InternetWorld: The Truth About Patents

By Bill Roberts, InternetWorld

Five Reasons They’ll Have Limited Impact On The Web’s
Evolution.

The patent frenzy sweeping the Internet doesn’t phase Jerry
Kaplan, CEO of Egghead.com.

“Patents will not determine the near-term success or failure of
any Internet company,” he says. Kaplan’s own strategy: He’s secured
a patent for the company’s online auction method and hopes to
license the technology to others–but at this point he has no plans
to sue anyone.

Notwithstanding Kaplan’s advice–and the fact that there are
many Internet CEOs who agree with him–it’s sure tough not to get
panicked about patents.

Two widely watched lawsuits alleging patent infringement do
nothing to soothe most fears. In one case, Amazon.com is battling
to block Barnesandnoble.com from using Amazon’s “1-Click” Web
shopping feature. In another case, Priceline.com claims Microsoft
is improperly using Priceline’s reverse-auction technology.

Internet companies, many flush with resources from venture
capitalists or successful IPOs, are aggressively getting patent
applications into the pipeline. A few hundred Internet-related
patents have been granted, and hundreds, if not thousands, more may
be wending their way through the U.S. Patent and Trademark Office
(PTO). Many insiders are wondering: Is this the point in Internet
history when powerhouses begin to use patents to put a stranglehold
on e-commerce?

Not likely. Patents are important, and every company needs a
strategy to protect its intellectual property. But any fear of an
impending patent war that would forever change the shape of the
Internet or e-commerce is overwrought. “They’re a small-to-moderate
competitive tool people use to threaten others,” Kaplan says. It’s
rare that any single patent gives the holder a lock on a technology
or a business method.

Even Amazon.com’s CEO, Jeff Bezos, admits there’s much more to
building a successful Internet business than lots of patents. “The
vast majority of our competitive advantage will continue to come
not from patents, but from raising the bar on things like service,
price, and selection,” he wrote to customers in a recent open
message. In that letter, written after he was harshly criticized
for his company’s patent strategy, Bezos joined the chorus of
people calling for reform of the patent approval process. He
recommends the lifespan be shortened to 5 years or less, instead of
17, for patents that cover business methods and software–the
predominant type of Internet patents.

Some patents now being issued are for the nuts and bolts of the
technology itself–what patents have traditionally protected. Many,
though, are a relatively new breed of patent issued to protect
business methods that have been migrated from the physical world to
the Internet–Priceline’s reverse-auction format, for example.
Several infringement suits have been filed, at least one of which
has been settled out of court for $15 million. And several
companies are offering patent licenses, for a fee.

Paul Esdale, vice president of corporate development at Open
Market Inc., is among the executives pursuing an aggressive patent
strategy. “Those who believe that Internet patents aren’t relevant
are just kidding themselves,” says Esdale, who is trying to license
technology for five patents involving e-commerce software.

But will patents dictate how the Internet evolves? Probably not,
says Ullas Niak, an investment analyst at First Albany Corp. who
evaluates Internet companies. Niak rates patents much lower in
importance than a company’s potential market, management, and other
factors. “Patents serve mainly as a deterrent to competitors,” he
says.

Patents will have the same impact on the Internet as they’ve had
elsewhere. They’ll force competitors to pay attention to each
other’s innovations, explore licensing and cross-licensing options,
and sue when necessary. They’ll spur innovation and protect
inventors, which are the same goals the patent system had when it
was founded by Ben Franklin in the early days of the Republic.

With one difference: Because the speed of Internet innovation is
so much faster than the pace at which patents are granted, licenses
negotiated, and suits fought, many patents may quickly prove
irrelevant. Patents take three years or longer to be granted,
licenses can take a year or longer to negotiate, and infringement
suits take years to plod through trial and appeals. Internet
innovation, however, is measured in weeks or months. With this in
mind, experts identify five reasons why Internet patents, although
important, will only have a modest impact on the evolution of the
Web and e-commerce.

REASON 1: LAWSUITS ARE TOO EXPENSIVE
It is a rare patent holder who wants to spend money and time to
take a suit all the way to trial. Yet a court victory is the best
gauge of a patent’s strength. There’s no telling how significant
the Amazon or Priceline patents might be until they win or lose in
court.

