Losing the Signal: The Spectacular Rise and Fall of BlackBerry (17 page)

In fourteen short years Lazaridis and Balsillie had steered RIM from the obscurity of a small Ontario city to claim the title as the new kings of technology with an inventive smartphone that was a must-have status symbol for professionals. Through a mix of innovation and brazen tactics the duo had outsmarted bigger competitors and skated around wolfish carriers. Most remarkable of all, the unlikely pairing of the bookish innovator and abrasive business strategist had thrived. Contrasting personalities that might have driven Lazaridis and Balsillie apart during the stressful fight to survive instead united them into a stronger force against RIM’s adversaries. They understood each other’s strengths and weaknesses, presented a unified front to their staff and the outside world, and never yielded their shared ambition to transform RIM into a technology powerhouse. And RIM’s financial condition was catching up with their aspirations. By its 2006 fiscal year, the company’s revenue exceeded $2 billion, a milestone that would soon be passed with the release of a new BlackBerry smartphone.

Lazaridis and his close friend, Doug Fregin, spent most of the Christmas holidays in 2005 perfecting RIM’s first smartphone squarely aimed at consumers, a handset that combined e-mail and phone service with a music player, memory card, and camera. Fregin, the gifted circuit board designer, had the difficult challenge: fitting the new applications and internal circuitry into a slim new phone that would be called the Pearl. The challenge was so complex that Lazaridis found Fregin in the office alone on Christmas Day tinkering with a circuit board. He rewarded his oldest friend that day by driving to a nearby Harvey’s fast-food restaurant to pick up a hamburger and french fries. By the end of the holidays, “We got it all to fit,” Lazaridis says.

The following September, RIM invited dozens of journalists and bloggers to a theater in New York’s Times Square to watch a video presentation of Lazaridis speaking a new language. There was the father of battery and bandwidth conservation in a black V-neck sweater describing the Pearl as a “sleek” and “stylish” phone. This, Lazaridis said, was a “way different BlackBerry,”
delivering music and home videos. RIM was also talking to customers a different way. For years it had relied on carriers to market its products to their customers. Now, RIM was starting its own branding campaign, aimed for the first time at consumers. It tapped TV actress Mariska Hargitay, author Douglas Coupland, and Martin Eberhard, CEO of Tesla Motors, to appear in advertisements talking about how the Pearl had changed their lives.

The showstopper was a new trackball in the middle of the device, a rubber ball that users rolled to navigate around the screen like a mouse, replacing the trackwheel that had been a feature on all previous BlackBerrys. Reviewers were smitten.
Computerworld
columnist Mike Elgan declared the slim phone a “ground-breaking, genre-killing, trend-setting device.” With its fluid trackball, Internet navigation was so easy that Elgin wrote and filed his lengthy column from the Pearl.

“The trackball will become the dominant navigational device for mobile devices within two years,” he wrote. “Welcome to the future.”
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EVERYBODY HAS PLANS UNTIL THEY GET HIT.
— MIKE TYSON

Jim Balsillie was fighting a losing battle against an unfamiliar adversary. He slept and ate so fitfully that he dropped twenty pounds. In November 2005 he booked a room in a Toronto hotel to confront a bigger loss: his confidence. RIM’s dogged dealmaker was paralyzed with fear. He retreated to the hotel to come to grips with his crisis. Alone in his room he sobbed uncontrollably. “I know what depression feels like. You’re bawling your eyes out at night for hours. You can’t function,” Balsillie says. “I had never been in this position before. I never felt dread like that before.”

His crisis was triggered by a tiny slip of a company with only a fistful of patents to its name. Balsillie and Lazaridis had underestimated NTP Inc. ever since the Virginia-based shell company sued RIM in 2001 for infringing on its wireless e-mail patents. Don’t worry, RIM’s lawyers reassured him; it’s a nuisance claim. But it didn’t play out that way. RIM badly underestimated NTP’s case and the risks of fighting a patent dispute in a U.S. court, where the odds did not favor defendants. RIM suffered a humiliating court defeat in 2002, multiple appeals failed, and settlement talks foundered. Now a Virginia judge was threatening to take the company to the brink by enforcing an injunction to bar BlackBerry service in the U.S.

