“Patent trolls” (to use the intellectual property world’s pejorative term) are entities that exist solely to acquire U.S. patents and sue companies for alleged infringement. They make no products, offer no services and invent nothing; their business model is to extract monetary settlements through litigation.
Historically, the hospitality industry has been relatively untouched by patent trolls. But a recent wave of lawsuits has changed that landscape. Hotel and resort owners, operators and franchisees are now embroiled in patent infringement disputes over their companies’ Internet sites, hosted Wi-Fi platforms, mobile applications and other computer hardware and software.
So, the odds are good that your hospitality company will hear from a patent troll in 2014 if that hasn’t happened already. The troll may send a demand letter leveling vague accusations and threatening to sue unless you settle. Or, your company may be sued without any advance notice. Either way, here are seven practical tips on mounting a cost-effective defense:
Before litigation ensues:
1. Understand the accused technology.
You should first identify an expert who can explain and analyze the relevant technology. This may be one of your own business or IT executives, an employee of the outside vendor or supplier or another outside consultant. Such an expert can help identify weaknesses in the allegations, prepare non-infringement defenses and — if your company decides to settle — ensure any settlement agreement protects your use of future improvements of the accused technology.
2. Consider responding to the troll’s demand letter.
This is usually a generic form letter, which leaves you unsure about which patents are being asserted and/or the technology under threat (other than such vague descriptions as “your company’s website”).
Some companies simply ignore the demand letters, hoping the troll will lose interest; this may work in some instances. Alternatively, your company should consider issuing a response through your lawyer that asks for a detailed, written explanation of which patents are being asserted, what technology supposedly infringes the patent and how the technology supposedly infringes. To the extent you have them (and are willing to disclose them up front), your response could also provide preliminary defenses that point out the weaknesses of the troll’s claims. This may head off litigation if the patent troll isn’t prepared to provide the requested details or if your company’s defenses appear viable.
3. Identify and notify your insurer and technology suppliers immediately.
As soon as you receive a patent troll’s demand letter or lawsuit, notify your insurer of the claim. Many insurance policies offer protection against claims of violation of intellectual property rights, provided they receive notice of the claim within a prescribed period. Likewise, determine as soon as possible whether the accused technology is supplied (in whole or in part) to your company by an outside supplier. If so, then that supplier may be required to indemnify and defend your company against the infringement claim (depending upon its contract with your company). You could lose the right to indemnification (or contribution to settlement) if the supplier is not promptly notified.
During the litigation:
4. Develop your non-infringement defenses early in the litigation.
Broadly speaking, defendants can defeat infringement claims by showing either that the accused technology does not infringe the patent or by proving that the patent is invalid. In our experience, the first approach — dubbed a “non-infringement defense” — is often the faster, cheaper way to defeat a patent troll’s lawsuit. Patent trolls bear the burden of proving the accused technology infringes each and every element of the patent claims. If one or more elements are missing, then courts are often willing to grant judgments for a defendant early in a patent litigation. Of course, the hospitality company must have sound explanations for why there is no infringement. This is why we recommend an early focus on developing your non-infringement defenses.
5. Join with other defendants — but do so strategically.
Frequently, patent trolls simultaneously sue other related and unrelated companies for allegedly infringing the same patent. Those companies often band together to share the costs of defending against the lawsuits. This makes intuitive sense as long as such participation strategically benefits your company.
For example, your accused technology (like your Internet-based reservations system) may function very differently from the corresponding technology of your co-defendants. This might lead you to develop a unique non-infringement defense. In our experience, the most effective defense often requires hospitality companies to operate outside a joint defense effort, as well as within one.
Negotiating the settlement documents:
6. Obtain a broad license and general release for your franchisees, suppliers, owners and operators.
When negotiating a settlement agreement, a troll often will try to limit the license to the patent asserted in the lawsuit (and the troll’s release of claims) to just the hospitality company that it sued. Don’t let that happen. Instead, draft the agreement to protect all companies that are related to (or under common control with) yours; all franchisees, owners, managers and operators of properties that utilize your brand names; and the suppliers and downstream users of the technology accused of infringement (such as your property’s guests and users of your conference facilities). Most trolls agree to include these protections, which your customers can then use if they are sued on the same patent.
7. Include a confidentiality clause in the settlement agreement.
Patent trolls that settle with well-known companies typically like to advertise such results. To avoid unwelcome publicity, ensure your settlement agreement includes a confidentiality clause barring the troll from disclosing the existence or amount of a settlement. To make the provision stick, consider requiring the troll to return the settlement payment if there is a confidentiality breach.
John Cuddihy and Kim Warshawsky are partners in the intellectual property department of Ballard Spahr LLP, a U.S. law firm of more than 500 attorneys, and have served as lead trial lawyers for hospitality companies in more than 15 patent infringement lawsuits.