Andrew Youderian
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May 24, 2012
Few things get your attention like the threat of being sued, especially when you’re a small company. So you can imagine my reaction when I received a threatening letter from a company called Kelora presenting two choices: pay a $10,000 annual patent licensing fee within the month or face a lawsuit.
You might think I’d stolen a proprietary algorithm or illegally incorporated commercial source code into my website. Not quite. My “patent violation” consisted of using the popular Magento eCommerce software and, more specifically, its layered navigation function, which allows visitors to filter products using criteria like price, brand and color.
That’s right! The same functionality that’s been widely used for years by giants such as Amazon, Newegg, Zappos and other eCommerce stalwarts, whom Kelora was suing as well. It was suing everyone and anyone in hopes of extorting generating licensing fees. It was a textbook patent troll case.
My wife, who is a legal journalist, looked into the pending case (Kelora vs. the eCommerce World) and discovered that Kelora had been dealt a few recent setbacks and a major ruling was due shortly. She was hopeful Kelora’s claim would be thrown out, so I let the $10,000 “deadline” pass without reply.
And then, this Monday a federal judge in California found Kelora’s patent invalid and subsequently dismissed its infringement claims against eCommerce merchants. VICTORY! For details and context on the ruling, please see this eCommerceFuel exclusive story.
So what did I learn from the whole encounter?
Kelora sued all the big boys (Amazon, Microsoft, Newegg, etc.) in hopes of hitting the jackpot, but got very little money because the giants had the legal resources to fight back. Most of Kelora’s money came from bullying small companies into licensing agreements. I’ve excerpted some of the scare-tactic language from the letter I received:
Trolls know that small companies are intimated by the mere threat of a lawsuit, because they don’t have the money and/or time to get involved with a legal fight. So they send out as many threatening letters as possible, hoping to scare smaller merchants into a settlement. It’s just like playground bullying, except with a lot more at stake.
The best thing to do? Ignore trolls. Contacting them – even to tell them you’ll never pay up – simply registers as a bite on one of the many lines they’ve thrown into the water. If they want to bully you, make them do it through the most expensive and inconvenient avenue possible: the court system.
That said, if you are contacted about a patent violation, I highly recommend hiring a lawyer to look things over. The last thing you want is to ignore a legitimate infringement claim or legal issue.
Unfortunately, Kelora successfully bullied a number of merchants into licensing agreements before its amended patent was ruled invalid. Although these merchants likely have the legal right to pursue a refund, there’s the chance all Kelora’s money will go to repaying the legal fees of all the entities it sued.
The lesson? Unless you’re advised to by your attorney – or ordered to by a judge – don’t pay a patent troll! Your money may disappear forever, and you’re emboldening the troll with success. Like the wildlife at Yellowstone, you should never feed a troll.
If you’re operating a business, especially online, you’re a potential target for patent trolls. And while the Kelora case was thrown out, trolls do succeed, which is why we continue to see more and more of them. That’s why it’s crucial to be legally protected with some kind of corporate structure. For most small businesses, this means creating a limited liability company. An LLC costs about $150 up-front and around $25 per year – a small price to protect your personal assets and family from unscrupulous trolls and other liabilities.
Assuming Kelora had won, the only assets it could go after would be those owned by my LLC. Hypothetically, it could bankrupt my business, but my home and personal savings would be safe. If you do business online – of any kind – I strongly encourage you to protect yourself with incorporation. It’s cheap. It’s easy. There’s no reason not to do it.
The world of software patents is controversial. Many people (myself included) believe that software patents are too broadly issued, leading to stifled innovation, excessive legal costs and an unnecessary arms race as tech companies stockpile patents for defensive purposes. Most people agree: The laws around software patents desperately need to be reformed.
The Electronic Frontier Foundation created a great info graphic summarizing the current landscape:
While congress recently passed the America Invents Act, it failed to address the most problematic issues, especially those related to software patents. For anything to really change, we need to pressure those in power to take real action.
Contact your representatives and let them know you consider their stance on patent reform a crucial issue. Back companies with progressive stances on patents, such as Twitter with its Innovator’s Patent Agreement. Or get involved with the Electronic Frontier Foundation’s Patent Busting Project, which helps challenge bogus patents.
If enough of us speak out, we can rid ourselves of patent trolls for good.
Have you been targeted by patent trolls? Know of other organizations fighting for patent reform? Let me know in the comments below!
Disclaimer: I am not an attorney, nor am I offering legal advice with this post. I am simply sharing lessons from a personal experience. If you find yourself in a similar situation, you should consult an attorney.
