Blackberry Blues

When the BlackBerry burst onto the market, Don Stout thought the technology seemed familiar. Lawyers soon were lined up on both sides.

By: Kim Eisler

Don Stout isn't exactly Michael Jordan, but the basketball court did change his life.

Stout is a 59-year-old patent lawyer, about five-foot-eleven and skinny. He's a left-hander, which throws off opponents when he drives to the basket during the daily noon basketball game at the Rhode Island Avenue YMCA in downtown DC.

Basketball at the Y is a sweaty affair where lawyers, doctors, and journalists butt up against one another for an hour. When the game is over and some of the players head to the steam room, business sometimes gets done.

Like the day back in 1987 when another guy in the game, a communications lawyer, told Stout that one of his clients was looking for someone to file some patents. He figured that no one in Washington knew his way around the arcane world of "claim construction" and "infringement" better than Stout. It was in his blood.

Stout's father was a Pittsburgh lawyer who worked on patents at the Union Switch Division of the Westinghouse Air Brake Company. Don went to Penn State to study electrical engineering. In 1968 he moved to Washington to take a job with the US Patent Office and enrolled at George Washington University Law School.

After graduating, Stout became a patent-law specialist. He took an office in downtown DC and got into the habit of playing basketball through lunch.

Electrical engineering may sound like an odd place to start a career in law, but Stout was not the only Washington patent attorney with that background. Jim Wallace, who grew up in Columbia, South Carolina, also planned on a career in electrical engineering. But after getting his degree at the University of South Carolina, he decided to be a lawyer and enrolled at Georgetown University's law school. To the bewilderment of his South Carolina family and friends, most of whom viewed the nation's capital as an alien outpost, he fell in love with Washington and stayed.

Wallace took a job at the Chicago-based corporate firm Kirkland & Ellis. There he fell under the influence of Richard Wiley, who had served as head of the Federal Communications Commission and was regarded as Washington's smartest communications lawyer.

When in 1983 Wiley started his own law firm, which would become known as Wiley Rein & Fielding, Wallace was one of the 38 Kirkland defectors who became founders of one of Washington's great homegrown law firms.

Wallace first met Don Stout in a complicated case in which the two men were on opposite sides. Stout had a wonderful gift for making "In re Dual Mode Dialectic Filters" sound intelligible. Wallace's side won, but he decided he wanted Stout on his side next time.

Wallace started using Stout as an expert witness, and the two became familiar with each other professionally, though they were not friends. Stout tried to refer a couple of patent cases to Wallace, but the first contacts failed because of conflicts of interest on the side of Wiley Rein.

It was after the noon basketball game in 1987 that Stout heard about Telefind, a pioneer in wireless communications. Telefind was trying to improve its paging business, still in its infancy. Pagers in the late 1980s could tell you little more than that someone had called and maybe read out a number on a small screen.

One of the engineers at Telefind was Thomas J. Campana Jr., a Chicago-based electronics wizard who had devised a system that could send text transmissions among computers and wireless devices.

In 1991, Telefind was underfinanced and headed for bankruptcy. Manufacturers were not eager to buy Campana's inventions. Campana consulted Stout about how to protect his work. Campana realized that laptop computers, cell phones, paging devices, and personal communicators were winning the hearts and minds of American consumers. And linking those devices via wireless transmissions became the obsession of many software engineers.

Campana and Stout decided to form a holding company, called NTP, out of Stout's Annandale home. The initials stood for New Technologies Products.

Most of the shares in NTP were divided between Stout and Campana. Ultimately, 22 others took positions in the holding company, some of them members of Stout's Arlington-based law firm. The company's principal assets--virtually its only assets--were patents filed on Campana's innovations. Stout kept them in a file drawer at his office.

Meanwhile, up in Waterloo, Ontario, a company created in 1984 was poised to profit from the coming craze in wireless technology.

The name of the Canadian start-up was Research in Motion, known as RIM. One founder of RIM was college senior Mike Lazaridis, the Istanbul-born son of Greek parents who had emigrated to Canada when he was five. In its early years, Lazaridis's company mostly did software-engineering work for other clients. Its largest customer was a firm that built electrical systems for airport hangars.

The company spent more than ten years researching and testing a high-tech product of its own--a wireless pager with a tiny, thumb-operated keyboard. In 1997, RIM went public.

