March 27, 2012, 12:46 PM

Shifts in the e-commerce patent battle

A federal law from late last year could provide help to e-retailers.

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Newegg Inc. continues to wage the rare public war against infringement suits filed by holders of patents for site search, navigation, product recommendation and other e-commerce functions. And the retailer, along with fellow e-retailer Overstock.com Inc., (No. 27) last fall won a major infringement suit that, patent experts say, offers some hope to other web merchants that face costly licensing or damage claims.

Now, Lee Cheng, general counsel for retailer, which is No. 12 in the Internet Retailer Top 500 Guide, says retailers call him more often than they did last year to seek advice in defending against patent infringement claims.

Cheng says he provides what the law allows: documents, names of experts, and guidance on how to mount a defense using relatively low-priced legal help. “The more expertise we have, the more we will share,” he says. “We are very happy to discuss how we can work together more efficiently.”

On the one hand, the increasing frequency of those calls show the widespread panic—and it is panic, going by the private comments of e-retailers targeted by patent holders—caused by infringement claims and their costly settlement demands. On the other hand, those calls suggest more e-retailers may be inclined to fight the infringement actions from such patent holders as Kelora Systems LLC and Select Retrieval LLC, to name two of the plaintiffs familiar to web merchants.

Few online retailers escape the attention of patent holders—denounced by merchants as “patent trolls”—that in many cases are basing their claims on patents issued during the early years of the Internet, in the 1990s. Those patents may have passed, via merger, acquisition or outright sale, through the hands of several enterprises since then, often ending up with companies that have no greater purpose than to collect patent licensing fees.  

The good news is that retailers may have gained some relief with the enactment last fall of the Leahy-Smith America Invents Act, the first major patent reform law in some 50 years.

The part of the law that could help e-retailers is its joinder provision. Plaintiffs in infringement cases generally no longer can sue multiple defendants in a single action—that is, the patent holders can no longer sue by shotgun blast. However, plaintiffs rushed to take advantage of the old rules right up to the end—on Sept. 15, right before act became law, there were 54 new infringement cases of all kinds filed across the country naming 804 defendants, according to the PriorSmart litigation tracking service. The spate of suits filed just before the law took effect could account for why many e-retailers feel they have been hit by more lawsuits in the past year.

Now that the America Invents Act is law, patent holders must generally sue by rifle shot—one defendant per action. That doesn’t prevent them from filing multiple suits, but it does increase the paperwork and attorney time required, which forces patents holders to think harder about which companies are worth suing, attorneys say. “Some of the less well known players in the e-commerce space, or less significant targets, might be dropped by plaintiffs” as a result of the provision, says Thomas Duston, a partner in Chicago-based law firm Marshall, Gerstein & Borun who specializes in patent litigation.

But there is also bad news about patent infringement suits. Some merchants tell Internet Retailer they’ve received as many as 10 letters in the last 12 months accusing them of infringing e-commerce technology patents.

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 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.”

Still, in a ruling handed down in October in the Eastern District of Texas, a jury found that neither Newegg Inc. nor Overstock.com Inc. violated patents held by Alcatel-Lucent USA; the patents involved such technology as web site drop-down boxes, text boxes, site search and tools that correct consumer misspellings and other errors. Alcatel had demanded as much as $6 million to license its technology—this would have included tools covered by about 27,000 patents—but dropped that to $1 million after the trial started.  Alcatel settled with eight online retailers, including Sears Holdings Corp.

“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,” says Peter Brann, a partner with Lewiston, ME-based law firm Brann & Isaacson who has defended e-retailers against patent infringement claims.

Cheng says that Newegg and Overstock have shown that e-retailers can work together to beat an infringement suit. In fact, the companies had single closing and opening statements, and set up a joint account that covered shared work on the successful trial.

Read much more about patent infringement claims and e-commerce in the April issue of Internet Retailer.

Cheng will speak at the Internet Retailer Conference & Exhibition 2012 on June 6 from 1:45 p.m. to 2:30 p.m. during a session entitled “Fighting back against patent suits: What to do and how to do it.” The IRCE $200 early-bird discount expires March 31.

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