Patent Assertion Entities (PAEs), disdainfully referred to as "patent trolls” by many, have proven to be a thorn in retailers’ sides. A Boston University study found that these companies are costing businesses some $29 billion a year, not including indirect costs.
Retailers of all stripes and sizes are vulnerable to PAEs, which work in the shadows, buying up broad patents in order to opportunistically sue technology users (which include most if not all retailers, especially any with e-commerce operations) for infringement. Patent lawsuits filed in U.S. District Court totaled nearly 5,800 in 2015, up 14% year over year and up 66% from the 3,500 cases filed in 2011, according to the National Retail Federation. If you include administrative cases at the U.S. Patent and Trademark Office, the total number of patent disputes in 2015 was more than 7,500, the highest on record. Two-thirds of the cases came from patent trolls, and they disproportionately involve retailers, according to the NRF.
Retailers tend to settle these lawsuits, opting for quick and possibly less expensive resolutions, and Boston University found that these settlements simply accrue to themselves as profits that don’t go to investors or inventors, stifling innovation. In fact, Diane Lettelier, senior managing counsel for J.C. Penney, told the U.S. Senate Judiciary Committee last year that the retailer has avoided using technology developed by smaller firms, not because it considers the technology inferior or suspect, but because those tech startups are helpless against the trolls, making J.C. Penney a potential target in patent lawsuits.
But electronics e-retailer Newegg has made a point of fighting patent trolls, becoming something of a hero in the space.
“Fortunately, because of the years of work and investment in deterrence against trolls, Newegg has not been sued since 2013,” noted Lee Cheng, Newegg’s chief legal officer, in an e-mail to Retail Dive. “In late 2015, a patent suit was filed against our private label business, Rosewill, but the lawsuit was dismissed as soon as the plaintiff was informed that Rosewill is owned by Newegg.”
The value of keeping up the fight
Newegg is a private computer and electronics retailer founded in 2001. Though primarily an e-commerce brand, it nevertheless is exploring omnichannel retail by offering pick-up locations in various spots in the U.S. and Canada. Ranked one of the top private companies on Forbes' 2015 list, with some $2.6 billion dollars in sales, Newegg a few years ago considered going public, but withdrew its IPO application in 2011.
Newegg has also made a name for itself among tech enthusiasts, retailers and legal experts for its many court battles against patent owners. Perhaps its most high-profile win, before Rosewill, was its victory in the Supreme Court in 2013 against a company that named a long list of fellow retailers (including J. Crew, Macy's and Williams-Sonoma) for infringing its patent for e-commerce shopping-cart technology. That win has likely benefitted any retailer that employs a virtual shopping cart on its website.
Newegg has been battling patent trolls for years—the company has printed a T-shirt touting its legal prowess with the words "Don't Settle" splashed across it—and experts interviewed by Retail Dive credited the events of the Rosewill case for solidifying Newegg's legendary status in this arena.
This is what happened: A shell company (a common tactic by patent trolls) called Minero Digital late last year sued a number of computer-peripheral manufacturers, including Rosewill. Within days of receiving a call from Newegg's attorney, Minero deleted Rosewill from its suit, suggesting that Newegg’s doggedness in this area has brought it to the point where patent troll companies have learned there’s no point in pursuing legal action.
“The thing about patent trolls is that there’s a lot of money in it. Patents, especially software patents, are vague and it’s really expensive to defend yourself against a lawsuit,” Matt Levy, patent counsel at the Computer & Communications Industry Association, told Retail Dive. “Newegg is a prime example of a company that was assertive from the beginning, so that it’s paid off in the long term.”
But Minero, in withdrawing its case, had left open the possibility that it could refile it. So Newegg trolled the troll, legally speaking, by suing Minero back, in order to finish off the fight and help stave off related cases against retailers like Wal-Mart that carry Rosewill products.
"We just don’t believe Rosewill’s products and customers infringed on valid patent claims," Cheng told Ars Technica about that case. "Minero’s case does not have merit, and its patent is not only expired but would suck even if it wasn’t expired. Now that they have started the litigation, it would be irresponsible for Newegg to not finish it."
What makes retailers vulnerable
While Newegg has staked out its position and refused to settle patent cases, even Cheng understands why retailers would opt to settle.
“Here’s what the math looks like on a typical multi-defendant case: a troll buys a crappy patent for a few thousand dollars, potentially under $10,000,” Cheng told Retail Dive. “They hire a plaintiff’s lawyer who agrees to work on a contingency fee basis. The lawyer sues 26 defendants, mostly small- and medium-sized companies without the ability or resources to thoroughly defend themselves, or corporate customers (like retailers) who are indemnified by suppliers and are thus more likely to pay the troll off in the mistaken belief that their vendor settlements will never be passed back to them in the form of higher costs.”
There’s nothing particularly unique about Newegg or its patents that makes it less vulnerable. In fact, it’s not that other retailers wouldn’t win in court; it’s that the money and time it takes to litigate patent cases seem so daunting.
“Each defendant, if separately represented, could easily spend hundreds of thousands, to low millions, of dollars on a robust defense, which they would almost certainly win,” Cheng said. “However, the troll will target obtaining $25,000-$100,000 from each defendant, counting on total settlements of $1 million to $3 million. If any defendant shows any sign of being willing to fight back hard, the troll will dismiss its lawsuit.”
