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Lawyer: Retailers must consider potential legal costs when factoring ROI from deploying RFID

The retail industry is keeping a close eye on several lawsuits brought against retail chains that have recently rolled out RFID technology. The litigation, brought by Round Rock Research LLC, claims that the retail use of RFID infringes on several of its patents.

Although it is unknown if the patent licensing suits will hold up in court, some retailers are building the cost of defending the suits or paying possible royalties into their ROI plans for deploying RFID.

“I’ve had conversations with at least three large apparel retailers that are considering implementing RFID, and they are very interested in what is happening,” says Anthony V. Lupo, a partner at Washington, DC-based Arent Fox LLP. “At the end of the day, a court might not enforce these suits, but retailers still have to factor this into the bottom line when considering if they want to move in the direction of RFID.”

Lupo says that a common strategy employed by patent licensing companies like Round Rock is to agree to a licensing fee that is less expensive than the cost to fight the suit in court. The patent licensing company would then look to roll out the fee agreements to the other retailers it has sued.

Lupo says the strategy used by Round Rock and other patent licensing companies is to target an industry (retailers in this case) that has made substantial investments in the technology, and therefore, are unwilling to back out of their RFID investment due to the capital investment made in deploying the technology.

“This could be a huge issue for the industry if these patents are upheld,” says Lupo. “There have been discussions about whether the patent actually fully covers everything they say it does. Round Rock certainly believes that it does.”

John Hohenthaner, an attorney for patent litigation firm Desmarais LLP, is representing Round Rock. He says that Round Rock is in settlement discussions with “several” of the retailers. “We’re prepared to litigate if necessary,” he says, “although our client prefers a mutually agreeable licensing agreement if at all possible with each of the defendants. Most of our clients business involves licensing that has not come from litigation.”

Despite the potential storm clouds, many industry executives still believe that the lawsuits brought against Macy’s, JC Penney and others are unlikely to slow the pace of retail deployments in 2012.

Retail deployment — which is expected to skyrocket in 2012 — should not be greatly impacted, unless the suits are upheld in court. One fallout could be that some retailers may opt to stay in stealth mode longer until the suits are settled or dismissed.

“The rate of adoption will only increase, particularly with Walmart, JC Penney and Macy’s formally announcing their RFID programs” in 2011, says Patrick Javick, vice president of Industry Engagement at GS1 US. He added that the participation of those three retailers will make the adoption curve much stronger.

In October, Javick told RFID 24-7 that “there is a lot of activity that we know about that we are just not authorized to speak about. The interest in apparel from other countries has skyrocketed.”

Round Rock Research LLC, the holder of several RFID patents, recently filed the lawsuits in a Delaware federal court against Macy’s, Gap, J.C. Penney, American Apparel and others over the alleged infringement of patents belonging to Round Rock. According to Lupo, Round Rock filed the suits in late December after growing tired of the slow pace of licensing talks with the retailers.

Jim Sluzewski, senior vice president of corporate communications and external affairs at Macy’s, said that the company does not comment on litigation.

“I would think that the lawyers at Macy’s are laughing at this thing,” said one industry executive. “At most it’s an annoyance.”

Another industry insider employed by a global provider of RFID hardware solutions said that his company is taking steps to double check that its patents – and those owned by the suppliers and integrators that the company works with – are locked down. “It’s forcing us to double check that everything is in order with our patents and our partners patents,” he said.

Some refer to the suits as “patent trolling,” a shakedown-like practice where attorneys bring suits against companies with the hope of settling for less than the cost of defending the suit.

Round Rock Research acquired a portfolio of 4,500 patents from Micron Technology in 2010, including many RFID patents. Round Rock was founded by John Desmarais, a patent attorney who won a $1.5 billion verdict for Alcatel-Lucent against Microsoft in 2007.

In June 2010, research and consulting company TechIPm, LLC — noting the purchase of RFID patents from Micron — predicted on its web site that a major patent lawsuit could occur once the highly fragmented RFID market matured and revenue generating products appeared in the market. Today, that is clearly the case. TechIPm, LLC specializes in technology and intellectual property mining.

According to an article in the Daily Business Review, PepsiCo, J.C. Penney, Hanesbrands, The Gap, Fruit of the Loom, Dole Food Co., American Apparel, Macy’s, and V.F. Corp. (owner of Wrangler, Lee, and Nautica) have been targeted by Round Rock. The defendants allegedly infringed five patents held by Round Rock relating to RFID.

In an email published by the Daily Business Review, Desmarais said that “We are in discussions with many other companies using RFID equipment and systems. Most are substantively engaged in license negotiations and therefore are not part of these actions. We believe we have one the largest, if not the largest, RFID patent portfolios.”

The following is an excerpt from the story posted by Arent Fox.

Round Rock, founded by patent attorney John Desmarais, is a patent-licensing company that has acquired a patent portfolio consisting of several thousand issued patents and pending applications through the United States, Europe, and Asia. In the nine complaints that it filed in the US District Court for the District of Delaware, Round Rock cites the same five patents—Patent Numbers 5,500,650, 5,627,544, 5,974,078, 6,459,726, and RE41,531—which cover communications methods or RFID. Although the complaints differ in some ways, such as allegations of notice through letters sent to certain defendants by Round Rock, each claims that a given defendant has infringed Round Rock’s patents by making, using, selling, or importing products or systems that consist of or include ultra high frequency RFID tags and readers. Likewise, Round Rock has consistently asked the court to declare that a defendant’s infringement is “willful” and to award unspecified damages, attorneys’ fees, and expenses incurred in litigation.

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