Non-practicing entities, also known as patent trolls, find midsize companies make ideal targets for infringement claims. Online retailer Ashford.com is fighting back.
Barnes said that some patents are too broad or otherwise lack merit. "The courts hold patents invalid regularly," he said. "I definitely agree that some patents [are] issued that shouldn't [be]."
While the threat of litigation is an ordinary NPE strategy, the conventional wisdom says that NPEs want to avoid the courtroom. "The troll is usually seeking to avoid litigation costs as that reduces its return on investment," attorney Olender said. "Thus, they seek a quick resolution and payment." That has been Zelman's experience at Ashford, too: "Their game is to get in and get out," he said.
In 2012, though, Cronos Technologies sued the likes of J. Crew, Abercrombie & Fitch, Nutrisystem and GNC -- in all four cases claiming infringement of the '110 patent. Barnes said lawsuits are often the only effective method of patent enforcement. Polite letters, like the aforementioned one Barnes sent on behalf of Cronos Technologies, usually go unanswered. "They'll just ignore you," he said, adding that some businesses receive dozens of such letters every month. "The only way you can get their attention is to sue them."
One Capital Legal Group client, for example, has around eight different patent-related lawsuits pending, according to Barnes. (Capital Legal Group is not a litigation firm. It hires other law firms to handle litigation work on behalf of its clients.) While Barnes said more patent holders are now securing licensing deals without litigation, that usually doesn't occur until they've shown a willingness to go to court. "Until you have a credible threat of litigation -- such as a having a big name like an IBM or a Microsoft, or until you have already sued somebody -- people won't take you seriously," Barnes said.
Barnes also pointed out that some large companies use NPEs, also called non-operating companies or non-operating units, to manage patents as well. "Some of the big companies will decide that they don't want to be party to a suit, so they'll assign their patents to a newly formed LLC and use that LLC to monetize those patents," he said.
Finding potential patent infringers is a matter of putting in the hours, according to Barnes.
"It's just brute force. We look at companies that have similar patents to the one that we're looking at for infringement or have products in that industry, and we just have to hardcore do the analysis to see whether they infringe or not," Barnes said. "There's no shortcut. It's just tedious, time-consuming effort to look at products that might infringe and conclude one way or the other."
Zelman, Ashford's CFO, declined to state how much patent-infringement claims have cost his bottom line. Ultimately, he thinks of them as "a nuisance." Zelman doesn't expect NPEs to stop pursuing claims against businesses like Ashford any time soon, though he's reasonably optimistic about his and his peers' chances for better defending against them. Among other reasons why, Zelman thinks companies will begin to put more pressure on their software vendors and other technology suppliers for legal support in the event of patent-infringement claims, something he said has been assumed in the past but rarely actually exists.
"Executives -- people who are responsible for making decisions of acquiring, purchasing, licensing -- I think as we become more sophisticated in documenting what it is that we're agreeing to license and the fees in these documents, we're getting smarter," Zelman said. "People are starting to realize that there's a requirement that we need to build in some kind of defense mechanism."
In the bigger picture, Zelman also expects more companies like Ashford -- successful, but far from household names -- will simply decide to no longer support the NPE business model.
"There are more and more folks that are taking a stand," Zelman said. "It's going to be a little more painful, but we're going to take the stand and we're going to fight. We're going to push and continue to push and potentially expose fraudulent litigation, because most of the time this is what it is."
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