Non-practicing entities, also known as patent trolls, find midsize companies make ideal targets for infringement claims. Online retailer Ashford.com is fighting back.
Online retailer Ashford.com does well by the business metric that matters most: Money. In 2012, the 50-person company sold $35 million worth of watches. The company expects to beat that figure by a considerable margin this year, according to CFO Simon Zelman. But the website's growth has attracted some unwelcome attention.
"My introduction to patent trolls probably started about two years ago," Zelman said in a phone interview. "The success of Ashford, and appearing in a trade magazine such as Internet Retailer, basically gives [them] a list -- it's almost like a roadmap for these guys -- where they peruse through this information and say: 'Aha! This is a good target.'"
The term patent troll -- or its counterpart, non-practicing entity (NPE) -- refers to corporations whose sole business is the ownership and enforcement of United States patents. By definition, NPEs have no other product or service. They acquire patents, often technology-related in nature, and attempt to generate revenue from them by pursuing licensing deals, sales or patent-infringement litigation. Unlike operating companies that pursue patent enforcement for competitive reasons, NPEs in this context exist solely to own patents and make money from them.
"A troll has no legitimate business interest to protect, and the patent laws were not intended to protect trolls. A troll merely seeks to make a return on its investment in having purchased the patent," Kurt Olender, a partner with the law firm OlenderFeldman, said in an email interview. "To be blunt, patent trolls are regarded as extortionists and opportunistic."
Critics of the practice point to the broad, commonplace or outdated nature of many of the patented technologies or processes that NPEs attempt to enforce, such as distributing a news release via email or, in Ashford's case, buying and selling goods on the Internet. Zelman said that while patent documents and the legal language of patent-infringement claims tend to be heavy on complex technical jargon, the process or technology in question is often very simple. "At the service level, they can be telling you: You looked at a screen [and] by looking at that screen you infringed on a patent," Zelman said. "Everybody in the world is looking at a screen every day. It's that ridiculous."
Ashford has been approached "more than three times" by NPEs claiming patent infringement, according to Zelman. He could not publicly disclose names or the specific outcomes of those disputes for legal reasons, but he offered a clear picture of what it's like to be on the receiving end of patent-infringement claims -- and of why NPEs are sometimes successful in their pursuit of financial settlements. The practice is widespread, according to Zelman.
"It is prevalent," Zelman said. "Most executives that I'm in touch with have had at some point in time an occurrence where they've had to deal with a patent troll."
Ashford's former president Eli Katz now runs an e-commerce trade group, theEmob, whose 40 or so members collectively do more than $1 billion in annual sales. (Ashford is a member of the group.) According to Katz, roughly half of the trade association's member companies have been the target of patent-infringement actions. All but one of those claims were made by NPEs, Katz said.
"There are a handful of trolls that have targeted midsize companies in what can best be interpreted as a shakedown," Katz said in an email.
There's a reason some NPEs favor midsize companies for patent-related licensing deals and lawsuits, according to Olender. "Small businesses generally do not make good targets because they cannot afford a large enough fee for it to be worthwhile as a business model for the troll. The most efficient targets are middle market companies [with sales of] $50 million to $250 million," Olender said. "They can afford fees of $50,000 [to] $200,000 and the cost of defense will typically exceed these levels of license fees."
NPEs target large companies like an Amazon.com or a Walmart, too, but Olender said those firms are "riskier pursuits for the trolls" because of their corporate muscle and high profile. "Larger companies typically also have a vested business [or] industry interest in ensuring that trolls are defeated," he said. Olender described the "business model of a troll" as such: Price the patent license or sale high enough so that it's profitable, but low enough so that it's less expensive than defending against a lawsuit.
Ashford is essentially a case study in this model. While Zelman's first instinct is to challenge the validity of the infringement claims, his job as CFO requires him to weigh costs against potential benefits. The cost of mounting a legal defense can quickly surpass the cost of a settlement fee.
"I don't believe in paying these guys. I believe in trying to fight them, but that's up to a point," Zelman said. "More than likely, you're going to win. But at what cost? The instinct initially is to fight them, see what we can do to get them off our back. We'll respond at the point that we feel we need to respond and, in certain cases, put the pressure where we can. But at some point there is a decision that is made."
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