October 19, 2011, 12:42 PM

Newegg and Overstock win a patent-infringement case in federal court

The victory could make it easier for online retailers to defend themselves against other claims.

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Two of the largest e-retailers in the United States have won a patent-infringement case involving e-commerce technology, a ruling that patent attorneys call significant, and which could make it harder for patent holders to pursue similar cases.

In a verdict handed down Friday in the United States District Court for the Eastern District of Texas,  the jury found that neither Newegg Inc. nor Overstock.com Inc. violated patents held by Alcatel-Lucent USA. In a suit filed in September 2009, Alcatel, an arm of French telecommunications company Alcatel-Lucent, claimed the web retailers had infringed on three patents that involved such e-commerce functions as  web site drop-down boxes, text boxes, site search and  tools that correct consumer misspellings and other errors. 

Overstock said Alcatel took possession of the patents through mergers and acquisitions; Bell Laboratories, for example, is an Alcatel subsidiary.

Newegg and Overstock argued that Alcatel’s patents were invalid because they covered technology that was not original and was based on prior inventions. “As an innovator in the online retail space, we have always respected the intellectual property rights of others,” says Lee Chang, Newegg’s general counsel. “However, we will not hesitate to defend ourselves vigorously against frivolous claims and to do what we believe is necessary to prevent abuses of patent law.”

Newegg is No. 12 in the Internet Retailer Top 500 Guide. Overstock is No. 27.

Alcatel had initially demanded $4 million for a license to all of its patents, which number about 27,000, says Mark Griffin, general counsel for Overstock, which is rebranding itself as O.co.  Alcatel then raised its demand to $6 million for the three patents, a demand that after the first day of the trial dropped to $1 million, he says.

Alcatel also presented its patent claims to other online retailers, including Amazon.com Inc. and Sears Holdings Corp., and reached settlements with eight  companies, according to Bracewell & Giuliani LLP, the Texas law firm that represented Overstock. Amazon provided no immediate comment. A Sears spokeswoman confirmed the settlement but declined to give details. Amazon is No. 1 in the Internet Retailer Top 500 Guide and Sears No. 7.

An Alcatel spokeswoman indicated the company will appeal the ruling. "We were surprised and disappointed by the jury’s verdict and we will seek reconsideration of many of the issues," she says. "Alcatel-Lucent views its intellectual property as a vital asset, and we work hard to preserve and defend that asset." Alcatel declined further comment.

Newegg and Overstock are the rare e-retailers that publically fight patent infringement claims instead of settling; even e-retailers angry about payment demands from so-called patent trolls, a term that denotes companies that buy patents and then demand companies license those patents, usually prefer to speak off the record in order to avoid the arrows of infringement claims.  But the recent ruling in East Texas, and the public role played the two online retailers, likely will have a significant impact on future cases, says Peter Brann, a partner with Lewiston, ME-based law firm Brann & Isaacson who has defended e-retailers against patent infringement claims.

“It should have an immediate effect on claims asserted by Alcatel-Lucent against other Internet retailers that were not in litigation,” he says. “More broadly, the willingness of Newegg and Overstock to stand up and say ‘We’re mad as hell and we’re not going to take it anymore,’ and try to win a jury trial in East Texas, may encourage more Internet retailers to fight these types of claims instead of settling.”

The verdict in the Alcatel case is the latest from the Eastern District of Texas—a court where patent holders often file their claims—in which a jury sided with e-commerce companies,  says Thomas Duston, who specializes in patent litigation as a partner at Chicago law firm Marshall, Gerstein & Borun. In other cases, he says, juries either have ruled against infringement claims or awarded relatively tiny awards to patent holders. Duston, who says he has represented Newegg in past cases, says the recent verdict represents Cheng’s most favorable result yet in the retailer’s fight against patent infringement claims.

“I think he’s trying to send signals to his colleagues in the e-commerce space that these cases should be defended,” Duston says. “Certainly all defendants are looking at what’s happening in this case. Defendants are not as fearful as going to trial in a jury case in East Texas.”

He doubts, however, that companies will cease buying up patent portfolios and then seeking, and suing for, licensing fees. But this case and recent federal patent legislation—which he says makes it more difficult to sue large collections of e-retailers and other alleged patent infringers—could make it harder for the patent holders to conduct their business.

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