How a Typical Patent Battle Took an Unexpected Turn By DAVID SEGAL Published: July 13, 2013 WHAT would the country’s “most notorious patent troll” advise a guy under attack from a patent troll? Or, put more judiciously, a company that bears the outward appearance of a patent troll? I posed this question to the man with the notoriety, Erich Spangenberg, who runs IPNav, asking if he had any words of advice for a Chicago entrepreneur named Peter Braxton. Mr. Braxton, a former Air Force pilot, was in desperate shape when we first spoke about a month ago — so desperate that he was borrowing money from his mother and brother for living expenses. To understand how he got there, and to set up what turned out to be a rather surprising conversation with Mr. Spangenberg, let’s rewind Mr. Braxton’s story. Three years ago, Mr. Braxton was stuck with about 200 people, waiting to get into a nightclub at the Encore Hotel in Las Vegas. A few days later, he conceived an app called Jump Rope. It would give users the opportunity to pay some fee to get to the front of a line — at a club, a restaurant, a museum or any place where a premium for entry could be charged. Mr. Braxton, who at the time worked at Credit Suisse in Chicago, raised about $250,000 from friends and family to make his idea come to life, with more promised as the company grew. He hired code writers and two employees. The app started in November 2011. In December, Mr. Braxton received a phone call from Geoff Baker, a lawyer for a company, also based in Chicago, called Smart Options. “He said, ‘We have reason to believe you’re infringing on our patent, and we’d like to find a reasonable solution that involves some kind of license agreement,’ ” Mr. Braxton recalled. “I said, ‘Slow down.’ ” Mr. Braxton hired a lawyer, who told him that Jump Rope did not infringe what is officially known as Patent No. 7,313,539, a k a a “method and system for reserving future purchases of goods or services.” When Mr. Braxton declined to pay a license fee, and rebuffed a variety of other arrangements, Smart Options sued. Mr. Braxton returned all the money he’d raised — “Nobody wants to buy a lawsuit,” he explained — and paid for the case out of his own pocket. The ensuing dispute, by the standards of patent brawls, was brief and lopsided. Judge Amy J. St. Eve of Federal District Court in the Northern District of Illinois found for Jump Rope on summary judgment, which is another way of saying that the judge didn’t think the matter even worthy of a trial. Judge St. Eve also ordered Smart Options to pay Jump Rope’s legal fees. She called the lawsuit “frivolous.” This might have seemed like an obvious moment for Smart Options to cease hostilities. Instead, it reloaded. In addition to filing an appeal, in May, Mr. Braxton says Mr. Baker told him that Smart Options would sue Jump Rope using a different patent in its portfolio. Mr. Baker, in an interview, said the judge got it wrong. LAST month, when Mr. Braxton told me about his predicament by telephone, he sounded cornered. He was out of money, so he couldn’t afford to fight an appeal. At 35, Mr. Braxton was considering a return to the military, as a reservist. (He had already served in both Iraq and Afghanistan.) “I have about the same amount of money in my bank account as I did when I was 15 years old,” he said in June. “I’m practically bankrupt. If you’re a start-up, you have no chance with this kind of litigation.” What should he do? I asked Mr. Spangenberg if he would be willing to share ideas. I hoped only that the conversation would yield intriguing fodder for a profile of Mr. Spangenberg. That night, Mr. Spangenberg read the rulings in the case and he decided that he liked what he saw. Loved it, in fact. So much, that by the time he and Mr. Braxton were chatting the next day, via speakerphone, he wanted to make a deal. “If we came in and helped you on this, would you start your business back up?” he asked. “One hundred million percent yes,” Mr. Braxton said. A free consultation quickly became the beginnings of a negotiation. Mr. Spangenberg offered to take an equity position worth $500,000, in exchange for solving all of Jump Rope’s legal problems. “I’m going to invest as well,” Mr. Spangenberg said. “Peter, what do you need to get this back up while we raise money from people with lots of money?” “About half a million bucks,” he said. “That’s what I figured,” Mr. Spangenberg replied. “So we’d fund that.” The conversation went on for another minute, with Mr. Spangenberg asking for biographical information so that a background check could be conducted. When the call ended, Mr. Braxton sounded as if he’d just won the Showcase Showdown on “The Price Is Right.” I asked Mr. Spangenberg the obvious question: Was this a publicity stunt? Yes, he said, the deal would produce good publicity, though oddly enough, it was news to him that any of this repartee would appear in this article. (“Well, you need to wait until we get in touch with Smart Options,” he said.) But primarily, this was neither charity nor public relations. It was a great deal for IPNav. “Look, I’ll get $500,000 in equity for taking the legal piece off his plate,” he said. “It’ll cost me $100,000 to make the lawsuit go away.” He promised to locate “pressure points” on either Smart Options or Hugh McNally, its C.E.O. “I get to make a great investment on great terms,” he said. “Then I let Citadel” — a large hedge fund that had expressed interest in funding Jump Rope — “put a big chunk of money into it and I go off and do something else.” Mr. Spangenberg is spending more of his time and money on venture capital. He now owns equity in roughly 25 companies, most of them, like Jump Rope, in distress. In the days after the conference call, employees at IPNav did due diligence on Mr. Braxton. Soon, an associate of Mr. Spangenberg’s named Billy Carter flew to Chicago for a meeting. (Mr. Carter owns and manages a firm that is suing The New York Times Company for patent infringement.) The two discussed possible terms of a deal, then headed to a nightclub for a celebratory drink. Here, the story takes its most improbable turn. At some point in the evening, Mr. Braxton realized that he was standing next to Mr. McNally, the Smart Options C.E.O. When Mr. Braxton pointed out the man, Mr. Carter bought Mr. McNally and his friends a round of drinks. Mr. Carter then explained to Mr. McNally that he was now working with Mr. Braxton to help him resolve the dispute with Smart Options. The conversation quickly turned ugly. “He stood behind me and tried to intimidate me,” Mr. McNally said of Mr. Carter. “He said, ‘I’m coming after you.’ ” Actually, Mr. Carter says he said much more than that. “I told him,” Mr. Carter recalls, “that before this is over you’ll have to apologize to Peter for the things you’ve said and done to him in the past, and you’re going to have to get down on your hands and knees and beg me for your job.” Mr. Baker, the Smart Options lawyer, had a different take on the litigation against Jump Rope. He said in e-mails and a phone interview that Smart Options had tried, in good faith, for months to negotiate any number of deals with Peter Braxton, including an outright purchase, or an investment in exchange for equity. “We like his app,” he explained. “We just have to make sure we’re protecting our intellectual property rights.” But why should Mr. Braxton strike any deal with Smart Options, given that a judge had found that his software didn’t infringe its patent? Because, Mr. Baker said, the company disagreed with the judge, which is why the case is under appeal. “It’s not clear-cut whether our patents cover what Peter Braxton is doing,” he said. “What’s clear-cut is that he chose to say ‘no’ to more than half a dozen reasonable relationships we laid out for him.” ON Monday, Mr. Braxton flew to Dallas for additional meetings with IPNav, and on Wednesday, a deal between Jump Rope and IPNav was signed. It was not as generous as the original terms. IP Nav put up $200,000 in capital, agreed to handle any litigation and would own 40 percent of the company. For his part, Mr. Spangenberg seems delighted to be confounding expectations and playing the role of patent-troll slayer. But Peter Braxton’s story suggests that there is really only one way to deal with a patent bully: team up with a bigger bully.
Posted on: Sun, 14 Jul 2013 05:54:10 +0000
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