August 2, 2010, 1:10 PM

The lively business of e-commerce patent trolls

Patent troll cases increase 400% since 2001, RPX says.

Patent trolls—organizations or individuals also known as non-practicing entities who seek rewards in patent infringement cases though they have no interest in using the cited patent to operate a business—are continuing to target retailers who use e-commerce technology, says John Amster, CEO of RPX Corp., a firm that buys up patents to protect its clients from getting sued.

“Many of these cases are related to web sites, and it’s become more common recently for non-practicing entities to target back-end e-commerce infrastructure, the web server side,” Amster says.

Since 2001, he notes, the volume of patent troll cases have increased by nearly 400% and represent about 20% of all patent suits filed in the retail industry. Amster adds that patent cases in the first quarter of this year had an average of 7.6 defendants per case, up from 4.4 in the first quarter of 2009.

Other patent law experts say the biggest change regarding challenges to e-commerce technology and method patents is that e-commerce innovation has become both more widespread and easier to identify through records than a decade ago—providing more documentation for those bringing patent lawsuits, as well as for those defending against them.

“What’s really changed from the early days of e-commerce is the amount of activity that’s identifiable,” says Thomas Duston, who specializes in patent litigation as a partner at Chicago law firm Marshall, Gerstein & Borun.

On the one hand, he says, the open standards nature of Internet technology—the reality that many companies using similar technology makes it easier for e-commerce to function—means that many organizations may be using something similar to any new development in technology or business methods. “It becomes a crowded art, and the areas of possible new innovation tend to be narrower in crowded arts,” Duston says.

On the other hand, however, it’s also more possible these days for patent holders to research prior technology developments to argue a patent case. “When the web started, there wasn’t a good research database on prior developments,” Duston says. “That has changed with Google and the ability to systematically index the web. Sources of information about past technology solutions are more readily available and more easily searched.”

At RPX, the goal is to help clients avoid having to fight, or even settle out of court, costly patent cases, Amster says. RPX has invested more than $220 million since the company launched two years ago to acquire more than 1,400 patents and patent rights, he says. The technologies its patents portfolio covers include mobile commerce and communication devices, e-commerce software, media content and distribution, and networking technology. Patents can cover business methods as well as technology, Amster says.

San Francisco-based RPX earns its revenue from annual fees it charges clients ranging from $40,000 to $5.2 million, depending on company size but not on the size of the RPX patent portfolio, he adds. It’s also backed by venture capital firms Kleiner Perkins Caufield & Byers, Charles River Ventures and Index Ventures.

Duston asserts that, while a firm like RPX will have a goal of “draining the swamp” of patent litigation threats against its clients, it is virtually impossible to eliminate patent claims completely, and a company subscribing to such a service should consider what kind of resources it will still require to defend against patent cases that arise. “Draining the swamp is a tall order,” he says. “If a firm drains part of it, there’s still a sizable swamp out there.”

Still, Duston says a service like RPX can be very helpful in removing the most threatening patent challenges to clients, such as by acquiring patents already involved in early stages of litigation. “It can eliminate the more identifiable threats,” he says.

Duston also cautions, however, that companies using a service like RPX should clarify patent licensing terms and ask if the service could eventually re-sell the same patents it acquires, possibly to patent trolls, and potentially expose clients as well as other non-client companies to future patent litigation.

Amster says RPX may re-sell its acquired patents, but the licensing rights to those patents remain with its clients regardless of who owns the patent. “We may occasionally sell our patents to a non-practicing entity,” he says. “But when we sell them, they’re encumbered with licenses to our clients. Someone who buys our patents knows they can’t ever sue our clients.”

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