Communications is on the hook for the entire sum of any damages because it agreed to indemnify its customers against patent-infringement suits when it installed its technology.
Boston Communications had been formed in 1988 by Mr. Tobin and three other cellphone veterans. Their company started out selling technology to let a customer of one cellphone provider make calls in another provider's region -- now a common feature called roaming but then an innovation.
In 1994, according to later trial testimony, a Boston Communications executive conceived of a prepaid system that would handle calls from cellphones without requiring PIN-codes or special chips in the phones. Cellphone carriers could keep using standard telephone switches in their existing facilities. All they needed to do was load the switches with Boston Communications software that could identify prepaid callers and check them against a database so their accounts could be debited.
No patent was sought for the system. "We didn't even focus on" obtaining one, says Mr. Tobin. "The hardware was off the shelf and we were just writing software."
By the time the case went to court, Boston Communications was a leader in the field of prepaid calling with a 35 percent market share. It had installed switches nationwide for Bell Atlantic, now part of Verizon Communications Inc. Today, Boston Communications's service is used by about four million of the 18 million prepaid cellphone customers in the U.S.
During the patent suit, Freedom's lawyers showed to the jury evidence uncovered in an earlier Freedom case that that Bell Atlantic engineers had been in regular communication with Boston Communications engineers about Mr. Fougnies's technology. The evidence included internal Bell Atlantic memos. Mr. Day says the phone company would call Mr. Fougnies "and then call BCGI and say, 'Here's how to solve your problems with incoming calls.' "
Boston Communications says the discussions were innocent. "We certainly didn't need to steal anyone's idea," Mr. Tobin says.
Boston Communications's defense, led by Michael Keating of the big Foley Hoag law firm, centered on a central plank of patent law: No one can patent something that is already public knowledge.
Following in the footsteps of GTE's successful defense, Mr. Keating showed that before Mr. Fougnies developed his system -- and before he filed for his patents -- he had visited a Phoenix company called Banana Cellular, which already had a working prepaid system. The defense also pointed to a 1993 article in a trade publication describing technology that could be used to make a prepaid system using switches with special software.
Freedom's lawyer, William Price of Quinn Emanuel, contended that the prepaid systems discussed before 1994 didn't invalidate Mr. Fougnies's patent because they had technical differences and weren't operational.
Separately, Boston Communications maintained that even if the patent was valid, its technology was different from Freedom's and therefore didn't infringe.
Lured by the potential returns, hedge funds and other institutional investors now are bankrolling businesses that buy up patent portfolios. More law firms, including some branching out from product-liability and malpractice work, are taking patent cases on a contingency basis. That means the law firms are paid a percentage of any damages awarded but little or nothing if the patent-holder loses.
Critics call the small litigants "patent trolls" and say they are parasites on successful businesses. "We finally built it up to where we started to make money at it, and the patent troll industry came along and said, 'We want a piece of that,' " says Paul Tobin, the 62-year-old founder and chairman of Boston Communications. "No one comes after you until it all works. They don't go after the failures."
(...)
The 48-year-old Mr. Fougnies says he worked in real-estate development and recreational-vehicle sales before getting into the cellphone business in 1990. Using $2,000 borrowed on his wife's credit card, he says, he opened a retail store in Phoenix selling cellphones and calling plans. Soon he had five outlets and became partners with Mr. Day. The former blackjack dealer and pit boss in Las Vegas had became a prosperous Phoenix insurance agent and was looking for an investment opportunity.
In 1994 Mr. Fougnies and Jack Harned, a Phoenix software engineer, filed for a patent covering a prepaid cellphone system. The patent describes in general terms a method for setting up such a system so that it can keep track of how many minutes users have left on their phones without requiring them to punch in a special access code. The system would be able to shut down cellphones that had run out of minutes.
At the time, prepaid phones were cumbersome to use because users typically had to dial a special number first and then type in a personal identification number before going on to complete their call. Companies were eager to offer prepaid calling because many people with poor credit couldn't qualify for regular cellphone plans.
Mr. Fougnies started showing the system to prospective customers, including GTE Wireless Corp. When GTE announced a prepaid plan based on a different system, his company filed a $500 million suit accusing GTE of stealing its trade secrets.
The suit went badly for Mr. Fougnies. In a deposition, he denied that he had ever stolen anything, only to be confronted later in the deposition by the record of a 1980s conviction for car theft. Mr. Fougnies says he never stole cars but in 1986 provided a ring of thieves with phony new-vehicle titles. The ring, he says, was renting cars in California and Las Vegas, reporting them stolen and driving them to Phoenix. Mr. Fougnies, who cooperated with the authorities, was convicted of a misdemeanor, which he says he thought had been expunged from the record at the time he was deposed.
