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.”