Troll photo by Kevin Dooley
18 Comments
LLCs are vastly overrated as a way of protecting your assets. Any competent lawyer can “pierce the corporate veil” and go after your personal assets, assuming there’s a genuine cause of action and judgement. Frankly, unless you set up the corporation with the assistance of an experienced attorney, the incorporation fees are wasted money. Even with the assistance of a good attorney, I’m still not sure if a sole proprietorship, single owner LLC actually provides any protection.
Thanks for the reply, Elliotte!
While possible to pierce with a good attorney/just cause, do you think an LLC would give pause to those looking for a quick-win? I imagine even if they’re not bulletproof, an LLC would require more work to compromise than a non-LLC (sole proprietorship) and might deter casual trolls looking for low-hanging fruit.
Also, what would you recommend to solo entrepreneurs and small teams in terms of protecting themselves? A properly setup LLC with a competent attorney? Or is a full-on corporation required for full protection?
The legal standards for veil piercing an LLC are no different from those of piercing a corporation. No difference whatsoever.
Jeremy is correct. A full corporation doesn’t help any more than an LLC if it only exists to pretend a sole proprietorship is something it’s not. If you have a real corporation with multiple employees, an independent board of directors that consists of more than your spouse and your accountant, multiple owners/shareholders, and so forth, then you can probably protect your personal assets from judgements against the corporation. And even then it depends on how motivated the plaintiffs are. I agree that patent trolls are scum, but forming a corporation to shield your assets just isn’t an effective defense against one, I’m afraid.
The US corporations should rise and kill the USPTO right now, before it’s too late and other countries stop considering US-issued patents as valid.
No kidding, when I see what they let you patent and how many clone patents there are, I want to work with countries that don’t give a damn about patents at all.
Either way nice story, doubt it’ll protect you from Apple or the other bigger patent trolls though (lol we patented touch gestures from scifi books and movies that we don’t own and now we sue you) –
Thanks for the comment, Morg! Hopefully we won’t get sued by Apple anytime soon. 😉
Great article. Thank you so much for telling your story and offering simple, yet practical advice. Obviously, consulting with your attorney is priority #1, but I thought the best advice was IGNORE them.
Thanks for the comment, Rich!
It’s a hard decision to make (reply vs. ignore), but in this case I think we made the right call. I know this is the strategy a number of other merchants targeted by Kelora took as well.
Wow, you got incredibly lucky with that judge ruling happening so timely. Unfortunately, that is very rarely the case and such things drag on for years. While that is probably not your intention, the gist of this post can be interpreted to ignore a patent trolls approaching you. Yes, you state correctly you should only pay up if your lawyer advises you to, it might be worth noting that typically a lawyer will indeed advise you to pay up. Because just following a case passively will cost your lawyer (that you are typically not married to) thousands and thousands of dollars and that is what the trolls speculate on. It is typically much cheaper to negotiate an even bigger discount and just pay up. In my own case, I ended paying $5,000 “license fees” and $2,000 lawyer fees. Alternative was to pay $1000/month for my lawyer to just track the case for what looked like a minimum of two years and then the costs of the lawsuit itself. If you are target of a patent troll case and you don’t have deep pockets, the general approach is to pay up, seek a deal quietly and get out as fast as possible, EXCEPT your are in a similar, extremely lucky and rare position and your lawyer determines that.
Ignoring such things is very tempting, because it feels so wrong morally, but it can get very expensive. I’d recommend everybody who reads this with a feeling of relief to NOT oversee that one key advise Andrew states there, which is “only if your lawyer advises so”. Sorry for bad news :/ And yes, go on the barricades, some good pointers there at the end of the post, thx for sharing those!
Thanks for the comment, Markus!
I’m sorry to hear about your troll encounter, and that it ended up costing you so much. You’re right – my intention is NOT to advise people to ignore legal action! However, in the case that you’re advised by a lawyer that the entity is a “troll” harassing large numbers of small businesses it may make sense to not react, as that’s what we did. This may or may not be the right action for others.
I appreciate and feel very blessed that the judgement came so shortly after we were contacted. I know not everyone is so lucky. The system really is broken – as evidenced by what happened to both of us – and I really hope congress acts to change it soon.
I’ll also re-iterate what you closed with. Do NOT ignore a notice of legal action UNLESS advised to by a lawyer! Thanks Markus….