Unless RIM quickly forged a settlement it would be locked out of its most lucrative market. Peace talks, however, were going nowhere because NTP insisted on a rich royalty that would sap RIM’s profits for years. Balsillie balked at the terms. While the standoff dragged on, BlackBerry U.S. subscription
growth began to fall short of expectations. Balsillie’s days were filled with insistent calls from the country’s most powerful carriers, businesses, and government agencies.
What was the backup plan for BlackBerry e-mail service? Why hadn’t RIM solved the crisis?

For the first time in his life, Balsillie was confronted with a problem he could not fix. He always had a solution, a cunning ploy or two to gain the advantage. After three years of fighting he’d been backed into a corner without ammunition. It was a place Sun Tzu called the “death ground.” According to the ancient military guide he had two choices: succumb or advance. Moving forward did not seem like an option that evening as fear and panic overwhelmed Balsillie.

“I never thought of killing myself, but it didn’t seem like a bad idea.”

NTP’s lawsuit began with a talented engineer whose early life closely mirrored that of Mike Lazaridis. Thomas Campana was born fourteen years before Lazaridis in a working-class neighborhood on the south side of Chicago. He shared more than a humble upbringing with the Canadian. Campana was a mechanical prodigy, inspired by his father, a radio operator who had flown bombing missions in World War II.
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He showed an early affinity for machines, repairing radios, and building a family television from scrounged parts. He earned an engineering degree from the University of Illinois, served in the air force’s communications branch, and landed a job building a wireless communications system for the Chicago police.

Like Lazaridis, Campana took a leap and founded a wireless business, Electronic Services Associates. Unlike Lazaridis, Campana had no Jim Balsillie lassoing deals and money to keep the business afloat. “He was not the greatest businessman in the world,” his father, Tom Campana Sr., told the
Globe and Mail
.
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Campana’s prospects improved in the late 1980s when he helped a fledgling Miami paging company, Telefind, develop a breakthrough pager that worked on multiple frequencies across the United States. The innovation attracted AT&T, which asked Telefind and Campana to develop a wireless e-mail service for a new line of laptop computers. Campana designed a system connecting AT&T laptops to Telefind’s paging network. But rather than striking it rich, the venture ran aground: Telefind’s paging system proved unreliable and AT&T walked away in 1991. Telefind filed
for bankruptcy, owing one of its biggest creditors, Campana, half a million dollars.
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One of the few things Campana salvaged from Telefind’s collapse was the legal right to a set of patents for the wireless message technology he helped develop. The other was a business relationship with Telefind’s lawyer, Donald Stout, a former government patent examiner based in Arlington, Virginia, who liked to hunt in his spare time. Stout saw an opportunity to parlay Campana’s patent rights into a revenue stream of licensing fees at a time wireless data was taking off. The two men formed NTP to hold the stranded patents. The skeletal company was part of a growing breed of patent trolls whose primary business was to sue businesses allegedly infringing on their rights. Lawyers represented trolls on the contingency they would share a portion of any court awards. It was a booming business. U.S. lawsuits filed by patent trolls rose sharply to 428 in 2007 and 2,750 just five years later, by which point they accounted for nearly 60 percent of all U.S. patent lawsuits, double the level of five years earlier.
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Stout started the hunt for licensing fees by writing letters to dozens of communications companies suggesting they were infringing on its technology. One of the last letters was sent in January 2000 to RIM. NTP received no replies from most of the targets, including RIM. In May 2001, Stout noticed a story in the
Wall Street Journal
about U.S. patents granted to the Waterloo company for its BlackBerry wireless e-mail system. Calling it a “huge day for RIM,” Balsillie put copycats on notice. “BlackBerry knockoffs will now need a license from us,” Balsillie told the newspaper. “The amateurs out there have to stop.”
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Balsillie had hoped to warn off patent violators, but instead he put a target on RIM’s back. The more Stout read about BlackBerry, the more he thought it sounded like NTP’s technology.
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“That certainly made our choice easy,” Stout says.

