Three years ago, Steven Golden, chairman and chief executive of Cool Savings, came up with a hot new idea for how to distribute coupons to consumers over the Web. The business by all accounts turned out to be a smashing success. Golden said Cool Savings became responsible for close to 40 percent of all coupons distributed via the World Wide Web.
Then one day a letter arrived in the mail from the law offices of David Fink, representing Henry Von Kohorn, an 86-year-old Florida inventor. Fink informed Golden that his firm was infringing on a patent held by Von Kohorn's company, Response Reward Systems, covering a method for downloading coupons over the Internet.
Golden thought about fighting the patent claim but, in the end, decided it made more sense to pay the small licensing fee to Von Kohorn. (The firms would not reveal what deal was struck.)
"To defend a patent claim can be in excess of a million dollars," he said. "It came down to a straight business decision."
Not to worry. Cool Savings has acquired a few Internet patents of its own and is in litigation with eight companies that it is suing for infringement. Three have been settled.
One of those companies is Catalina Marketing. Catalina already pays Von Kohorn's Response Reward Systems a licensing fee and recently opted to pay Cool Savings a licensing fee for its technologies.
But don't cry for Catalina. David Diamond, the firm's executive vice president, said Catalina also has also been issued four patents and is thinking about launching a few infringement lawsuits of its own.
"Sure, it's a bit ridiculous," Diamond said. "Everybody has patents, and they all fall on top of one another."
The Internet may still have the image of being a Wild West frontier, but fences increasingly are being strung up across the ranges of cyberspace in the form of patents.
The U.S. Patent and Trademark Office is being flooded with Internet-related applications from corporations looking to protect their intellectual assets, and from think tanks looking to make money by patenting and licensing business concepts. Prior to 1986, the number of Internet-related patents granted by the patent office totaled just 13 - seven of U.S. origin, six from Canada. Between 1986 and 1993, the patents continued to trickle in, from as few as four in 1986 to a high of 52 in 1993. At that point, a sharp growth curve began. In 1995, 165 Internet-related patents were granted; in 1996, 371; in 1997, 648 such patents were granted, and in 1998 that number climbed to 2,193.
For the first three months of 1999, a total of 696 Internet-related patents were granted. That puts the year on course for a total of about 2,785.
U.S. companies are responsible for the vast majority of the patents granted to date - 3,754 out of 4,380. Japan is next in line with 307 patents, followed by Canada with 76 and Britain with 49.
The trend alarms many who feel that patents are being approved without proper research and that they threaten the universality of the Web.
Fence builders like Priceline.com founder Jay Walker said stop whining. Patents will protect and foster the development of the Internet as they have in many other industries.
He's counting on it, in fact.
In an example of the kind of patent frenzy that is roiling the Internet, a couple of entrepreneurs are laying claim to the technology Walker already has patented covering the process of allowing customers to establish the prices they'll pay for goods and services in advance of purchase.
Walker's patent, which forms the basis for Priceline.com - an Internet start-up with a market cap of some US$10 billion - is unusual in that it covers a method of doing business, not a technology. Debate over whether such business methods actually could be patented was finally laid to rest in July 1998. The U.S. Court of Appeals ruled in a case between Signature Financial Group and State Street Bank that Signature's patented hub-and-spoke method of using software and a central asset pool to update mutual fund share prices was, in fact, unique and produced a useful result. As a result, the court ruled it merited patent protection. State Street had challenged Signature's patent after licensing negotiations between the companies broke down.
Walker used that landmark ruling to his full advantage. His think tank, Walker Digital, not only lays claim to the Priceline patent, but also 15 other business method patents. The company's 50 scientists and inventors currently have 230 patents before the patent office, 75 percent of which are related to the Internet.
Walker's patent-related troubles come from two fronts. Tom Woolsten, an engineer and Washington, D.C., patent lawyer, filed a challenge with the patent office to have Walker's claim invalidated. Woolsten isn't claiming that the Priceline patent should be re-examined - only that he invented the bidding system first. Woolsten applied for his patent, which describes a computer-based system for letting consumers determine prices for goods, in April 1995, 17 months before Walker. Walker received his patent first, however, on Aug. 11, 1998, while Woolsten's patent was granted in December.
"Priceline was able to sneak in there and get a patent issued - but the fact is, we were there first," Woolsten said. Woolsten has, in fact, licensed his technology to an online travel service, Azumano.com, which plans to offer a service that would compete with Priceline.
A more troubling challenge comes from a lawsuit filed in January by William Perell, founder of a firm called Marketel International. Perell alleged that Walker stole the idea for the Priceline patent from him, after he presented Walker with a business proposal in 1988.
For his part, Walker claims both challenges are groundless, and he plans to fight them. But these types of disputes - and the sheer volume of applications filed with the patent office and granted each year - have many industry executives concerned. Even those who make their living off the patent business.
Patrick Long, an intellectual property lawyer with the Chicago firm Long & Long, believes the patent office is incapable of coping with the volume and may be granting applications without adequate research into prior art.