By 1999, the device was ready to market. Lazaridis had a keen marketing sense, and he hired the same Sausalito, California, branding agency that had helped name the Apple PowerBook. The little keys on the machine looked like strawberry seeds to one of the ad executives. "Let's call it the StrawBerry," he said.

Lazaridis couldn't imagine stores full of pink or red personal communicating devices. His device wasn't going to be strawberry-colored; it was going to be black. His new device would be called the BlackBerry.

Even before the BlackBerry hit the streets, a rival company was selling a device called the Palm Pilot. The main function of the Palm Pilot seemed to be keeping track of addresses and appointments. The purpose of the BlackBerry was to send e-mail communications from the hand-held device to a person's desktop computer or another hand-held device.

The more Don Stout read about the BlackBerry, the more intrigued he became. This seemed to be the very function covered by the patents in his drawer.

The BlackBerry exploded onto the market, especially among attorneys. It allowed people to carry their e-mail message systems with them. Almost overnight, the sound of a cell phone going off at lunch was replaced by a subtle beep. Many attorneys would fiddle with their BlackBerries throughout the meal.

Stout concluded that the BlackBerry infringed on patents he had filed for Campana over the previous ten years.

On January 27, 2000, they sent a letter to RIM notifying the company that it was infringing on an NTP-owned patent. As is the practice in the patent field, Stout offered to license his company's technology to RIM for a fee to be negotiated.

What happened next has become a contentious part of a multimillion-dollar legal battle between the Canadian tech giant and the skinny man with the file drawer.

Stout claims that he never received a response from anyone at RIM. His licensing request had been sent to RIM through the highly regarded Richmond-based firm Hunton & Williams. The law firm says it never heard back from RIM, either. •

Lazaridis has claimed that after receiving the letter from NTP, the company conducted a review of all its patent obligations and concluded that no infringement was taking place. RIM claims that it informed Stout of this, though no proof of a reply to Stout has been presented.

If Campana's patents were going to mean anything, Stout believed he had to defend them. Indeed, this was why NTP had been created. Wireless e-mail was becoming a force in the communications world, and the NTP patents would be worthless if companies like RIM could ignore them.

Stout needed a top-flight attorney to challenge the fast-growing Canadian company. In the BlackBerry's first year, sales took off, and the stock price increased tenfold. By 2000, RIM's BlackBerry was the technology hit of the year, with most of its sales in the United States.

Stout called Jim Wallace and asked if he could recommend a good attorney to take NTP's patent-infringement claims to court.

"Hey, how about me?" Wallace replied.

Stout had assumed Wiley Rein would have a conflict. But Wallace checked with his partners and found he was free to take up the case against the Canadian company.

In November 2001, Wallace walked into the federal courthouse in Alexandria, Virginia, where many patent-related cases are filed. Lawyers love to file cases in Virginia because the federal courts there move them quickly. The so-called "rocket docket"--perfected by federal judges Oren Lewis and Albert Bryan Jr.--should be a national model for judicial efficiency, but no other jurisdiction has quite been able to copy it.

So many patent cases are filed in Alexandria that judges now have to assign about a third of them to colleagues in Richmond lest the rocket docket slow down. Stout's patent case, now in the hands of Wallace, was one of those moved to Richmond for litigation.

To oppose the action, RIM hired Robert C. Kahrl of the Cleveland-based firm Jones, Day, Reavis & Pogue. The author of Patent Claim Construction, a well-known tome in his area of expertise, Kahrl had represented RIM in other cases.

Jones Day is not only one of the oldest firms in the United States; it also was among the first to envision a legal future in which law firms would become as national as the Big Eight accounting firms were then. Jones Day opened a Washington office in 1946. Many more would follow. Ultimately Jones Day would spread to 30 cities worldwide and employ more than 2,200 lawyers.

Jones Day's style of practice wasn't completely in sync with the tempo of the rocket docket. Among lawyers who have been in court with Jones Day attorneys, the firm had a reputation for overstaffing cases, overwhelming opponents with paper filings, and constantly seeking tactical advantages through continuances and motions. That approach conflicted with the fact that in Virginia, short of bleeding to death in the courtroom, you don't get a continuance.

Wallace, with his Southern accent, was happy about being moved to Richmond, especially after September 11, 2001, when the Alexandria court became inundated with terrorism-related cases. Lawyers began referring to the Alexandria courthouse as the Taliban Court.