Within a day, Stout and Campana lined up $2 million, from several investors including other lawyers, to finance a patent infringement lawsuit against RIM. He didn’t have to go far to find an accommodating jurisdiction for his case. Stout lived in one of the friendliest U.S. court districts for patent plaintiffs. The Eastern District Court of Virginia propelled cases so quickly through its courts it was known as the Rocket Docket. The district’s motto summed up its priorities: justice delayed is justice denied. A median case in the district took barely nine months to move from claim to trial in the early 2000s, less than half the national equivalent.
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Time was the friend of patent plaintiffs. The faster complex cases traveled through courts, the less time defendants
had to prepare, and to educate and convince a judge and jury that they had not breached the patents.

“Fast justice is what you want,” says Stout.

Patent disputes are as old as ancient Greece. Local politicians granted primitive patent rights to favored cooks to protect culinary inventions from kitchen pirates. Medieval kings and queens solved disputes by selling lucrative long-term patents for everything from farm equipment to playing cards. The rudimentary system was not up to the task of policing innovations during the Industrial Revolution. Machines transformed everyday life in so many ways that the boundary between inventions and copycats grew blurry. Breakthroughs were dogged by so many ownership disputes that new patent laws and rights were imposed to referee the idea wars.

Patent fights snowballed in the Information Age. Computing and communication advances arrived with such velocity that U.S. patent applications increased fourfold in the decade ending in 2010.
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Leading the way was the mobile phone business, accounting for nearly 25 percent of total U.S. patents granted in 2013, up from 5 percent in 2001.
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Many breakthroughs were based on software concepts, opening a new front in the patent wars involving a labyrinth of algorithms and code. These feuds became high-stakes battlegrounds when U.S. courts began handing out rich awards for patent infringements. The case that would define these damaging patent crusades began in November 2001, when NTP filed its claim against RIM for patent infringement.

NTP’s legal assault on RIM’s chief witness began under stormy skies in Richmond, Virginia, in the second week of November 2002.
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The city’s massive granite federal courthouse was impervious to the violent winds and lightning dancing above the century-old building. The same could not be said for the witness who took the stand on November 11. Before long Mike Lazaridis was reeling.

NTP’s lawyers were veterans of the Rocket Docket. In an impatient court district and before an untrained jury, they understood that cases were seldom won or lost by launching into weighty technology examinations. There wasn’t enough time and the risks of jury confusion were high. A more effective tactic was attacking the credibility of defense witnesses. If they could rattle RIM’s founder they might win over the jury.

Lazaridis took the stand for only half a day. Under questioning from NTP’s lawyer, Jim Wallace, he was defensive and easily flustered. When he testified that RIM had thoroughly researched whether RIM had infringed on NTP’s patent rights, Wallace cited contradictory sworn evidence from another RIM employee. When Lazaridis cast RIM as a struggling company, Wallace brandished a rosy newspaper account of the company’s prospects and internal RIM e-mails about the company’s prosperity. The failed attempt to poor-mouth RIM’s condition hurt Lazaridis’s credibility with jurors. “We didn’t really buy that,” says Rose Ann Janis, one of the jurors. “He kept talking about how poorly they were doing financially … and it was really hard to believe. BlackBerry was the new, cool thing.”
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With the credibility of its chief witness under attack, RIM’s legal team had to convincingly demonstrate to the jury that the company had not infringed on NTP’s patents. This meant RIM had to prove that similar wireless e-mail technology preceded Campana’s patents, rendering them invalid. To win that point, RIM’s legal team from Jones Day Reavis & Pogue decided to demonstrate another company’s wireless e-mail system. It was a risky strategy. Old technology was often so unreliable that RIM’s case could collapse if the system didn’t work. The other challenge was the presiding judge. Federal judge James Spencer was a formidable and sometimes impatient judge who was known to rebuke lawyers, witnesses, and even jurors. He once cut off a windy witness, blurting: “I can’t take another second of this.”
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RIM did not want to be on Judge Spencer’s bad side.

