January 20, 2012, 3:17 PM

Patent battles heat up

Patent holders are not just targeting the biggest online retailers.

Mark Brohan

Research Director

Lead Photo

Online retailers increasingly face e-commerce patent infringement lawsuits or the threat of litigation aimed at forcing them to pay hefty licensing fees to avoid a possible court date. And it’s not just the biggest retailers being targeted with lawsuits and threatening letters from patent holders and their lawyers.

E-commerce technology patent holders are aggressively targeting retailers ranked from 100 to 500 in the Internet Retailer Top 500 Guide, those with annual web sales that range from about $180 million to $20 million or less. In some cases, these web retailers tell Internet Retailer, they’ve been sent as many as 10 e-commerce technology patent infringement letters in the last 12 months.

The letters typically advise the online retailer they are in violation of a particular technology patent, and demand the retailer sign a licensing agreement for fees that can range from $50,000 to several hundred thousand dollars or face a possible lawsuit. “Just getting one of these letters costs me up to $25,000 to have our attorney investigate the claim and respond, and we’ve been hit by 10 of these just in the last year,” says one web merchant, who asked not to be identified. “Dealing with these threatening patent infringement letters is becoming one of my biggest cost centers.”

Patent infringement disputes are not a new industry problem, but the number and types of patent holders looking to collect licensing fees and other monetary damages from web retailers they see as illegally using their technology is accelerating. In some cases the patent holders developed the technology in question, but oftentimes they are companies who acquired patents over time through mergers, acquisitions and bankruptcy auctions and built a business out of deriving licensing fees from those patents. And the patent holders aren’t afraid to take web retailers to court.

In the last several months, Select Retrieval LLC, which says it holds various patents covering site search technology, has filed suit against a number of big and smaller web merchants. The company filed its latest complaint Jan. 3 against Winchester Carpet & Rug Co., No. 356 in the Internet Retailer Top 500 Guide, in the U.S. District Court for the Western District of Virginia. Since September, Select Retrieval LLC has filed suit against nearly 100 retailers, including 75 retailers ranked in the Top 500 Guide.

Other e-commerce technology patent holders actively filing lawsuits against web merchants or sendng infringement letters to retailers include Kelora Systems LLC, which says it holds patents for a certain type of site search application and faceted navigation; SpeedTrack Inc., which says its patents incorporate applications for document, search, analytics and related technology; and Lodsys LLC, which claims to hold various patents for e-commerce customer service and merchandising software. “Over the last 12 months there has been a flood of infringement letters and lawsuits unleashed against web retailers of all sizes and that trend has accelerated,” says David Donoghue, an attorney with Holland & Knight LLP in Chicago who specializes in retail industry patent infringement law. “Many of these companies seeking damages or a licensing agreement from smaller retailers are targeting them because oftentimes they don’t have any in-house counsel or their company lawyer is typically focused on other trends. These small retailers usually don’t have an expertise in dealing with patent law.”

It remains to be seen how aggressive online retailers, especially many smaller merchants with limited legal resources, will be in reacting to patent infringement threat. At least one online retailer who asked not to be identified says his company has spent at least $50,000 to buy a license agreement from one patent holder. The online retailer is considering several more settlements. “The cost to defend yourself against just one of these infringement threats is too prohibitive and we chose to settle and acquire a license,” the retailer says. “Now we are getting multiple threatening letters and don’t know when this will stop. These letters are a huge worry to us and a drain on resources we should be using to invest in the business.”

Patent lawyers say technology infringement complaints against online retailers escalated last summer right before the America Invents Act, an overhaul of the patent system, took effect Sept. 16. Under the new law companies filing infringement issues can no longer include numerous parties in a single complaint. Instead, each company must now be sued separately. “You can’t just roll up and lump in anyone you want to like you could before,” says Peter Brann, a partner with Lewiston, ME-based law firm Brann & Isaacson who has defended e-retailers against patent infringement claims. “Now each complaint must be entered into separately.”

The latest flurry of patent infringement court cases and threatening letters to web retailers over patent violations also raises the issue of whether merchants who purchase and use software from an e-commerce platform application developer are protected by indemnification conditions in the licensing agreements with those vendors. In some instances a customer that licenses e-commerce software may be covered for some costs and damages from intellectual property claims by an indemnification clause in its contract. “Retailers should be looking at what they have in the way of indemnification in their software contracts,” says Donoghue. “They need to know the details and formulate a plan.”

Many retailers say patent infringement threats are becoming a large and complex industry problem. But so far retailers do not appear to be moving to form a trade organization or collective body to deal with patent infringement litigation issues. “I am not aware of any trade groups being formed in our segment of the industry, but it would be a very good tactic for small online retailers to pursue,” says Bill Crutchfield, CEO and co-founder of Crutchfield Corp., who also is a vocal  critic of unnecessary patent litigation.  “Most don’t have the financial resources or legal sophistication to fight patent trolls on their own.” A patent troll is a term sometimes used to describe a person or company who buys and enforces patents against infringers in a way considered to be extremely aggressive.

Comments | 5 Responses

  • So take for example a site like LivingDirect.com that uses a third party platform. There is no possibility of infringement correct? All concerns are squarely on the solution provider correct?

    • Ultimately your third party provider will probably have to indemnify you. But you can still expect the pleasure having to retain a lawyer, shell out some cash and generally waste precious time and energy dealing with modern day extortionists. You should talk to TheEmob (theemob.org) about joining a group defense.

  • @ Searchguru, It's a nice site. What third party platform was used? Thanks, Ron

  • @Searchguru, as far as I know, no. They will send you a letter requesting that you purchase a licence to the patent and end the case right there, or proceed with court hearings. It is a legitimate filing with the U.S. District Court, but this is a scare tactic. Even though you may be using Netsol, Magento, OScommerce, etc. etc. etc., they will first send the letter to you to see if you'll settle, or fight. Most people settle, and these companies (in my case, Kelora Systems) stay afloat off of these payments. No matter who your third party provider is, in the end of things, the third party will do everything to protect itself as you must do everything to protect yourself. Each party should retain their own counsel. Since you are using the technology of the third party, your lawyer will create a Joint Defense or Common Interest Agreement with the third party, and from that point on, liability on your side of things is greatly reduced. If or when you get the complaint and it is issued to your company, you are the one liable to respond to the complaint, not the third party (hence the advice to seek your own counsel, in intellectual property law specifically). This is becoming more and more common and it is highway robbery, or should I dare say, ethernet robbery.

  • According to the estimates of how many letters sent out and what can be gathered is the average they are asking for, Kelora values their "technology," which can be expressed in six lines of code, (which I do not see any evidence of them developing for themselves) to be $75 Billion. This is the current market valuation of Facebook. "Troll" is not a term for someone who just aggressively pursues licensing fees, it's for someone who aggressively pursues licensing fees under threat of litigation for technology that is overly broad and doesn't do anything to develop the technology themselves. They patent a simple, broad idea and wait for someone to spend the money to develop it.

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