Time, Wallace knew, was on the side of RIM. It had lots of money to spend on its high-powered legal team from Ohio. Stout had to sell more shares of his company to his law-firm colleagues to finance the litigation. He knew that the longer the case went, the harder it would be for Stout and Campana to sustain it financially. The speed of the Virginia court system would be his weapon.

The companies now locked in legal combat couldn't have looked more different. One was the billion-dollar sweetheart of Wall Street. The other was a file drawer. NTP produced nothing and had no employees, no building, and few resources.

In his public statements, Kahrl seemed confident that this was just another of the annoying 2,000-plus patent-infringement cases filed in federal courts each year. Bleeding NTP to death, the way he might be able to do in a crowded Chicago or New York courtroom, could work.

But as one member of RIM's legal team would later observe, "Jones Day's tactics really blew up in their face."

Kahrl regarded NTP as a "troll," a patent-world term for people who buy patents from extinct companies and then try to extort money from successful businesses like RIM. He referred to NTP as "a company in a file drawer."

But NTP's situation wasn't exactly as Kahrl characterized it. The company was not a "vulture" trying to make money on someone else's patent. The patents owned by NTP were Campana's, and he was a major shareholder. Not only did the patents exist on paper at the US Patent Office, but some of his wireless e-mail inventions had been demonstrated with AT&T at the annual Comdex computer show in Las Vegas.

The distinction seemed lost on RIM and its attorneys. One of its supporting briefs referred to companies like NTP as hiding "under bridges they didn't build themselves."

Confident that NTP would be exposed as a troll, Jones Day and its Canadian clients refused to discuss a settlement seriously even though Stout and Campana probably would have taken a modest sum at that point.

In November 2001, Wallace told Stout that just starting the litigation would cost $1.5 million. Wallace agreed to advance the money in exchange for one-third of the final judgment or settlement. Large firms like Wiley Rein rarely take cases on a contingency basis. Its attorneys ordinarily bill by the hour; most partners bill between $400 and $600. But Wallace had some associates with time on their hands. It would be better to have them work on a case like this than to be idle.

Stout worked to raise as much money as he could to pay for the litigation, selling off bits and pieces of NTP. In a contingency case, the client is still responsible for expenses.

In a series of pretrial motions and maneuverings, the Jones Day lawyers tried to get the case thrown out of court. But the judge, James Spencer, a former Richmond prosecutor, decided to let the case go before a jury.

In November 2002, NTP v. Research in Motion was called before the federal court in Richmond. In a world where years can pass after the filing of a civil case, it had been only one year from the decision to sue to the beginning of the trial.

The lawyers from Jones Day got off to an awkward start as their motions for continuances were denied one after another. Then there were the motions for summary judgment. Judge Spencer had no patience with those, either. He was determined to try the case, however complicated it might be, and get it over with.

Jones Day was forced to defend its client's actions. The company wanted to argue that the true heritage of the RIM BlackBerry could be traced to a two-way Motorola pager created by different inventors. Wallace and Stout never alleged that BlackBerry had stolen Campana's work. They didn't have to. Under patent law, they had to show only that a patent already existed on the technology and that BlackBerry had an obligation to negotiate a license fee after learning that there was a preexisting patent on its processes.

RIM's lawyers also argued that no one had licensed the five NTP patents in the lawsuit because they didn't apply to the current state of wireless technology. It put on a demonstration intended to prove that a pager capable of receiving alphanumeric messages had been invented before Campana's patent.

But Wallace's associate Kevin Anderson, who had spent ten years as a software scientist before joining Wiley Rein's patent department, detected problems with the demonstration and was able to show that the software used in it was developed after, not before, Campana's patent. Anderson was stunned by his opponents' mistake and the ease with which he countered it. "It was like fileting a fish," he thought to himself.

The demonstration turned into a disaster for the Jones Day lawyers. They claimed that the problems were technical and asked the judge to let them do it over again. But Spencer, who had had his fill of Jones Day's dilatory tactics, was never convinced that the demonstration was anything but fraudulent, he wrote in his opinion.

The jury trial lasted three weeks. When it was over, the 12 jurors deliberated a mere three hours before finding that RIM's BlackBerry did infringe on Campana's patents and that its conduct in the case was "willful." The jury decided that NTP should be assigned 5.7 percent of BlackBerry's ongoing business.

