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Patent (Lawsuits) Pending Small e-tailers get squeezed by questionable IP claims.
By Elaine Pofeldt

(FORTUNE Small Business) – You may not know Rob Johnston's company, but surely you've come across his e-tailing site. It's the one that uses shopping-cart technology to complete transactions.

What's that? You say that virtually every shopping site fits that description? That's what Johnston, CEO of Johnny's Selected Seeds, figured too. So imagine his surprise this past October when he found himself on the receiving end of a lawsuit that claimed that his website's use of a shopping cart violated a patent.

Johnny's, based in Winslow, Maine, is one of several small businesses that have been sued for patent infringement by Divine Inc., a Chicago software and technology services company. Divine claimed to own the patent on the shopping-cart technology that a web developer used in building John-ny's website in 1995--and demanded a onetime licensing fee of $20,000, or 1% of Johnny's Internet sales. Johnston, the company's founder, didn't think Divine's claim would hold up in court. Plus, Johnston added, "if they thought they had a defendable patent that could justify licensing, you'd think they'd go after really big companies." But with Johnny's bringing in $10 million annually, he couldn't afford to spend nearly $1 million to make his case; in late January he negotiated a confidential settlement. (A Divine spokesperson responds that the company is simply trying to protect its intellectual property and plans to license it to companies of all sizes.)

Other companies locked up such deals during the early days of the Internet. Within the past year PanIP, a San Diego technology-development firm, has sued 51 ventures for infractions including owning websites that cull financial data such as credit-card information. And Acacia Media Technologies Corp. in Newport Beach, Calif., has filed suits against 27 businesses, mostly in the porn industry, that feature video and audio on demand and streaming video. It's seeking 2% of the sales they generate each year through the technologies. For their part, the patent holders say they're not in the business of suing; they just want to defend the valuable intellectual property they've acquired. "We are a licensing company," says Paul Ryan, Acacia's CEO. "It is our revenue model."

To fight PanIP, 15 defendants have started a joint legal defense, explaining their case on a site called youmaybenext.com. But many fear that taking a stand may end up being too costly. Take romance and bath products retailer Peekay Inc. of Auburn, Wash., which has $15 million in sales. It recently struck a deal with PanIP, says Charlie Jewell, vice president of corporate development. "It was purely a matter of economics."

But settling may not solve the problem. "The really awful thing for the small companies is that if they get hit with one lawsuit, there's no reason to think they won't get hit with another and another," says Jonathan Hangartner, the San Diego attorney representing the 15 PanIP defendants.

In the end, then, the story is familiar: Someone thinks they've discovered a way to use the Internet to make money.