“Litigation is the best test of validity,” says Alan Fisch, an
attorney with Howrey Simon Arnold & White, a Washington, D.C.,
law firm. “During this process, the accused infringer has the
opportunity to prove, by clear and convincing evidence, that the
patent-in-suit is invalid.”

Litigation, however, is the least common patent strategy.
Companies are more likely to offer licensing programs, or to use
patents for defensive purposes if someone tries to sue them. “Most
patent owners want to license their patents,” says Marc Brown, a
partner in the Los Angeles law office of Oppenheimer, Wolff &
Donnelly. “They don’t want to put you out of business.”

There have been a dozen or more Internet patent infringement
suits filed so far, but none have gone to trial. “I’ve seen
relatively little significant patent litigation in the Internet
space,” says Kaplan, who was CEO of Onsale Inc. when it merged with
Egghead in November. At the time of the merger, Onsale had one U.S.
patent [No. 5,835,896]. It has others pending for its online
auction methods.

Kaplan says his main patent strategy is defensive in nature.
Despite the occasional claim that Egghead infringes on some other
patent, the company hasn’t had to pay any licensing fees yet.
Kaplan attributes that to his company’s own patent. Egghead also
plans to launch a licensing program after it gets more patents, but
Kaplan doesn’t expect litigation to be part of the strategy. Why?
“It takes years and millions of dollars to pursue a patent
infringement case.”

Others agree. “Our long-term objective is to license the patents
to people for whom they are relevant,” says Nat Goldhaber, CEO of
Cybergold Inc. It has two U.S. patents: One for the
incentives-based sponsorship program it runs at its Web site and
markets to others [No. 5,794,210], and one for privacy protection
[No. 5,855,008]. It is negotiating licenses–in one case it’s a
cross-license–with a handful of sites for the sponsorship patent,
and hasn’t decided what approach to take with the other one, says
Goldhaber. Cybergold hasn’t sued or been sued.

Open Market may have some of the more seminal U.S. patents. It
filed applications early and often for patents to cover technology
for secure online payments and other networked commerce processes.
Five have been granted [Nos. 5,909,492; 5,812,776; 5,724,424;
5,715,314; and 5,708,780]. It has negotiated with several potential
licensees for more than a year, but has no deals yet. And despite
the frustrating pace, it has declined to sue.

Open Market wants to foster, not thwart, the Internet’s
evolution, says Esdale. However, he admits, “others have decided
that litigation is a prerequisite to meaningful licensing
discussions, and we’re watching them with interest.”

Some experts say even Priceline and Microsoft will settle
without a trial–even though, of all the Internet-related patent
suits filed thus far, this one is most likely to go the distance,
given both companies’ deep pockets. Having touted its reverse
auction [U.S. Patent No. 5,794,207] as a barrier to entry when it
was wooing investors, Priceline may have more to lose than most if
its patent isn’t strengthened through a trial verdict, experts say.
Priceline executives declined to be interviewed.

REASON 2: THEY’D RATHER LICENSE THAN FIGHT
Given the choice of fighting in court or paying a license fee–even
a stiff one–most companies, when sued for patent infringement,
will pay the fee. The first thing an attorney does when a client
gets an infringement notice is to evaluate the patent and determine
if the client can avoid it through a design twist. Next, the lawyer
looks into a license, says attorney Brown, who works with dozens of
Internet companies. “Often, a license is available,” he says.

Art Technology Group (ATG), which develops customer relationship
management tools and other e-commerce products and services,
recently settled a suit filed against it in December 1998 by
BroadVision Inc. The fee: $15 million over three years. CEO Jeet
Singh says ATG hasn’t changed its opinion that it is not infringing
upon the patent [No. 5,710,887], which covers aspects of one-to-one
commerce. Settling the suit, he says, had little to do with the
patent’s merits, and everything to do with a desire to resolve the
issue and get on with business in a fast-growing market. Paying
even a stiff fee made better business sense than continuing to
fight, Singh says. “It is to our advantage to put our resources
into growing the business, rather than slogging through this
complex and costly legal process.”

BroadVision didn’t really want to sell a license and has no
intention of offering a licensing program, says Peter Downs, the
company treasurer. It just wanted ATG to stop infringing, but “it
was time to settle this thing,” Downs says. “They’re paying us
quite a bit of money, and technology marches on. We need to move
forward with our own R&D efforts.”

