January 1, 2011, 12:00 AM

Defusing the patent bomb

(Page 2 of 3)

Unlike many other companies filing such suits, Interval can’t be described as a “troll” because it says it developed the patents in question. “This lawsuit is necessary to protect our investment in innovation,” an Interval spokesman says. “We are not asserting patents that other companies have filed, nor are we buying patents originally assigned to someone else.”

In December, Judge Marsha Pechman for the U.S. District Court for the Western District of Washington ruled that Interval didn’t provide enough detail to support its claims for patent violations. The ruling signals that judges and juries will want more evidence to support infringement claims, some experts say. “Courts and judges are looking for greater levels of detail from the company’s filing the infringement suits to explain the plausibility of how their patents are being violated,” Brann says. Interval said it planned to file an amended complaint.

Soverain’s claims are based on some 50 patents it owns that date back more than 15 years to an e-commerce software development firm, and the company says it has every right to seek fees for technology covered by its patents. “We have made a considerable investment in developing and defending our intellectual property,” Katharine Wolanyk, president of Soverain, said in August, after the most recent Newegg ruling. “While we would have preferred to avoid a trial, going forward, this verdict should put to rest any doubts as we continue our patent licensing program.”

And Soverain can claim one of the biggest coups: Amazon.com, the world’s largest online retailer, paid $40 million to Soverain to settle patent claims in 2005, according to an Amazon filing that year with the U.S. Securities and Exchange Commission.

High costs

While the large size of that settlement reflects in part Amazon’s spectacular success, many other online retailers have become attractive targets for patent holders.

Web discounter Overstock.com says it has been sued more than a dozen times over patents relating to site search, shopping carts and cookies, which marketers use to track consumers’ online behavior.

One example is a late 2009 lawsuit filed by SpeedTrack Inc. in the U.S. District Court of Northern California against Overstock and 27 other defendants over a patent for search and categorization software. Another recent suit involves infringement claims by AlcatelLucent USA Inc. against Overstock and 12 others over search software. That suit was filed in the Eastern District of Texas, a venue where many patent holders file because it’s viewed as plaintiff-friendly.

Settling a patent infringement case often will cost an online retailer less than fighting a suit, especially one that makes it to the expensive discovery phase. That is the pretrial part of a case when attorneys seek evidence and conduct depositions.

Costs can vary widely depending on venue—getting to the relatively remote Eastern District of Texas, where attorneys are all but assured of an overnight stay, can cost more than traveling to courts in big cities, for example. Generally, though, costs for a patent-infringement defense can range from $1 million to $10 million, says Q. Todd Dickinson, executive director of the American Intellectual Property Law Association and a former director of the U.S. Patent and Trademark Office.

Cheng, from Newegg, puts the typical cost of defending against an infringement claim at between $3 million and $6 million. Fighting as far as a Markman hearing, a critical pretrial hearing at which the judge rules on the meaning of key terms in the patent claim, rulings that can largely determine the outcome of a case, would have cost one Top 500 retailer approximately $500,000. The prospect of losing such an expensive gamble led the company to settle rather than fight, says an executive from that company. The settlement cost at least $100,000.

Fighting vs. settling

But some online retailers choose to fight, despite the risks of Alpine-level legal bills.

“A small licensing fee can be less than a month’s worth of legal bills, but you don’t negotiate with terrorists,” says Jonathan Johnson, president of Overstock. He says settling only encourages more claims, and likens that course to a store owner paying mobsters for protection and never getting free of their demands.

For retailers who fight, one way to limit costs is to hire relatively low-cost attorneys. That’s the tactic used by Newegg. The e-retailer engages lawyers from boutique firms in smaller cities such as Pittsburgh and Boise, Idaho, who Cheng says bill at half the rates of similarly qualified big-city lawyers.

While companies such as Newegg and Overstock consider their legal bills an investment in backing off patent-holding companies, at least until the U.S. Supreme Court or perhaps Congress acts to limit patent claims, most online retailers continue to pay up in hopes of getting away cheaply.

A U.S. Supreme Court ruling announced in June may drive more into the settlement camp. In Bilski v. Kappos, the justices unanimously ruled that the United States was right in rejecting a patent for a method of hedging against risk in energy trading. But the court also ruled 5-4 that such business methods can be patented. Patent attorneys and retailers say that will make it easier for patent holders to sue web site operators for a broader range of online shopping methods, such as enabling a preregistered consumer to check out from a web site with a single click.

“These business method patents as applied to the Internet are really a virus,” says Brann. And online retailers simply have to respect the cold odds when deciding whether to fight or settle. “For online retailers, there are thousands of patents that may have something to do with the Internet,” he adds. “Fighting might not prevent someone else from showing up.”

Forms of protection

Retailers can look to other forms of protection, but how well they work is questionable. Insurance policies generally offer little or no relief, according to retailers and lawyers. “Our deductible is often above the amount we would need to settle,” says Brian Elliott, CEO of retailer Monsoon Commerce Solutions Inc., which in September changed its name from Alibris Holdings Inc. “It’s like your car insurance: You generally are not going to make a claim on the car until you really need it.”

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