24 August 2013

Upaid – Another Candidate for a Down-Under Troll?

Upaid v TelstraUpaid Systems Ltd, a company incorporated in the British Virgin Islands, has sued Australia's largest telecommunications carrier, Telstra, for infringement of two patents relating to making online purchases from mobile devices.

To my knowledge, the law suit filed on 21 August 2013 was first reported in the Australian Financial Review by technology journalist James Hutchinson (@j_hutch), who avoided the term ‘troll’.  Others, however (e.g. at ZDNet and iTWire have shown less restraint.

So, is Upaid a patent troll?

I have expressed the opinion previously that the classic patent troll business model is a form of litigation abuse which is not viable within the Australian system.  I also firmly believe that it is not productive to define ‘patent troll’ so as to broadly encompass all so-called ‘non-practising entities’ (NPEs).  Just because a company does not actually make and sell products embodying its patented inventions should not preclude it from nonetheless monetising them through licensing to others who do. 

To insist upon this is akin to requiring songwriters either to sing their own songs, or to give them away freely for others to record and profit from.  Just as you do not need to have a pleasant singing voice to write a good song, you do not need to have the capability to successfully commercialise your ideas in order to come up with good inventions.

Upaid actually developed the inventions covered by the patents on which it is suing Telstra back in the late 1990's and early 2000's, but failed to bring any product of its own to market.  Only then did it turn to an alternative business model based on licensing and enforcement of its patents.  So in this sense, at least, Upaid is certainly not the worst kind of troll, which is an entity that acquires dubious patents from others (often at fire-sale prices) and then uses them to extort payments from operating companies under threat of expensive litigation, regardless of the strength or applicability of the patents.

But, even so, is Upaid any kind of troll?  And if so, what are its prospects of making money in Australia?

Genesis of the UPaid Patents

There is an unusual amount of publicly-available information about the genesis of Upaid and its patents, thanks to the fact that Upaid fell into dispute with the Indian company it had contracted to help develop the technology, Satyam Computer Service Ltd.  This dispute led to court action in the US and the UK.  The UK litigation resulted in two published decisions: Satyam Computer Services Ltd v Upaid Systems Ltd [2008] EWHC 31 (Comm) in the High Court; and Satyam Computer Services Ltd v Upaid Systems Ltd [2008] EWCA Civ 487 in the Court of Appeal.

In a nutshell:
  1. in about 1996, Upaid chairman, Simon Joyce, came up with the idea of using any telephone as a payment system by associating an unique customer identifier with a prepaid account;
  2. in 1997, Upaid engaged Satyam to develop the platform and associated software;
  3. in 1998, Upaid decided to seek patent protection for its inventions, and as a result a suitable legal agreement was drawn up and executed which assigned to Upaid all of the intellectual property rights in the project developed by Satyam;
  4. Upaid then sought to file full US utility patent applications in 1999, for which it required not only the proof of assignment from Satyam, but also signed Declarations from each individual inventor, whether they be from Upaid or Satyam;
  5. the required documentation was passed on to Satyam, which arranged for signature by the inventors,and returned the documents from filing at the USPTO; and
  6. during the same period, patent applications were filed in other countries (including Australia), in which, unlike the US system at the time, no further documents are required to be signed by the inventors.
By 1999, however, Upaid was in debt to Satyam to the tune of around US$2 million.This situation was resolved by an arrangement in which Satyam became a Upaid shareholder, the debt was restructured via an equity swap, Satyam invested a further US$2.5 million, and also procured additional investments totalling around US$5 million.  On this account, it appears that the total effective investment in development of the technology was around US$10 million.

Falling Out

By 2002 the relationship between Upaid and Satyam had soured.  Satyam said that Upaid owed it money, and that the intellectual property rights had reverted to it under their service agreement.  Upaid, for its part, complained about the standard of Satyam's work, and the behaviour of its representative on the Upaid board, whom Upaid accused of infringing its IP rights by providing a payment platform via another company that he had set up.

The dispute was, however, resolved, and the parties entered into a settlement agreement.

Commercialisation Effort

While Upaid does not appear ever to have successfully commercialised its technology, this does not seem to be for want of trying.  According to this 2003 article at finextra.com, at one point Upaid ‘signed an agreement with Visa CEMEA to supply technology for the market pilot of a SMS-based pre-paid top-up service’.  The article went on to say:

Initially, the pilot will involve just one mobile operator and one bank, which will serve as both acquirer and issuer.

The scheme is expected to go live in the second quarter of 2003 and Upaid says its plans to connect other parties to the ASP are underway.

I can only assume that – for whatever reasons – the pilot either did not proceed, or was insufficiently successful to warrant further development.

US Patent Enforcement

In 2005, Upaid commenced its first patent infringement proceedings, against Qualcomm Incorporated and Verizon Wireless in the Eastern District of Texas (a jurisdiction infamously favoured by patent trolls but, for the same reason, also favourable to other types of patent holder, such as Australia's CSIRO).

To cut a long story short, it emerged through this litigation that at least two of the inventors' signatures on the US documentation may have been forged, and that one of those inventors now worked for Verizon!

Submitting fraudulent documents to the USPTO is very bad!  Even if, as in this case, the ultimate owner of the patent was unaware of the fraud, it may render a resulting patent totally unenforceable.  Upaid clearly did not want this issue formally decided by the court, and it is therefore perhaps unsurprising that it settled with Verizon and Qualcomm on terms which left its US patents intact, while granting both respondents a perpetual, royalty-free licence to use the patented technology.

The fact remains, however, that the US patents are seemingly lame ducks!

Upaid Sues Satyam Sues Upaid

Obviously, the loss of the ability to enforce its US patents against Verizon and Qualcomm was potentially very costly to Upaid.  Unsurprisingly, it sued Satyam (again in Texas) seeking damages to compensate for its loss.