The case against GTE dissolved after GTE presented testimony that another vendor was offering a similar prepaid technology. That suggested Messrs. Fougnies and Day didn't have any trade secrets that could be stolen. They eventually agreed to a settlement in which their company paid more than $90,000 to GTE for legal expenses, said GTE hadn't stolen any trade secrets, and agreed never to sue it again.
[Hmmm, was the GTE case a patent case or a trade secret case? If GTE presented evidence of prior art, showing the Fougnies work was not a trade secret, that prior art might also prove the Fougnies work was not patentable. If so, why didn't this approach work for Boston Communications (who seemed to rely on an inequitable conduct defense, which did not work. See text below, which still isn't the full answer. There must be more to this story than presented in the WSJ.]
With the prepaid-cellphone business bringing in little profit and hopes for expansion receding, Messrs. Day and Fougnies shut it down in 1999. Having recently received the patent they had sought, they decided to start a new company called Freedom Wireless Inc. focusing solely on patent litigation. They raised several million dollars by selling their retail stores and the subscribers, and several million dollars more by selling shares in Freedom to private investors.
Freedom bought a "patent-enforcement" insurance policy through Lloyd's of London, which covered up to $5 million of any litigation costs in exchange for a premium payment that Mr. Day says was less than 12 percent of that sum, or less than $600,000. The policy resembled an investment: If Freedom won its lawsuit or settled, the insurer would get back its original outlay plus a 25 percent bonus. A Los Angeles law firm, Quinn Emanuel Urquhart Oliver and Hedges, agreed to represent Freedom Wireless in part on a contingency basis.
In 2000, Freedom filed suit against Boston Communications and many of its customers, alleging patent infringement. After mergers and out-of-court settlements, the main defendants that remain today are Boston Communications; Cingular Wireless, which is owned by SBC Communications Inc. and BellSouth Corp; and Western Wireless Corp., which is being acquired by Alltel Corp. Boston Communications is on the hook for the entire sum of any damages because it agreed to indemnify its customers against patent-infringement suits when it installed its technology.
Boston Communications had been formed in 1988 by Mr. Tobin and three other cellphone veterans. Their company started out selling technology to let a customer of one cellphone provider make calls in another provider's region -- now a common feature called roaming but then an innovation.
In 1994, according to later trial testimony, a Boston Communications executive conceived of a prepaid system that would handle calls from cellphones without requiring PIN-codes or special chips in the phones. Cellphone carriers could keep using standard telephone switches in their existing facilities. All they needed to do was load the switches with Boston Communications software that could identify prepaid callers and check them against a database so their accounts could be debited.
No patent was sought for the system. "We didn't even focus on" obtaining one, says Mr. Tobin. "The hardware was off the shelf and we were just writing software."
By the time the case went to court, Boston Communications was a leader in the field of prepaid calling with a 35 percent market share. It had installed switches nationwide for Bell Atlantic, now part of Verizon Communications Inc. Today, Boston Communications's service is used by about four million of the 18 million prepaid cellphone customers in the U.S.
During the patent suit, Freedom's lawyers showed to the jury evidence uncovered in an earlier Freedom case that that Bell Atlantic engineers had been in regular communication with Boston Communications engineers about Mr. Fougnies's technology. The evidence included internal Bell Atlantic memos. Mr. Day says the phone company would call Mr. Fougnies "and then call BCGI and say, 'Here's how to solve your problems with incoming calls.' "
Boston Communications says the discussions were innocent. "We certainly didn't need to steal anyone's idea," Mr. Tobin says.
Boston Communications's defense, led by Michael Keating of the big Foley Hoag law firm, centered on a central plank of patent law: No one can patent something that is already public knowledge.
Following in the footsteps of GTE's successful defense, Mr. Keating showed that before Mr. Fougnies developed his system -- and before he filed for his patents -- he had visited a Phoenix company called Banana Cellular, which already had a working prepaid system. The defense also pointed to a 1993 article in a trade publication describing technology that could be used to make a prepaid system using switches with special software.
Freedom's lawyer, William Price of Quinn Emanuel, contended that the prepaid systems discussed before 1994 didn't invalidate Mr. Fougnies's patent because they had technical differences and weren't operational.
Separately, Boston Communications maintained that even if the patent was valid, its technology was different from Freedom's and therefore didn't infringe.
posted by Lawrence B. Ebert at 1:40 PM
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