He points to the patents obtained last year by Open Market, which are so broad, he doesn't believe they have a hope of standing up in court. Open Market's patents cover electronic shopping carts, the ability to analyze how a visitor browses through content on a Web site and secure, real-time payment using credit and debit cards over the Internet.
To date, Open Market has not filed infringement lawsuits, leading many lawyers to believe the company is not confident they will hold up to a legal challenge.
"The situation has a sense of a nuclear reactor going critical," he said. "You have all these companies springing up, trying to jump onto the Internet gold rush. A lot of them are applying for patents to substantiate what they're doing, or lend substance to something that may not be there.
"There's a real danger here that we could be diluting what a patent means," he said. "The next Microsoft could be getting killed in the market as a result, because we can't see the forest for the trees."
Novadigm, which obtained a patent for its push technology in 1997, may serve as an example. While BackWeb and Marimba have attracted the vast majority of investor interest in the electronic software delivery market, Novadigm has struggled for attention. Edwin McLendon, an analyst at Advest, believes Novadigm has not been given the respect it deserves, and that could be because of market confusion over the value of its patent.
Novadigm has had an ongoing patent lawsuit against Marimba, dating back to March 1997.
Gregory Aharonian, publisher of a newsletter covering software patent issues (e-mail: patents@world.std.com), is an even more vocal critic of the U.S. Patent and Trademark Office. He believes it caters to the interests of big businesses, like IBM, at the expense of the general public.
"The patent office forgets they have two customers," he said. "Big corporations that want as many broadly defined patents as possible, and the general public which wants as few, narrowly defined patents, as possible.
"They're forgetting about the public interest."
He points to a patent granted to push technology developer Intermind earlier this year as an example of a patent that may be too broad and could have ramifications for the industry. The Intermind patent also has raised the ire of the World Wide Web Consortium.
Intermind's patent loosely describes a method where two nodes - a sender and a receiver - have persistent storage, communicate over a network and exchange control structure defined by information about information, called metadata (an example: tags created by the eXtensible Markup Language). The data describes how to transfer updated information from the publisher to the subscriber, how to transfer feedback information and how to process the exchanged information. (For a full description see: www.intermind.com/materials/ patent_ desc.html)
The W3C fears Intermind's patent could interfere with efforts to establish a Platform for Privacy Preferences standard, which would let clients and servers negotiate how a client's personal information can be used and distributed.
It took the unprecedented step of sending out a call to arms among the developer community in May to try to dig up prior art that would invalidate or limit the scope of the Intermind patent.
Todd Dickinson, acting commissioner of patents and trademarks, said his office has not been asleep at the wheel and has, in fact, been preparing for the onslaught of Internet patent applications for years.
"One of the misconceptions is that the sudden influx of Internet patents has hit us from out of the blue. But we've been investigating them for more than 10 years now," he said.
In 1999, the patent office has hired 11 new examiners dedicated to Internet patents, for a total of 36 examiners. All have a business and/or Internet background combined with a science or engineering degree. An additional four hires are planned for the remainder of the year.
As for patents being granted without proper research of prior art, Dickinson said that's not true. "We have more access to prior art now than in the history of the U.S. patent office." Dickinson said the Internet and the use of digital libraries has greatly fostered access to prior art.
The patent office also plans to soon embark on a field trip program, where examiners will visit many of the businesses and industry sectors where the patents are being put into real use.
"I've seen a lot of criticism of the patent office out there, but I haven't seen anybody file [an Internet patent] re-examination request," Dickinson adds. "If they don't think we're doing a good job, then maybe they should step up to the plate and file a re-examination."
It's a statement that all sources interviewed for this story were unable to challenge.
Internet patent suits won't stop any time soon. Some of the more recent examples include Marimba firing back against competitor Novadigm, which had levied its lawsuit against Marimba in 1997.
Marimba alleges Novadigm is infringing on a patent it received July 6 covering a method for the "distribution of code and data updates." Postage meter giant Pitney Bowes is suing two "dot coms," E-Stamp and Stamps.com, that are muscling in on its turf. Pitney Bowes says it holds 15 patents covering personal computer metering technologies, from coding and decoding addresses to printing postage on a standard computer printer.
E-Stamp responded earlier this month by accusing Pitney Bowes of being involved in a "scheme" to defraud the patent office. In a filing, E-Stamp said Pitney Bowes has routinely failed to disclose information about its patent applications.
And in one of the more far-reaching lawsuits being watched this year, Eolas Technologies of Chicago has filed a patent lawsuit against Microsoft, claiming the software giant infringed on its patented technologies covering a browser system that incorporates small interactive programs, such as plug-ins, applets or scriplets. (For additional details, see: www.eolas.com/zmapress.htm)
Priceline's Walker maintains the current debate about the flood of Internet patents in general is much ado about nothing.
"There's a lot of heat and a lot of light, but not a lot of fire here," he said. "Throughout history, the patent system has proven to be the strongest backbone of making the U.S. the most innovative country in the world."