To prove his case that wireless e-mail existed prior to Campana’s patents, a Jones Day lawyer called the founder of Arizona-based TekNow as a witness. David Keeney told the court his company had designed a wireless messaging system in the late 1980s, well before Campana filed his patent applications. To drive home the point, Keeney sent a message on a computer he rigged up in the courtroom to a modem and paging transmitter. When his message, “Tommy, the deal is closed,” arrived on a pager, another lawyer on the defense team triumphantly carried it across the room to the jury.

NTP’s lawyers noticed something wrong when examining background documents for the TekNow demonstration. According to materials RIM gave the court, the successful demo operated on computer programs dated in 1994 and 1997, years
after
Campana filed his patents. When NTP cross-examined Keeney he explained the dates referred only to the last time the files had been saved on a computer. The program was in fact created years earlier. When
asked why the original program wasn’t used, Keeney gave NTP what it was looking for. He said that a RIM engineer who helped put the demonstration together “couldn’t get it to work” with the older files supplied by TekNow. The testimony crippled RIM’s case. Even worse, it was vulnerable to accusations that it had misled the court.

After ushering the jury out of the courtroom, Judge Spencer could barely contain his fury when addressing RIM’s legal team. “It is just not going to cut it,” he fumed. “Please. I’ll count to ten. I don’t want to yell at you…. I’m going to strike the entire demonstration and any discussion of it.” When RIM’s lawyers asked to test the correct version of the program in court, Judge Spencer refused. RIM would not recover from the setback. “Up to that point I had total confidence we were going to win it,” Lazaridis says. “It became a completely different trial. He threw out our whole case.”

The legal water torture lasted for twelve days. As the trial dragged on Lazaridis called Balsillie with grim updates.

“This is going really, really bad,” Lazaridis said.

“Just do your best,” Balsillie said, “We’ll find a way through. Don’t worry.”

“This is killing me, Jim. It’s like a nightmare that won’t end.”

It took the jury less than five hours to reach its verdict. RIM, they concluded, infringed on all of NTP’s five patents. Judge Spencer lowered his gavel six months later in a written decision that awarded NTP $53.7 million in damages and a royalty of 8.55 percent on RIM’s annual U.S. sales, then more than $250 million. Judge Spencer’s scathing decision accused the Waterloo company of “egregious” behavior for attempting to “confuse and mislead the jury” with the “fraudulent” TekNow demonstration. “This was not a close case,” he wrote.
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Devastated by the jury’s decision, Lazaridis returned to Waterloo in frail health. He doesn’t recall what happened next, but colleagues remember he disappeared from the office for two weeks. “That whole [period] was like a blank,” he says. “It was post-traumatic stress. You’re about to lose the company, about to lose everything.” His second-in-command, Larry Conlee, says the defeat was more than a business setback. “What I sensed from Mike was a lot of pain. Here’s the founder of the company being told he’s cheating these people and his technology is wrong. He was personally hurt by it.”

After the defeat, Balsillie assumed responsibility for managing the case. He told investors RIM would appeal the verdict and push to invalidate NTP’s patents. After dropping Jones Day he hired Howrey Simon Arnold & White, a firm that specialized in intellectual property cases. Howrey and RIM’s board agreed to keep fighting. Outraged by the idea of handing nearly a tenth of RIM’s sales to NTP, Balsillie dispatched lawyers, lobbyists, and former Canadian prime minister Brian Mulroney to Washington to neuter the impact of the court ruling. Eventually, appeal courts upheld the jury’s decision. A review by the U.S. Patent and Trademark Office took three years. As the wait dragged on and political pressure and media attention intensified, Judge Spencer grew incensed. “I’ve spent enough of my life and my time” on the case, he told a hearing in early November 2005, adding there would be no more waiting for the Patent Office’s review of Campana’s patents. Unless RIM struck a settlement with NTP, the company would be slapped with an injunction barring BlackBerry from the U.S. market, the source of more than 80 percent of its revenues.