April 1, 2012, 12:00 AM

E-commerce patent battles:Are the scales starting to tip back?

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That would mean fewer cases could be tried in the Eastern District of Texas, which is viewed as being plaintiff-friendly. It is also remote enough to make travel there extra expensive. Retailer lawyers have complained about having to fly to Dallas, rent a car, drive two hours to an Eastern District courthouse and spend a night each time they have to appear for a hearing. The Eastern District accounted for 299 patent complaints in 2010, nearly 17% more than the second place district, corporate-headquarters-rich Delaware, which had 255, according to the Patentlyo patent law blog, which is written by two law professors.

"If this is the wave of the future, then no one district will be the focus of all patent litigation," says Peter Brann, a partner with Lewiston, Maine-based law firm Brann & Isaacson, who has defended e-retailers against patent infringement claims.

Spreading more infringement cases out nationally means not only potentially cheaper costs to defend suits and fewer shotgun blasts by plaintiffs, but a wider variety of judges hearing those cases—another factor that could lead to retailer-favorable change. "Generally, the more experience a judge gains [with patent issues], the more discerning the judge becomes," Duston says. "Each judge's approach becomes more sophisticated, and they are able to draw more nuanced distinctions. It is something that would occur over time."

Recent cases

In addition to the potential benefits of the America Invents Act, online retailers also can take hope from some recent infringement cases.

Two of them involved a suit brought by Bedrock Computer Technologies LLC in the Eastern District of Texas. The company accused search rivals Google Inc. and Yahoo Inc. of violating a patent for computer code used to remove expired records. In verdicts handed down last year in the separate cases, one jury ruled that Yahoo did not infringe the patent, while another jury found that Google did. Google was ordered to pay $5 million—a nice sum, to be sure, but barely pocket change for a giant that reported $9.74 billion in net income in 2011.

In another 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, ÔWe'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," Brann says.

Unwelcome mail

Despite the glimmers of hope, many e-retailers remain pessimistic, and view infringement claims as a growing problem, and for good reason. 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.

A typical letter advises the online retailer that it is in violation of a particular technology patent, and demands the retailer sign a licensing agreement for fees that can range from $50,000 to several hundred thousand dollars or face a possible lawsuit. Going to court, at least through the discovery phase, can cost from $200,000 to more than $5 million, according to estimates given to Internet Retailer.

One web merchant with annual sales of more than $150 million says it costs $1 million to fight each infringement claim, and that it has been involved in three of them, all the cases heard in Texas. Another merchant, also speaking privately, sounded both angry and desperate: "We are not infringing on any of the patents, but we do not have the money to pay their settlement/license/extortion fees, nor do we have the money to pay the legal fees to fight them."

Patent holders aren't just targeting larger merchants with relatively deep pockets, either. Select Retrieval, for instance, filed an infringement complaint in January against Winchester Carpet & Rug Co., parent company of RugsUSA.com, No. 356 in the Internet Retailer Top 500 Guide, in the U.S. District Court for the Western District of Virginia. RugsUSA.com sold $26 million online in 2011, Internet Retailer estimates.

Other e-commerce technology patent holders actively filing lawsuits against web merchants or sending them infringement letters include SpeedTrack Inc., which says its patents incorporate applications for search, analytics and related technology; and Lodsys LLC, which says it holds patents for e-commerce customer service and merchandising software. "Many of these companies seeking damages or a licensing agreement from smaller retailers are targeting them because often times they don't have any in-house counsel or their company lawyer is typically focused on other trends," says David Donoghue, an attorney with Holland & Knight LLP in Chicago who specializes in retail patent infringement law. "These small retailers usually don't have an expertise in dealing with patent law."

Patent holders appear reluctant to talk about their actions. Attempts to contact such companies as SpeedTrack, Lodsys, Kelora Systems and Select Retrieval—including, in some cases, through attorneys who have represented them—proved fruitless for this story.

Many e-retailers feel they have no choice but to pay to avoid a court fight. 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 online retailer is considering several more settlements.

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