Most license fees are much more affordable. “Our philosophy is
not to make the pursuit of business uneconomical to people,” says
West Shell III, CEO of Netcentives Inc., which has one of the more
successful licensing programs to date. Netcentives, which develops
software and services for electronic marketing, has two U.S.
patents for customer loyalty methods [Nos. 6,009,412 and
5,774,870]. It is negotiating with several companies, including
competitors, and has licensed its patents to AOL, Lycos, LookSmart,
and American Express, says Shell, who declines to specify fees.

Shell says Netcentives is open to cross-licensing or paying fees
to others if it must, but to date it hasn’t. Netcentives and
Cybergold compete, and their patents are for similar processes.
Neither Shell nor Cybergold’s Goldhaber will comment on whether
they’re negotiating a cross-license, which would be one of the
first in the Internet industry.

Some firms will pay for a license even if there’s a good chance
the patent could be beaten, says Greg Aharonian, a professional
patent-buster. He makes his living searching for documents and
products, known as “prior art,” that were overlooked by the patent
applicant and the PTO examiner, and which would prove that the
innovation in question does not meet the statutory requirements of
being “new, novel, and non-obvious.” Prior art can make or break a
patent’s value or validity. It’s defined as any document or product
that’s publicly available before the patent application is filed
and that anticipates the technology in the application.

One Internet-related U.S. patent Aharonian considers dubious is
for compressing database information sent over a network [No.
5,253,341]. License fees have gleaned hundreds of thousands of
dollars for the patent holder, TechSearch LLC, says Aharonian,
because “the $50,000 or whatever they’re asking for a license isn’t
worth fighting in court.” A licensing fee is far cheaper than legal
fees, and in many cases may be cheaper than revamping a Web site to
avoid infringement, he notes.

REASON 3: MARKET FORCES RULE
If patent holders become too greedy, they could find the market
evolving without them. This is especially true of business-methods
patents in e-commerce. “Market forces will dictate how the holders
of patents will be compensated, one way or another,” says Drummond
Reed, chief technology officer at OneName Corp., which is
developing a platform for automated data exchange. OneName will
announce products and a licensing program this spring. It has one
U.S. patent for communication objects known as Web agents [No.
5,862,325] and three others pending. It is the only company
Internet World interviewed that has pursued, and been granted,
patents in other countries.

Reed likens market forces to a raging primordial river slashing
through rock and earth. The river might make a small bend to
accommodate an obstacle, he says, but its general flow won’t be
stopped. “If the holders of patents stake too strong a claim,” Reed
says, “the river will just go in another direction.”

Attorneys tend to agree. Lawyer Brown urges clients to file for
patent protection for their own innovations, but not to worry about
other companies’ patents. If the client is hit with a suit, the
design of the process or technology can often be tweaked to avoid
the infringement, he says.

The Amazon case is such an example. Amazon sued Barnes &
Noble for infringing on its 1-Click buying method [U.S. Patent No.
5,960,411]. It won a court injunction, which prohibited its
bookselling competitor from using one-click while the matter is
settled. In her ruling, however, the judge said Barnes &
Noble’s proposed two-click buying button was not likely to infringe
on Amazon’s patent.

“There was this mass hysteria that the Amazon patent would
destroy the Web,” says Brown. “But Barnes & Noble goes right on
with business.” Amazon executives did not return calls to comment
on the case or to discuss their strategy for eight other
patents.

Brown thinks the one-click buy could benefit Amazon financially,
since it will cause more impulse buys, but he admits that one can
also argue that two-click is better for consumers, giving them a
second chance to think about a purchase. Only time will tell, but
Barnes & Noble could lose little or nothing. “By holding that
piece tight, Amazon potentially becomes the poster child of the
river-going-around-you analogy,” says OneName’s Reed.

REASON 4: BUSTED IN COURT
The rare company that fights a patent suit all the way to a trial
verdict may find that some patents can be busted. Whether they can
or can’t be busted will be less important than the perception that
some can–a perception that may keep patent holders from getting
too aggressive. Aharonian, who has examined prior art for hundreds
of patents, says Internet patent applicants aren’t doing adequate
searches. And the PTO doesn’t have adequately trained staff or
resources to fully search prior art either, he adds. The result,
says Aharonian: Because prior art for most Internet patents is not
well searched, the patents are much more vulnerable in court.

