Online retailers increasingly face e-commerce patent infringement lawsuits or the threat of litigation aimed at forcing them to pay hefty licensing fees to avoid a possible court date. And it’s not just the biggest retailers being targeted with lawsuits and threatening letters from patent holders and their lawyers.
E-commerce technology patent holders are aggressively targeting retailers ranked from 100 to 500 in the Internet Retailer Top 500 Guide, those with annual web sales that range from about $180 million to $20 million or less. In some cases, these web retailers tell Internet Retailer, they’ve been sent as many as 10 e-commerce technology patent infringement letters 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.”
Patent infringement disputes are not a new industry problem, but the number and types of patent holders looking to collect licensing fees and other monetary damages from web retailers they see as illegally using their technology is accelerating. In some cases the patent holders developed the technology in question, but oftentimes they are companies who acquired patents over time through mergers, acquisitions and bankruptcy auctions and built a business out of deriving licensing fees from those patents. And the patent holders aren’t afraid to take web retailers to court.
In the last several months, Select Retrieval LLC, which says it holds various patents covering site search technology, has filed suit against a number of big and smaller web merchants. The company filed its latest complaint Jan. 3 against Winchester Carpet & Rug Co., No. 356 in the Internet Retailer Top 500 Guide, 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 Top 500 Guide.
Other e-commerce technology patent holders actively filing lawsuits against web merchants or sendng 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 claims to hold 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 of these companies seeking damages or a licensing agreement from smaller retailers are targeting them because oftentimes they don’t have any in-house counsel or their company lawyer is typically focused on other trends. These small retailers usually don’t have an expertise in dealing with patent law.”
It remains to be seen how aggressive online retailers, especially many smaller merchants with limited legal resources, will be in reacting to patent infringement threat. At least 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. “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.”
Patent lawyers say technology infringement complaints against online retailers escalated last summer right before the America Invents Act, an overhaul of the patent system, took effect Sept. 16. Under the new law companies filing infringement issues can no longer include numerous parties in a single complaint. Instead, each company must now be sued separately. “You can’t just roll up and lump in anyone you want to like you could before,” says Peter Brann, a partner with Lewiston, ME-based law firm Brann & Isaacson who has defended e-retailers against patent infringement claims. “Now each complaint must be entered into separately.”
The latest flurry of patent infringement court cases and threatening letters to web retailers over patent violations also raises the issue of whether merchants who purchase and use software from an e-commerce platform application developer are protected by indemnification conditions in the licensing agreements with those vendors. In some instances a customer that licenses e-commerce software may be covered for some costs and damages from intellectual property claims by an indemnification clause in its contract. “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.”
Many retailers say patent infringement threats are becoming a large and complex industry problem. But so far retailers do not appear to be moving to form a trade organization or collective body to deal with patent infringement litigation issues. “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 co-founder of Crutchfield Corp., who also is a vocal critic of unnecessary patent litigation. “Most don’t have the financial resources or legal sophistication to fight patent trolls on their own.” A patent troll is a term sometimes used to describe a person or company who buys and enforces patents against infringers in a way considered to be extremely aggressive.
With a wave of patent infringement problems now hitting more retailers, merchants need to keep abreast of changes to how patent law is changing, says Lee Cheng, general counsel, corporate secretary and vice president of human resources for e-retailer Newegg Inc. (No. 12). “The best thing to do is to fight each infringement issue when it comes up," says Cheng. “The worst thing would be to nothing and get labeled as a potentially easy mark.”
Newegg and Overstock.com Inc. (No. 27) won a patent infringement case involving e-commerce technology in October, a ruling that patent attorneys call significant, and which could make it harder for patent holders to pursue similar cases. Cheng will speak on patent infringement issues on June 6 from 1:45 p.m. to 2:30 p.m. at the Internet Retailer Conference & Exhibition in Chicago in session entitled “Fighting back against patent suits: What to do and how to do it.”