July 30, 2010, 1:07 PM

The mother of all patent battles

Web merchants should pay close attention to a pair of court battles underway in Texas over shopping cart patents.

Interested parties in online retailing—and you should be one of them­—are keeping a close eye on a pair of patent infringement cases underway in the U.S. District Court for the Eastern District of Texas.

The battles aren’t about any minor patent infringement of e-commerce technology. Rather, the final outcome of two court cases—Case 6:07-cv-00511-LED and Case 6:09-cv-00274-LED—may decide who can enforce their patent rights to an indispensable piece of e-commerce technology: the shopping cart. At stake is whether several big online retailers may be forced to fork out millions of dollars in licensing fees and court costs and even risk losing their shopping cart altogether.

The two court cases aren’t new, but the action is certainly heating up. After winning a $40 million settlement from Amazon.com in 2005, Chicago-based Soverain Software LLC, which sells transaction management technology, filed suit against Newegg Inc. and other big web merchants in November 2007. At the time Soverain Software accused Newegg, CDW Corp., Systemax Inc., Redcats USA and Zappos.com of infringing on three of its patents that cover the underlying technology that e-retailers use to handle purchases and payments, as well as for their online shopping carts. Many retailers settled, but Newegg chose to fight in court. In May, a jury found that Newegg must pay $2.5 million in damages to Soverain Software for infringing on its e-retailing technology patents.

But the final outcome—and the impact on other web merchants—are very much ongoing.

In June 2009 Soverain also filed a similar suit against a slew of the big web retailers. Among them: J.C. Penney Co. Inc., Amway Corp., Bidz.com Inc., Etronics Inc., HSN Inc., QVC Inc., Shutterfly Inc., Victoria’s Secret Direct, Vistaprint Ltd. and others.

After spending about $1 million in legal fees, several retailers have chosen to settle out of court with Soverain Software for amounts of at least $2.5 million, several sources have told me. The cases are so sensitive that most web retailers won’t talk on the record about the litigation. Soverian Software says the company can’t comment on the litigation—and why they are aggressively suing so many online retailers—until the lawsuits are resolved.

But both cases are heating up—and the Newegg case could have a direct impact on the outcome on the second patent infringement suit  and similar litigation down the road. After a jury found in late April that Newegg was in “indirect violation” of Soverain Software’s patents, both parties have since filed a steady stream of motions for hearings and other documents in the courtroom of federal judge Leonard Davis. And the judge could rule in as soon as a few weeks on the core issue of any “direct” violation. What that means is that the judge could rule fairly quickly during a post trial hearing who wins and who doesn’t—at least until the appeals process.

If the judge rules in favor of Soverain Software, Newegg may be forced to pay a substantial sum in patent infringement fees or even find or develop a new shopping card. Here’s what Newegg, which generated web sales of $2.3 billion in 2009, had to say in a March regulatory finding with the U.S. Securities and Exchange Commission about the patent fight with Soverain Software: “If an injunction is granted, it could force the company to stop or alter certain aspects of its business activities, such as aspects of its shopping cart and session identification functionalities, and there is no guarantee that suitable non-infringing alternatives could be developed or obtained at a commercially reasonable cost. Similarly, an award or damages could be substantial, and if any royalties are awarded.” The findings in the Newegg case could also have a direct impact on the second case—the patent infringement suit against J.C. Penney and others­—and any future litigation. 

“This is a huge deal for every retailer to watch,” says the president of an online retailing site doing more than $1 billion in annual sales, who asked not to be identified. “If you are found to be in violation of their patent, in the end you may not have a shopping cart or you’ll be forced to pay substantial fees to purchase a software license for perpetuity or scramble to get a new shopping cart without incurring any major disruption. Nobody wants big problems with something as fundamentally important as their shopping cart.”

Soverain Software owns about 50 patents. The patents it holds for shopping cart technology—and for web-based payment technology, a URL-based system for session identification and management, and hypertext statements—were originally awarded almost 16 years ago to Open Market, a now-defunct e-commerce software development company. Another company, Saratoga Partners, a New York-based private equity firm, later acquired the patents and formed Soverain Software.

Soverain Software doesn’t seem to be doing much business with online retailers as a seller of e-commerce applications. On its web site Soverain Software lists its main clients as publishing and media companies, including Reuters, Bureau of National Affairs, The McGraw-Hill Companies, Seceti S.p.A., Telecom Italia Mobile, NTT, Disney, and NBC Television.

But big web retailers are certainly doing a lot of court-related business with Soverain Software. These days patent infringement suits are becoming almost a part of doing business as an online retailer—and the court fights are extracting a toll. “Lawsuits like the ones that have been filed against Newegg and other Internet retailers extract a significant cost on us and on our customers—monies that largely go to pay lawyers” says Newegg.com general counsel Lee Cheng. “The only guaranteed beneficiaries of these suits are plaintiffs' and defense counsel. This is money that could be used to create jobs, grow companies and to invest in research and development.” 

 The main reason web retailers should watch the outcome of this pair of patent infringement suits and the multiple similar cases is the high stakes and fundamental application that’s involved: the shopping cart. So a word to the wise: keep an eye out for future developments.

As one patent attorney told me: “The same judge in the same court that’s presiding over the Newegg case is also overseeing the second case. There are a lot of reasons web retailers should be caring about this shopping cart patent infringement issue because it won’t be going away any time soon.”

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