A lot of Internet research was done in the 1980s. Some of it
resulted in patents, and a lot just ended up in scientific
journals, university and corporate libraries, and other places,
Aharonian says. If it is public record, it is potential prior art,
he adds. He says the number of non-patent prior art citations
appearing on software patents has gradually declined since 1994,
which indicates that applicants are not doing rigorous prior art
searches. One problem, he says, is that the non-patented research
isn’t easy to dig up. “You have to go through back volumes of stuff
page by page to find it,” he says. Aharonian, based in San
Francisco, spends a lot of time in the libraries at Stanford
University and the University of California at Berkeley.

Companies can help their own cause by placing as much
information as possible into the public realm, says James Pooley, a
patent attorney and partner at Gray Cary Ware & Freidenrich
LLP, Palo Alto, Calif. He points out that IBM has published
research and other material for decades. Much of it never becomes
patented, but it does become prior art and makes it more difficult
for competitors to prove that a similar innovation is new, novel,
and non-obvious. “Make sure a lot of stuff gets into the public
domain so there’s very little room for someone to maneuver in
issuing a patent,” says Pooley. He suggests that companies work
together to create libraries or museums of such material.

So-called business-methods patents are most susceptible to
busting. Critics, including Aharonian, argue that the PTO shouldn’t
be granting such patents. The PTO, however, has decided that
putting a physical-world process–like a reverse-auction format–on
a network can be new and novel, and therefore worthy of a patent.
The business-method patent as a type was upheld by the federal
court in a precedent-setting, non-Internet case nearly two years
ago (State Street Bank & Trust v. Signature Financial
Group).

Still, Aharonian and others believe that overlooked prior art
will show that many Internet business-methods patents do not meet
the requirement of being new, novel, and non-obvious. Many believe
even Amazon’s 1-Click patent is frivolous and would not withstand
the scrutiny of a thorough search of prior art.

REASON 5: TIME IS AN ALLY
Nothing about patents operates on Internet time. That’s to the
advantage of the company alleged to be infringing. If the Internet
moves like a raging river, then the patent process is as slow as a
glacier. “By the time the issue gets resolved, the chances are the
businesses will have succeeded or failed on their own merits rather
than on the value of the patents,” says Egghead’s Kaplan.

The fact is, given that it takes about three years to be granted
a patent, the technology it covers could be obsolete by the time it
is awarded. “Patents often have a potential legal life that
surpasses the protected idea’s practical life span,” says attorney
Fisch. It’s possible an Internet startup could begin and fail
before the PTO issues its patents, he notes. Fisch points out that
Bezos’ argument for a five-year patent lifespan implicitly admits
that the innovation is likely to become obsolete in that time
period anyway. That being the case, he adds, it doesn’t matter how
long the life of the patent is.

Esdale admits that Open Market has learned a tough lesson from
its licensing efforts. “In the patent area, the time frame is more
akin to traditional industries. The Internet moves faster than
anything any of us has been involved in.” He says there’s a
tremendous amount of research that a potential licensee must do
once the patent is presented to them. It can take three months or
longer before there’s a second contact between the two parties.
“The cadence of patent licensing is not as fast as other things we
know,” Esdale says.

Meanwhile, the pace of Internet innovation doesn’t slow down.
While lawyers negotiate licenses, or file and counter-file suits,
innovation moves ahead. Reed expects that when the Web agent
platform OneName is developing takes off, there’ll be new
innovation to move many business methods onto the platform, thus
antiquating a previous business-method breakthrough. “How much we
could enhance the reverse-auction process with Web agents is
unclear,” he says, “but it wouldn’t take much to argue that you’ve
got more innovation.”

That doesn’t mean that companies should avoid securing their own
patents. Everyone interviewed agrees that an Internet company needs
a patent strategy. Most urge companies to file for a patent if they
think they’ve developed innovative technology or business methods.
Attorneys say they meet too many young companies that were too busy
during their startup days to consider applying for patents, which
is shortsighted. “Companies should develop their own program of
creating intellectual property and protecting it so they have their
own cards to trade if someone comes knocking,” Pooley says.

Brown agrees: “An average patent application costs about
$10,000. That’s a drop in the bucket to setting up the Web site. If
you have a new, enhanced approach to doing business and are going
to spend $100,000 designing the Web site, it’s a no-brainer. File
for the patent.”