The question of whether RIM had responded to Stout's original letter proved to be important in the finding. RIM's attorneys never proved that the company had conducted the investigation it claimed it had after receiving the letter from NTP. Instead, the jury concluded, RIM continued to ignore the patent claim.

The finding of "willfulness" opened the legal door for Judge Spencer to hold a further hearing on damages. After it, he increased NTP's percentage of RIM's sales to 8.55 percent, a figure that would amount to about $180 million to date.

In addition to its one-third stake in the verdict, Wiley Rein was awarded at least $4.5 million in attorneys' fees.

Judge Spencer issued a legal bombshell--an order barring the sale of BlackBerries in the United States until the judgment was entered. He agreed to stay the injunction only after RIM agreed to deposit the damage-award funds into an interest-bearing escrow account.

The judge scolded RIM's lawyers repeatedly during the trial and later used words like "questionable," "implausible," and even "fraudulent" to describe RIM's legal tactics and courtroom testimony.

"RIM's infringement was clear," Spencer wrote in a post-trial decision. "Indeed, it offered no real defense to NTP's infringement case at trial . . . . [T]his was not a close case."

The judge's injunction would never be put into effect, nor was there any expectation that it would be. But it did create headlines and caused RIM stock to plunge.

RIM attempted to respond to the injunction order by going over the head of Spencer to Congress. RIM claimed that its device was vital to US national security: After the September 11 terrorist attacks, all members of Congress had received BlackBerries so members could be made instantly aware of another attack. The argument pushed the BlackBerry case onto even more front pages--and made investors even more nervous.

Rather than settle the case after the verdict, RIM replaced its Jones Day lawyers with lawyers from Washington-based Howrey Simon Arnold & White, now known as Howrey, and appealed the decision.

Patent law has its own appeals court, the US Court of Appeals for the Federal Circuit. This differs from the better-known US Court of Appeals for the DC Circuit. In late 2004, the Federal Circuit unanimously upheld almost the entirety of the lower-court judgment. Howrey advised RIM that it was time to settle.

Howrey hoped the settlement process might be simplified by the news virtually the same week as the appeals-court decision that Campana, a lifelong smoker, had died of cancer. Over the following months, attorneys from Howrey negotiated with the Wiley Rein team. Then, in an announcement that seemed to delight Wall Street, RIM agreed to pay Stout, his investors, and the Wiley Rein lawyers $450 million in damages. Wiley Rein's take would amount to $150 million, split among all its partners.

RIM's public-relations staff in Canada announced that the case was over. Most important to Wall Street was the idea that RIM would no longer have to operate under the threat of an injunction. The stock shot up more than 20 percent above the lows it had experienced during the litigation and appeals.

Wiley Rein issued a press release congratulating itself on the settlement. The firm had plenty of reason to be happy. It has never publicly disclosed its substantial financial interest in the case and still refuses to acknowledge or discuss it.

The ending seemed too good to be true. Stout and Wiley Rein made out very, very well. Campana did not live to enjoy the fruits of his inventions, but his family will profit handsomely from what would have been his share.

And Lazaridis couldn't shed too many tears. The surge in the stock price after the settlement was announced made him close to whole, and RIM investors seemed happy.

But there was no happy ending. This summer, RIM announced that Stout and Wiley Rein were blocking the final settlement. After several weeks of rumors that the agreement was falling apart, it did collapse. Both sides now say there is no settlement.

The NTP side says the dispute is over the licensing agreements. As other companies introduce wireless e-mail, Wallace and NTP want to make sure that a precedent is set, one that they can use in negotiations with Nokia and other companies about to issue smart cell phones with e-mail applications.

RIM has launched a renewed public-relations attack against NTP, arguing that Campana's original patents are being reexamined and that Judge Spencer should never have considered them valid. RIM attorneys have been insisting that the final settlement agreement allow the Canadian company to sue to get its money back if Campana's patents are voided by US patent examiners.

Says one NTP source, "This isn't Research in Motion; it should be called Lawsuits in Motion. They could be suing us for the rest of our lives if we agreed to their terms."

Don Stout says he is happy to wait a little longer for the check to be written.

"My children are all out of college," he says. "My wife is a retired teacher. I have two Saabs and a Chevy Silverado pickup truck. It's a lot of money, but I never count on anything until the ball is in the basket. I'm not quitting my day job--not yet."