But, Cheng notes, the incentives still remain—for patent trolls to attempt the suits, and for retailers to settle. It simply doesn’t cost much for the patent-holding companies to file suits, and, despite a 2014 U.S. Supreme Court decision (involving sports equipment retailer Octane Fitness and now known as the “Octane Fitness decision”) that made it somewhat easier for anyone fighting patent-holding entities to recoup their court costs, it’s still a bit of a crapshoot whether the plaintiffs will have to reimburse defendants for those costs.
“Even with the Supreme Court’s Octane Fitness decision, unless a troll is incredibly careless or stupid, there is little or no chance that a defendant will be able to recover its legal fees,” Cheng said. “So basically the troll, in most of these cases, stands to make $1 million or more in settlements while spending at most a few hundred thousand in fees and costs. The only way the math changes is if one or more defendants fights back and MAKES the troll incur more cost. While more and more defendants are fighting back, and using cost-sharing arrangements to do so, such resistance is still sufficiently rare to make even nuisance cases generally lucrative."
What retailers can do
While retailers may feel that opting for a settlement in the thousands is preferable to getting ensnared in a court fight that could vacuum up time and money, once a retailer settles it may be a sitting duck for further lawsuits, said CCIA's Levy.
Vera Ranieri, a staff attorney at the Electronic Frontier Foundation (EFF)—a nonprofit that “defends civil liberties in the digital world”—agreed. “Patent owners might target those that they believe cannot engage in Newegg’s strategy,” she told Retail Dive. “Obviously I don’t know the patent owners’ motivation. But we do see a pattern.”
One of the factors making this process so difficult to navigate is the number of different types of patent holders. Some own patents and have teams of lawyers (indeed, some are even publicly-traded companies), while others are smaller outfits whose attorneys work on contingency fees. Still others don’t intend to file suit but hope their threatening letters are enough to do the trick, Levy said.
Ranieri said that it’s also difficult to fully assess the patent troll threat because so many vital details are under wraps. “We don’t know the full scope of the problem,” she said. “We don’t know the particulars of settlements, often because they’re confidential.”
But retailers besides Newegg have increasingly decided that it’s better to fight than cave in, despite the uncertainties and commitment of resources. Last year a group of retailers formed United for Patent Reform, a coalition to fight patent trolls. And as more suits have been thrown about, more retailers are opting to fight in court, too, Cheng said.
“An increasing number of retailers have felt the pain of abusive patent litigation—so much, in fact, that they have started to consistently fight, too,” he said. “Organizations like Overstock.com, Amazon.com, J.C. Penney and The Limited have waged and won very significant battles against patent trolls.”
Levy said that deciding how to respond to such a suit should involve careful consideration. “Part of what a retailer needs to know is, if they’ve received one of these letters, they’re probably not alone,” he said. “Which means that there are others who might be able to help. And although it’s certainly worth talking to an attorney, it’s not worth panicking about. So the first advice is: Don’t panic. Especially if you’ve never gotten one before, these legal letters are quite frightening. They’re very threatening and very intimidating, but much of the time nothing really comes of it.”
Ranieri believes that retailers should talk to each other about the issue, so that they’re not working in isolation. But, she said, reform is needed on a number of fronts.
“We will never fix this problem until we fix patent quality,” she noted, saying that EFF makes an effort to highlight the “Stupid Patent of the Month” on its blog. “We still see patents coming out regularly that have significant issues. In fairness, many will never be litigated. But we will never fully address this if we don’t attempt to get litigation costs under control and unless we get Congress to step in to do the things that the courts aren’t willing to.”
Some light at the end of the tunnel
There does appear to be some desire in Washington to clarify law to make patent trolls’ efforts more complicated. But even some lawmakers who favor change are finding it difficult to forge legislation that would ease concerns from pharmaceutical companies and others contending that anti-troll legislation could have unintended consequences for legitimate patent holders.
There has been some progress in the past 10 years, Cheng noted. “The America Invents Act created certain procedures that allow bad patents to be somewhat more easily and efficiently invalidated,” Cheng said. “The Supreme Court has issued a string of rulings in patent cases, including its 2014 Octane Fitness decision lowering the standard for fee shifting in patent cases, sending a clear message that the Justices have taken notice of patent abuse and want to curb it. Still, from a cost perspective, the legal system continues to highly favor patent owners and asserters—it costs very little to file a patent and assert it, and tens to hundreds of thousands to even challenge a bad patent or to defend oneself against a meritless lawsuit.”
And patent trolls will continue to sue retailers as long as they can make money at it, Cheng said.
“Unfortunately, far too many [companies] still settle, some directly because of the cost of defense and others because they believe that the fact that they may be contractually indemnified by a vendor or solutions provider allows them to punt the cost and problem to the vendor or solutions provider,” he said. “What the latter group overlooks is that the expediency of shifting cost to an indemnitor will inevitably mean that that party will increase costs to the retailer to defray the expense of the retailer’s settlement. Everyone ultimately pays the toll of the troll.”