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Patent Troubles Pending

Small companies say they're being sued for employing common practices for doing business on the Net

E-commerce on the Web was made for DeBrand Fine Chocolates. DeBrand, literally a mom-and-pop shop in Fort Wayne, Ind., has been selling its homemade chocolates over the Web "practically from the beginning, probably seven, maybe eight years," says Tim Beere, who owns and runs the three-store (soon to be four), 15-year-old company with his wife, Cathy Brand-Beere. "We've invested a lot of money in our Web site, for a small company," Beere says. "We have a very strong product, and the Internet opens up a large market to us."

It also has opened the company to litigation. DeBrand is one of a growing list of businesses sued by a San Diego company that holds patents on basic E-commerce functionality. PanIP LLC has sued more than 50 companies in the last seven months, claiming that their E-commerce Web sites infringe its two U.S. patents. The patents, No. 5,576,951 and No. 6,289,319, cover, respectively, an "automated sales and services system," and an "automatic business and financial transaction-processing system."


"The Internet opens up a large market to us," says Tim Beere, co-owner of DeBrand Fine Chocolates, and represents a significant investment for the small Indiana candy maker.
The list of defendants in these lawsuits reads like a directory of American small business: Able Supply, Can-Do National Tape, Kreg Tool, Rock Valley Tractor Parts, Snow Country Ski Shop. Many of them are small enough that their Web sites represent vital contacts with the commercial world at large, but not big enough to have the ready financial and legal resources to fight a potential patent-infringement lawsuit in court.

For instance, Delasco Dermatologic Lab & Supply Inc. gets "quite a bit of [its] overseas sales" from its Web site, VP Richard Rice says. Delasco, which was served lawsuit papers on Sept. 9, has been operating its Web site since 1996. And while the 37-employee skin-care products company in Council Bluffs, Iowa, generates less than 5% of its $6 million annual revenue from E-commerce, "it's an important part of our image," Rice says.

Double "H" Western Wear Inc., whose Web site promises "Fair Prices & Honest Values" on its line of clothes and its horse feed, was served last week. Mike Hodges, president of the Salem, Ore., company, says PanIP has offered to license use of its patents for a one-time fee of $5,000. With extensions, he has until Dec. 1 to respond to the lawsuit.

Back in April, when PanIP sued its first 11 defendants-all in separate suits-the cost to license the patents was at least $30,000, according to people involved in the litigation. PanIP has continued to sue other businesses, individually, in groups of 10 at a time: a group at the end of August, two groups in September, and the most recent group earlier this month. The change in licensing fee "was an internal decision," says Kathleen Walker, a private attorney representing PanIP. Walker says there's no commonality among the defendants PanIP is targeting for these lawsuits other than that "all of them are infringing the patent[s], and that's all we need to bring a lawsuit."

True enough. But at least one patent attorney thinks there may be more strategy than that behind the type of companies PanIP is targeting-a strategy increasingly common in the rough-and-tumble world of intellectual property. "Some of the plaintiff lawyers have turned this into a science," says Stuart Meyer, a patent attorney with Palo Alto, Calif., firm Fenwick & West LLP. "They know the threshold of pain."

Yet PanIP may not be simply going after low-hanging fruit. Some patent attorneys speculate that it may be looking to build a war chest to take on larger companies. It also may be looking for legal precedents for its patents-either decisions in court or a critical mass of settlements-that would bolster lawsuits against big E-commerce companies, such as Inc. or eBay Inc. Whether PanIP plans to use these initial suits to set precedent and go after bigger companies is unknown, but Meyer says that scenario is "potentially threatening to a company with deep pockets." Attorney Walker would say only, "My client intends to enforce the patent[s] through the life of the patent[s]." A number of companies with substantial E-commerce operations-including Amazon, eBay, and Yahoo-declined to comment.

The patents PanIP bases its lawsuits on were granted-the first in 1996 and the second last year-to Lawrence Lockwood, now a principal of PanIP, who has licensed the patents to the company, Walker says. The claims in these patents being asserted in the lawsuits refer to "a computerized system for selecting and ordering a variety of information, goods and services" and "an automatic data-processing system for processing business and financial transactions between entities from remote sites".

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