Satyam retaliated by suing Upaid in the UK, essentially seeking to establish that Upaid was not, in any event, the rightful owner of any IP, and was not entitled to sue Satyam, as a result of specific provisions of the services and settlement agreements.

Satyam lost its UK case, at first instance and on appeal.  It subsequently settled the US litigation.  The settlement included a payment of US$70 million.  This figure is of some importance, because Upaid is now characterising  this settlement as some form of ‘proof’ that its patents are valid, and have survived prior challenges in two countries.  This claim seems, to me at least, to be somewhat disingenuous.

International Litigation

Since Upaid’s patents allegedly cover very widely-deployed mobile payment technology, it stands to reason that they must be infringed by just about every operator of mobile network services.  The US is presumably the largest single market for such services, and has one of the most patentee-friendly patent systems in the world.  Yet, as I have explained, it is likely that Upaid will be unable ever to enforce its US patents against an unwilling licensee.

It is not surprising, therefore, that Upaid is now looking to enforce its patents in other jurisdictions.  In most countries the problems that arose in the US are not an issue.  Australia is typical of the rules that apply in a majority of jurisdictions: so long as the ultimate patent owner can show legitimate entitlement to the patent, it will have standing to enforce it via infringement proceedings.  In this case, although Satyam may have forged inventors’ signatures on the US declarations, there does not seem to be any real doubt that the inventors’ original rights accrued to Satyam, or that Satyam subsequently assigned those rights to Upaid.

According to Upaid’s own website, its portfolio ‘is composed of more than 35 patents granted in Armenia, Australia, Azerbaijan, Belarus, China P.R., Eurasia, Georgia, Hong Kong, Hungary, India, Indonesia, Israel, Japan, Kazakhstan, Kyrgyzstan, Mexico, Moldova, Philippines, Russia, Singapore, South Africa, Taiwan, Tajikistan, Turkmenistan, Ukraine, United States…’.  Notably, none of these countries are members of the European Patent Convention – although applications have been filed in Europe, they have been repeatedly rejected for a wide variety of reasons, and it seems unlikely, at this stage, that a European patent will be granted.

In addition to the new action against Telstra in Australia, Upaid has reportedly sued NTT DoCoMo in Japan.

What Are Upaid’s Prospects in Australia?

Upaid contends that its patents were attacked in the course of litigation in the US and the UK, and implies that their survival is indicative of the strength of the portfolio.

However, as the discussion above demonstrates, the publicly-available information strongly indicates that it was only the US patents which were challenged, and that the main line of attack was based on a legal technicality.  I have been unable to find any evidence, beyond Upaid’s own assertion, that the patents have ever been challenged on substantive grounds, e.g. whether the claimed invention in new and non-obvious.  Indeed, the fate of the European applications suggests that grounds for such a challenge may exist, because one of the reasons for which the applications have been rejected is that the claims lack inventiveness.

A Telstra spokesperson told the Financial Review that: ‘We are disappointed Upaid Systems has refused our offer of good faith discussions on this matter and instead [has] chosen to litigate in the first instance.’  This suggests that there has been some contact between the parties – it would certainly be very interesting to read Upaid’s ‘Genuine Steps Statement’ (i.e. the document it is required to file with the court setting out the efforts that have been made to settle the dispute before commencing litigation).  Whatever Upaid may have asked for by way of an opening licence proposal, Telstra was apparently unwilling to accept its terms. 

It is quite likely that even if Telstra were willing to pay something by way of royalties, it does not consider the Upaid patents to be as valuable as Upaid itself does!  Indeed, Telstra may have evaluated the patents, and decided that they are vulnerable to some form of attack on their validity.  Certainly, Telstra can afford to mount a strong legal defence, including a counterclaim for revocation of the patents.


Overall, although it appears that Upaid is not necessarily the most honourable actor within the international patent system, I would not characterise it as a true patent troll.

As I have noted above, based on the publicly-available information, I find Upaid’s claims that its patent portfolio must be strong, having survived ‘attacks’ in the US and the UK, to be somewhat disingenuous.  The US patents do not appear to have been seriously challenged on substantive grounds, and the UK litigation related to the contracts between Upaid and Satyam, and had no bearing on the validity of the patents.

On the other hand, Upaid does appear initially to have developed systems and software based on its inventions, with a genuine intention of commercialising the invention itself.  Its current enforcement actions also appear to be based on a genuine belief that its patents are valid and infringed by existing mobile payment platforms, and that the operators of those platforms are therefore obliged to pay royalties. 

These circumstances place Upaid above the classic ‘patent troll’, which has no real interest in the proving that its patents are valid or infringed, but rather seeks to abuse the court system to extract one-off payments on the basis that this is cheaper for the victim than proceeding with litigation.  Just to reiterate, I remain of the opinion that this dubious business model is not viable under the Australian system.

Nonetheless, I will be watching the progress of the dispute between Upaid and Telstra with interest, as a possible indicator of how other NPEs may fare in Australia.

PS: The Australian patents identified in Upaid's suit are AU770646 and AU2008203853.


john.macphail said...

Mark have you had a look at the patents, is it possible to take a view about their likely validity against the 1998/99 prior art?

Mark Summerfield said...

Hi John
Yes, I have looked at them. But without conducting a search, and taking the time to review the relevant prior art properly (i.e. many hours of work) I would not venture a view on validity.
However, the fact that patents were granted in the US and Japan is telling. These are pre-2002 applications, so the freedom to apply multiple prior art references against the claims in Australia is extremely limited. Rejection in Europe does not necessarily mean that there is a viable avenue of attack in Australia, because the European approach to this type of subject matter is very different.
The claims look pretty broad at first blush, but it is not at all apparent that they would be invalid.

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