Startups’ Secret: More Are Facing Patent Suits

May 15, 2013, 2:32 p.m. ET

Startups’ Secret: More Are Facing Patent Suits

By PUI-WING TAM

Kate Endress is mired in a type of legal quagmire that is afflicting an increasing number of Silicon Valley startup entrepreneurs, but which few typically want to openly discuss.

Ms. Endress is chief executive and co-founder of San Mateo-based Ditto Technologies Inc., a website that sells designer eyewear. Founded in 2011 and backed by venture-capital firm August Capital, the site features 3-D virtual “try-on” technology that lets customers scale a pair of glasses to their face.

In February, Ms. Endress received a complaint from lawyers of 1-800 Contacts Inc., a Draper, Utah, online purveyor of contact lenses owned by WellPoint Inc. WLP -0.22%In its lawsuit, filed in U.S. District Court for the District of Utah’s Central Division, 1-800 Contacts said it had purchased a patent for the 3-D technology last year and alleged Ditto was infringing it.Ditto denies infringing the patent, however Ms. Endress says she offered to settle or license the patent from 1-800 Contacts but was turned down. “They want an injunction” to shut Ditto down, says Ms. Endress, 30 years old.

1-800 Contacts spokeswoman Gene Rodriguez says the company didn’t receive an offer from Ditto to settle and “offered to discuss an amicable resolution to the lawsuit.” She adds that 1-800 Contacts “has a history of putting the consumer first by promoting competition.”

While big tech companies like Apple Inc. and Samsung Electronics Co. typically grab the headlines in patent-infringement cases, Ms. Endress’s situation illustrates a less visible trend: Intellectual-property claims against tech startups are rising.

A 2012 study from PricewaterhouseCoopers found that the tech industry experienced significant increases in “identified” decisions in patent cases from 2006 through 2011. And according to a study of tech startups and patent suits published last year by Colleen Chien, assistant professor at Santa Clara University School of Law, companies with less than $100 million in annual revenue accounted for at least 66% of unique defendants in such lawsuits, and at least 55% of those defendants had revenue of $10 million a year or less.

“As tech becomes pervasive, the building blocks of commerce are being patented and are the subject of major patent campaigns,” says Ms. Chien. That has ensnared many small tech companies, a “disproportionate number” of which are being hit by patent claims, she says.

Few startups talk about such cases. Many don’t have the resources to fight lengthy and costly litigation, and move to quickly settle these actions or sign confidentiality agreements, say intellectual-property experts.

Jeff Glueck, CEO of Skyfire Labs Inc., a Mountain View-based cloud-software startup, discovered firsthand how easy it can be to get caught in the line of fire. When his company sold its product in 2011 to a customer already embroiled in patent litigation, the plaintiff in the action then added Skyfire’s technology to its suit, says Mr. Glueck, who declined to go into specifics.

Mr. Glueck says because Skyfire is by contract liable for legal costs stemming from a customer’s use of its product, he essentially had to put his software on hold with customers until the lawsuit was resolved late last year. Meanwhile, his company was spending money to continue operating and raised $10 million to keep going last fall, he says.

“We didn’t know if it [the litigation] could put us out of business,” he says. Ultimately, the suit was settled and Skyfire is back on track, but Mr. Glueck says, “We were just lucky.”

Ms. Endress, meanwhile, is unsure how lucky she will be. With the lawsuit from 1-800 Contacts requiring her to pay what she estimates will be an “incredibly daunting [legal] bill” of “multimillion dollars over multi years,” she says she has stopped taking a salary, has eliminated marketing costs and laid off three of her 15-person workforce. To help defray legal costs, she is launching a campaign on crowdfunding site Indiegogo this week to raise money.

“We’re doing everything we can to survive this,” Ms. Endress says.

Ditto’s predicament has attracted the attention of the Electronic Frontier Foundation, a San Francisco nonprofit that is focused on digital-rights issues and is actively working to change federal legislation to curb patent abuse. EFF recently published a blog post on Ditto that said 1-800 Contacts is “abusing patents to squelch competition.”

Ditto’s situation “shows the real harm” of a suit “and puts a face to the story,” says Julie Samuels, an EFF staff attorney who is also the Mark Cuban Chair to Eliminate Stupid Patents, a position at EFF funded by the billionaire entrepreneur.

In a statement, 1-800 Contacts says three members of EFF’s advisory board work for the same law firm representing Ditto in the case, calling the situation full of “inherent bias.”

EFF’s Ms. Samuels says its advisory board members have “nothing to do” with how the group views the case between Ditto and 1-800 Contacts. Overall, she adds that “there have been more [such patent-startup] cases to be involved with.”