Non-Practicing Entities Employ Unique Business Model to Target the Hospitality Industry

In most high-tech industries, there have been no shortage of patent infringement lawsuits between manufacturers over the development of new device features. From a business model perspective, these lawsuits make sense in a competitive marketplace. For example, as mobile phone manufacturers and their competitors attempt to sell phones to a finite market, if consumers see a new feature exclusively available on one brand’s phone, that can create a significant competitive advantage. Because there is so much at stake, competitors are willing to spend millions to gain and protect that new market share.

In other industries, such as the hotel industry, businesses are sued for patent infringement by non-practicing entities (NPEs) under an entirely different business model.

Unlike plaintiffs in competitor versus competitor patent lawsuits, NPEs typically have no long-term goal for protecting and expanding their market share. And while there are certainly instances where an NPE purchases a quality patent and hunkers down for a long, expensive slog against large corporations with the hope for a pot of gold, most NPEs have a more modest business model: Buy an inexpensive patent that can be asserted against a couple handfuls of defendants, file the lawsuits, and get a stack of quick settlements with a minimum of effort.

This business model makes hotel chains ideal targets for such NPEs. Consider this: There are over 2 billion rooms booked every year. If the NPE has a patent that relates to a booking engine and sues the largest 50 brands for the past six years of infringement, even with a royalty rate of a penny or two per transaction, that’s tens of millions of dollars in exposure. Add in the costs of expensive intellectual property attorneys, expert witnesses, discovery production, and business disruption, and even for a “modest” patent case with, say, $1 million in exposure, companies may spend hundreds of thousands of dollars in litigation costs. Faced with the prospect of spending hundreds of thousands of dollars with the potential for a $1 million adverse verdict, the NPE’s early settlement offer of $150 thousand may seem like a wise business decision.

Before hotel chains write that check, they should consider that the NPE’s business model turns on generating a stack of quick settlements with a minimum of effort. Responses should attack this business model by incentivizing the NPE to accept a lower settlement. Every case is different, but oftentimes this involves early development of a solid defensive position (non-infringement, invalidity, or both) and then bringing defenses to the negotiation table. A quick, quiet settlement for a discounted amount still leaves a few dozen of less-informed defendants from whom the NPE can extract quick settlements with a minimum of effort.

It is likely inevitable that any hotel chain will be a defendant in an NPE’s patent infringement lawsuit and it is nearly impossible to “win” in the traditional sense without spending hundreds of thousands in legal fees. But by recognizing the NPE’s business model, hotel chains are more likely to reach a faster and less expensive resolution to the lawsuit and get back to the hotel business.

The views and opinions expressed in the article represent the view of the authors and not necessarily the official view of Clark Hill PLC. Nothing in this article constitutes professional legal advice nor is intended to be a substitute for professional legal advice.