May 28 (Bloomberg) -- To Neiman Marcus Group Inc.’s lawyers, the letter from an unnamed inventor’s representative offering to negotiate patent licenses after an “analysis” of its technology was all too familiar.
Saying it was put in an “intolerable position,” the Dallas-based luxury retailer filed a lawsuit against the sender without knowing whom it was suing. Neiman Marcus asked a court to require the patent owner be identified and to declare the retailer didn’t infringe any patent.
“CEOs are having to make a decision between fighting a case they believe is completely illegitimate or paying what amounts to an extortionate demand,” David French, senior vice president for government relations at the National Retail Federation, a Washington-based trade group, said in an interview.
Rising stakes in patent litigation over smartphones and other technologies have led to an increase in businesses, often derided as “trolls,” that make money by licensing patents rather than providing products and services. A subset have found that approaching users of technology, rather than the producers, gets settlements that avoid the cost and risk of going to court.
Retailers, hotel owners and municipalities say they’re fed up receiving royalty demands for using common technology like Wi-Fi connections to the Internet, tracking customer shipments and scanning documents to send via e-mail.
Some technology providers like Cisco Systems Inc., Adobe Systems Inc., Google Inc. and Microsoft Corp. are filing lawsuits seeking to invalidate patents owned by holders who’ve gone after their customers. Lawsuits against users would be put on hold if manufacturers intervene, under proposals by leaders of judiciary committees in both houses of Congress.
“The demands for settlements are designed to be well below the cost of litigation,” French said. “The lawyers know this and that’s why they come after retailers.”
Neiman Marcus had no comment for this story because of the litigation, said Ginger Reeder, a company spokeswoman.
ArrivalStar SA, a company based in Luxembourg that owns patents for systems to track vehicles, has filed hundreds of lawsuits against companies such as pharmacy retailer Rite Aid Corp., railroad Union Pacific Corp., electronics maker Sharp Corp. and even the city of Vacaville, California.
In most instances, the cases are quickly settled.
“Any company that we contact has actively gone out and implemented our technology,” said Anthony Dowell of Taft Stettinius & Hollister in Indianapolis, who represents ArrivalStar, in an interview. “We would prefer to go after the company that developed the technology and whenever we can, we do. We want to go after the forest, the big picture, and not the trees.”
Federal law says a patent infringer is anyone who makes, sells or uses a protected invention. In 2008, the U.S. Supreme Court limited patent holders from extracting royalties from companies at each stage of the distribution process. That forced them to choose where in the chain to make their legal stand. They could go after manufacturers, distributors or customers, not all three.
The court ruling “really started focusing people on the customers,” said James Yoon, a patent lawyer with Wilson Sonsini in Palo Alto, California, in an interview. “If people sued the suppliers and they settled, all the customers downstream would be protected.”
Lawsuits like the one filed April 30 by Neiman Marcus are rare because they cost a lot of money. A patent suit with less than $1 million at stake typically incurred about $650,000 in legal costs in 2011, according to a study by the American Intellectual Property Law Association in Arlington, Virginia.
As part of a 2011 law, Congress prevented patent owners from filing one suit against dozens of companies, intending that the cost of filing individual suits in multiple courts would deter some cases. That makes it hard to quantify whether the number of patent cases against end-user companies has grown.
Among the proposals in the U.S. House and Senate are ones that would make patent owners pay legal costs if they lose a case, increase reviews of software patents, and require patent owners to provide more data rather than filing boilerplate suits.
Retailers want more protections, including a requirement that technology users can’t be sued unless the manufacturer is named as well, French said.
The late Jerome Lemelson, who owned patents related to machines that scanned products for defects and prices, was a pioneer in suing end users. He first sued automakers in the late 1990s and then pursued hundreds of retailers.
Before his patents were thrown out by an appeals court in 2005, a foundation in his name had collected more than $1.5 billion in settlements. The money has gone in part to pay for a program at Massachusetts Institute of Technology and a section of the Smithsonian’s National Museum of American History.
“He wanted to sue the deep-pocketed end users,” said Jesse Jenner of Ropes & Gray in New York. Jenner represented the manufacturers, including Cognex Corp., who joined to fight the Lemelson patents. “Everybody has agreed it’s changed the nature of patents and patent enforcement.”
Sending letters to companies asking them to talk about specific patents can help avoid litigation, said Erich Spangenberg, chief executive officer of IP Navigation Group LLC, the Dallas-based patent licensing firm that sent the letter to Neiman Marcus.
While he wouldn’t identify his client, Spangenberg said the letter to the retailer was a “let’s talk” request that could have resulted in no payments by Neiman Marcus. He said that strategy helps avoid litigation and isn’t involved in the “shakedown” tactics of mass letter-writers.
The U.S. Court of Appeals for the Federal Circuit needs to provide more guidance to judges on when to put the user suits on hold, Yoon said. The appeals court, which handles all patent cases, has backed sanctions against patent owners who file frivolous suits or those seeking what the court has called “nuisance value settlements,” he said.
Until there are changes in the law, “little guys need to reach out to the community of other little guys to see if they can’t get together into a joint defense group to spread out the costs,” Jenner said.
The Senate bills are S.1013 and S.866. The House bills are H.R. 845 and H.R. 2024.
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