I’m not a lawyer either but you make it look a little bit as if those guys just shoot blind arrows out and ignoring them gives you a fair chance. It is my understanding that they do not drop cases easily, in fact it would look very bad on their side if they did. They are typically following up on their deadlines especially with the small guys and they will sue you without hesitation if you drop the ball, anything else would hurt their case. They can not have a judge find out that they sued one party and didn’t follow through with another one, that’s a very bad thing for their strategy. I do think the only reason your lawyer advised you the way she did was reading about the upcoming decision being so close and that’s a gamble you can definitely take.
So everybody reading this, this is Andrew and me debating on a layman’s level about whether or not those large scale threats are giving you a chance to slip under the radar or if you should exactly not assume that. We have two different positions there and that’s all you can conclude out of this. So, get a lawyer! :))
Well said, Markus! I would advise anyone in a similar situation to get a lawyer!
From talking to others / reading online, it appeared the troll in our case was widely suing everyone they knew of using the software with the hopes of scaring many of them into early settlements. I don’t “think” they would have had the resources to pursue legal action against – what I believe – to be hundreds, if not thousands – of merchants they contacted. Between this “shotgun” approach, and the fact a judgement was so near, we decided not to reply for out (emphasis on OUR) situation. 😉
Some questions:
1. in what state or local was it $150 to established your llc and $25 annually to keep it up and does that include the annual fees it costs to file any tax returns etc with governments (not the taxes themselves but the filing fees) ?
2.Did or would you hypothetically have given any thought to either removing the offending technology from your website to avoid paying licensing (is that a legal option) Contacting the Magento ecommerc people to do it .
3. Does the law give you that right of removal after being notified to aviod paying license (must they notify you before being legally able to charge you like a person with an infringed copyright must notify the network to remove before asserting copyright infringement charges)
4 did you give any thought to contacting others being sued by the troll to see if their was apossibility of a joint defense?
5. Ib this situation I would also look at the patent and see if it was obvious – find some preexisting negating material to negate their patent if easy – send back aletter saying I ‘ll agree not to challenge you trpatent right now ( and thus destroy your ability to extort money form others) if you agree to give me exemption without judgement of merit to paying any licensing fee.) It sort of reverse the blackmail on them although if big boys are already taking them to court it perhaps is less of value in negotiations.
6. Could you hav gotten MAgento to pay up and threatened to sue Magento if they didn’t because they sold you software that contained technology they didn’t own?
7. is there a way you can go to a court and get a summary judegment form them as to validity of this claim befor epaying ? (there should be)
8.If my memeory serves me this is similiar to threatening letter ssent out to copyright infringers and the fact that the letter stated “IF you don’t pay now, you will have to pay a higher amount later” language was judged by the court to be extortionary and thus evidence that the suit was really without merit and he threw it out. I think this is what I remember and the thinking was a person who is notified should not feel pressured to not exercise reasonable thought and explore negotiations without the threat of having to pay a lot more later and language like that really means they don’t want to enter a reasonable agreement with you but hope to force you to avoid risking your rightful legal options.
As an inventor I have to say I like the fact that small inventors who also don’t have resources to sue those who would steal their ideas can go to “patent troll” companies who have deep pockets to do the suing .
The real problem is that the Patent office issues patents that should never be issued. This sounds like one of those because selection by multiple criteria existed long before software and is an obvious codeable feature that any software coder would want to implement . (I have felt software should not be patentable for anything commonly done in the real world. coding something that already exists should not be patentable)
BTW int he old days you actually had to be putting your patent into practice
To anyone reading : not a lawyer. just my thoughts from reading and exercising my free speech.
I am being pursued right now by one of these scum suckers. I have a small, 12 person logistics company and we are being accused of infringing on a patent. Everything we do is manual and we have zero to do with their technology. They want 70,000 immediately for their license or they will sue us. It is unbelievable to me that bullies like this are allowed to operate. I have a lawyer but I’m thinking of calling the RCMP and reporting an attempted extortion.
That is a tough situation – I feel for you. Best of luck getting rid of the troll….
Andrew, did you see Kelora appealed in June 2012? I’ve been trying to find information on it, but haven’t found much.
No, I didn’t – thanks for letting me know. I’ll have to look into it. Keeping my fingers crossed that their appeal gets turned down, as it should.
I realize this is an old post, but I’m going through the whole site and had to respond to this one. I used to work at Zappos when they got hit by a separate patent issue.
The patent? The shopping cart. Yep, there is a patent on the entire process of an online cart. Amazon fought them and lost. Zappos decided it wasn’t worth it after the lawyers and whomever researched it.
Obviously they are going after the big dogs so I wouldn’t worry as a small online site, but you’d be amazed what is patented.