October 31, 2002, 12:00 AM

E-retailing’s latest hazard: Patent lawsuits

Divine Inc. and Pangea Intellectual Properties are suing a number of retailers over procedures at their web sites, claiming that they violate patents that the companies hold. Some have paid to settle, but others are banding together to fight the suits.

Who controls how a retailer processes shopping and payment transactions on a web site?

Chicago-based Divine Inc. and San Diego-based Pangea Intellectual Properties LLC say that, by virtue of patents they hold, they do and they are going after web sites they say violate their patents. By some calculations, that’s all web sites. And so far, they’re finding success.

Divine says it holds patents on shopping cart technology and the exchange of value for online transactions. In September, attorneys for Divine began contacting retail web sites they beleived were in violation of the patent. Those contacts in turn prompted the retailers to contact the outside firms many had hired to design the sites. As it happened, many were clients of Petaluma, Calif.-based Multimedia Live.

“We have over 100 clients running e-commerce technology; clearly we needed to do something about this,” Ken Burke, president of Multimedia Live, says. But with annual revenue of $15 million, Multimedia Live was unwilling to spend the money or devote the resources to fighting Divine’s claims. Within two weeks of the initial notice, Multimedia had settled with Divine by agreeing to pay a five-year licensing fee that would give Multimedia the right to the patented systems for itself and all clients in perpetuity, Burke says. It also gave Multimedia licenses to all Divine patents, Multimedia’s attorney says.

Burke says he didn’t want to pay the fee or give Divine any basis for pursuing other web site operators, but he felt he had little choice. “By doing this, we strengthened their case, but we protected our customers,” Burke says. “Our cost to litigate could have been in the millions of dollars.”

64 patents

Divine will not comment on any aspect of the patents it claims or its efforts to persuade retailers to pay fees for licensing the technology, citing ongoing litigation. It does say it stands by the description of the process as outlined in a press release from Multimedia announcing the settlement. That release says Divine claims 64 U.S. or international patents with more than 150 pending. The patents in question covered:

- “methods and business processes used to transact business over a network including the Internet.”

- “processes of purchasing goods and services over the Internet. It specifically patents both the shopping cart and the checkout process.”

- “methods for identifying an online user over the Internet. This method is essential for tracking a customer through the online buying process.”

Burke says Divine has been picking mid-sized merchants to contact about the violations. That could represent a strategy, he says, of establishing its credentials by settling with smaller retailers then using those successes as a foundation for going after bigger ones.

"If we are in infringement, so is Amazon, so is Best Buy, so is everyone else," says a small Internet retailer, also served over alleged patent infringement by Divine, who declines to be named. "The big guys shouldn`t feel this doesn`t concern them because these people are going after smaller operators who can`t afford a defense first. The more wins they get, the stronger their case becomes."

That strategy is similar to the approach that PanIP is taking in trying to enforce a patent it holds on online payment technology. Like Divine, PanIP won’t comment on its claims or efforts to persuade retailers to pay a licensing fee. But retailers who have been contacted by PanIP note a pattern of PanIP going after small retailers with few resources to fight litigation. In fact, Jon Hangartner, an attorney with Sheppard, Mullin who has been working with defendants, contends that PanIP is targeting not just small retailers, but retailers who are not near PanIP’s San Diego base, making it even less likely that they would fight the threatened suits. “They’ve been looking for retailers big enough to pay the licensing fee, but not big enough to fight the suit in California,” Hangartner says.

Banding together

Hangartner says the claim covers any web site that contains texts and graphics and that is capable of obtaining financial information, whether in an automated format or not. PanIP starts the negotiations by asking for $30,000 for a license to the technology, says a small retailer who has been approached by PanIP, but eventually settles for around $5,000. With a new round of suits filed in October, PanIP has filed against 50 retailers. A few have settled to avoid the expense of litigation.

Now, however, a group of online retailers is banding together to explore a collective fight against PanIP. The group, being organized by Timothy Beere of DeBrand Fine Chocolates, which sells hand-made sweets at DeBrand.com, has about 20 commitments so far to contribute to a defense fund. The group is talking to Hangartner about coordinating its defense and has created a website at Youmaybenext.com.

The group will base its defense on the broad nature of the technology under patent. Hangartner notes that the principal behind PanIP, Lawrence Lockwood, undertook similar litigation claiming to hold a patent on technology that American Airlines was using in its Sabre system and that the claim was eventually dismissed. The cost of disposing of these suits could range from $30,000 to $300,000 if the defendants succeed in persuading the Patent Office to invalidate the patent or if they can persuade a judge to issue a summary judgment. If the cases go to trial, Hangarnter says the bill could run to $750,000 and more. “These are complex patents and it would be a complex case to litigate,” he says.

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