April 1, 2012, 12:00 AM

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

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"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."

Are vendors responsible?

Patent holders often sue web retailers over technology the retailers have licensed from vendors. In some cases a merchant that licenses e-commerce software may be covered for some costs and damages from intellectual property claims by indemnification clauses in licenses. "Retailers should be looking at what they have in the way of indemnification in their software contracts," says Donoghue. "They need to know the details and formulate a plan."

E-commerce technology vendors contacted for this article declined to speak even off the record. Patent attorneys say they can discern no trend in this area, but say e-retailers may base a much larger part of their vendor decisions on the protections offered against infringement claims.

Newegg's Cheng views the vendor area as one of the negative developments when it comes to defending against infringement claims. "Platform providers are pushing back on indemnification claims," he says, adding that he blames the patent holders—the "trolls"—not the technology providers.

The main, long-term remedy, he insists, is for e-retailers to unify and push back—against vendors dropping protections and against companies making the infringement claims, especially as e-commerce becomes ever more profitable, presenting an even juicier target.

Another e-retailer who's become a vocal critic of unnecessary patent litigation agrees, especially for merchants that lack deep pockets. "I am not aware of any trade groups being formed in our segment of the industry, but it would be a very good tactic for small online retailers to pursue," says Bill Crutchfield, CEO and founder of consumer electronics retailer Crutchfield Corp.

The law is getting better for e-retailers, Cheng says, pointing to the joinder provision of the America Invents Act. And Newegg and Overstock have shown that e-retailers can work together to beat an infringement suit. In fact, the companies had single closing and opening statements, and set up a joint account that covered shared work on the successful trial.

What's more, he says, retailers can conduct their defenses without resorting to high-cost, national law firms, instead hiring attorneys who work out of smaller cities or boutique practices—in Cheng's case, he likes to work with partners at boutique law firms with 15 or more years of experience and who bill rates that are often lower than charged by junior associates at large firms. "And don't get into stupid discovery disputes," which can further inflate legal bills, he says.

No doubt e-retailers face more costly patent battles, even with the changes in patent law and recent rulings that came out in favor of defendants. No doubt, too, Cheng's phone will continue to ring with calls from fellow retailers, some of them merely scared, others weighing whether it's time to take a stand.



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