E-commerce grew 20% for Costco in fiscal 2015—20 times faster than store sales.
As if they didn't have enough challenges in keeping up with e-commerce technology trends, online retailers are facing a growing tide of legal actions from companies claiming that common features of retail web sites infringe their patents. And that tide is costing retailers big bucks in patent and attorney's fees.
Retailers who think they've covered all the costs of building their e-commerce sites may have to reconsider. Think that site search and navigation system or that online merchandising management system fits nicely into your budget? Wait until the patent holders and their lawyers come knocking.
As if they didn't have enough challenges already in keeping up with e-commerce technology trends, online retailers are facing a growing tide of legal actions from companies claiming that common features of retail web sites infringe their patents. They are demanding retailers license their technology, paying fees that can run well into six figures.
And it's not just e-commerce giants being targeted. Retailers with annual sales of $20 million or less tell Internet Retailer they've received as many as 10 threatening letters from patent holders 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."
Among the patent holders that have carried through on a threat to sue is Select Retrieval LLC, which says it holds various patents covering site search technology. The company's most recent suit was filed Jan. 3 against Winchester Carpet & Rug Co., operator of RugsDirect.com, 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 Internet Retailer Top 500 Guide.
Other patent holders actively filing lawsuits against web merchants or sending 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 says it holds 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 suits are filed against small retailers with few resources to fight back, he adds.
Some retailers believe it's less expensive to pay a licensing fee than go to court. One online retailer who asked not to be identified says his company has spent at least $50,000 on a licensing agreement with 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."
But other retailers say they're willing to bear the cost of contesting these patent claims. "The best thing to do is to fight each infringement issue when it comes up," says Lee Cheng, general counsel, corporate secretary and vice president of human resources for e-retailer Newegg Inc. "The worst thing would be to nothing and get labeled as a potentially easy mark."