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Patent piracy, or Goliath's comeuppance?

Patent holders have begun  demanding  licenses for  Internet technologies  seemingly used everywhere.  Some are succeeding, some are not. By's Bob Sullivan.
F.Birchman /

David Eastburn and Sandy Trevor are packrats from the Internet's earliest days, but they never suspected how valuable their computer clutter might be. 

During the 1980s, both were high-ranking executives at the fledgling Compuserve online service. By force of habit, they saved much of the hardware, software and content they ran across — including the competition's content. Theirs is among the best collections of pre-Internet memorabilia you'll find, a collection that some day might be worthy of the Smithsonian Institute.

But right now, their collection is much more valuable inside a courtroom. 

Armed with this archive, Trevor and Eastburn run a tiny company called Nuvocom Inc., which often finds itself in the middle of contentious patent disputes involving Internet technologies. 

In 1999, inventor Witold Ziarno sued the American Red Cross for accepting donations on its Web site, saying he had patented the electronic process by which the donations were made. Ziarno demanded a licensing fee from the non-profit agency for infringing on his patent, which he applied for in 1993 — before most people had even heard of the World Wide Web.

Red Cross attorneys hired Nuvocom to hunt for "prior art" — proof that the patent wasn't valid, because electronic donations were already in use before Ziarno filed for his patent. Researchers digging through the electronic archives found examples of UNICEF taking donations on Compuserve's service in the early 1990s. Trevor and Eastburn then reconstructed the UNICEF Compuserve site, complete with vintage hardware and a 1990 version of Compuserve's service.  They operated the site in open court, and Ziarno lost his case, and later, his appeal. But the defeat didn't deter dozens of other small intellectual property firms from trying to turn old patents into Internet-age profits.

It starts with chaos
The chaos of the patent-granting process in the Internet and software realms has made Eureka moments just as common in the courtroom as in the invention laboratory.  There's a long line of celebrated cases involving Web sites deploying commonly-used Internet technologies — in patent lingo, business methods — that are suddenly challenged by a patent holder who seemingly emerges from nowhere. Often, the plaintiff is a small intellectual property firm with big plans to cash in. And increasingly, small companies with no legal budget are being targeted because they are the least likely to mount a challenge.

"I find this whole thing kind of disturbing. ... This kind of enforcement strategy really reinforces stereotypes of lawyers in general," said Jon Hangartner, who argues both sides of patent cases.  "It increases people's distrust and frustration with the legal system."

The cases run the gamut from David vs. Goliath fights to battles royal between corporate behemoths. And despite some hard-to-believe legal stretches — such as a patent on hyperlinks once asserted by British Telecom — patent lawyers say consumers shouldn't jump to conclusions about intellectual property firms.

"Something can be simple, but we shouldn't be deceived by this," said Jack Slobodin, another patent attorney. "If no one has done it before or thought of it, it deserves a patent. Like the paper clip, or the Post-it note." And the inventor deserves compensation, Slobodin said.

Success breeds imitation
The Internet infringement genre was largely introduced to the public by's one-click case against Barnes and Noble. in 1999, Amazon maintained it held the rights to a simplified electronic commerce checkout procedure involving only one click. That case was settled out of court, and details weren't disclosed.

But since then, an endless stream of cases and a few big-ticket verdicts have emboldened patent holders and their lawyers. Tiny research firm Eolas won a $521 million judgement against Microsoft last year when it argued that Microsoft infringed on the firm's technology for accessing interactive functions on Web sites. (MSNBC is a joint venture of Microsoft and NBC.)

Eolas' patent is now being reviewed by the U.S. Patent Office, throwing the judgment into limbo.  But there have been other substantial legal victories. Last year, NTP Inc. was awarded $53 million in damages and attorney's fees from Research in Motion, the maker of the Blackberry portable e-mail device, after NTP successfully argued that it had patented the invention of a mobile device for receiving e-mail. And MercExchange was awarded $29 million after arguing that infringed on its patent by using the "Buy It Now" feature. 

The successes have emboldened firms like Acacia Research, which has patents on streaming video over the Internet, and has targeted adult Web sites for infringement.

Protecting the rights of inventors is a necessary part of the research and investment fields, said Slobodin.

Otherwise, he said, there would be little incentive for taking risks: "The inventor should have a key to the courthouse. There's a long, sordid history of big companies stealing the work of private inventors."

Pendulum swung too far
On the other hand, some, including Slobodin, now think the pendulum may have swung too far, creating a new kind of company that sees patent confusion surrounding the Internet as a chance to make a quick buck. A host of intellectual property firms are now being criticized for picking on small Internet sites that can't afford expensive legal fights and sometimes settle quickly for obnoxious licensing fees.

In 2002, a firm named Pangia Intellectual Property sued 40 small Web sites, asserting that it had patented the process for making purchases online.  Several sites settled with the firm for around $30,000 rather than pay costly legal fees, according to published reports.  But 16 defendants pooled their resources, launched a Web site called and hired patent attorney Jon Hangartner. Last month, PanIP settled with all 16 defendants, essentially agreeing to drop the lawsuits.

"Clearly they are using the system," Hangartner said.  "It's akin to slip-and-fall, where lawyers sue the city, knowing they can get a settlement."

Raymond Mercado, spokesman for PanIP, said in an e-mail to that his company has been treated unfairly in the press because there is a "bias, shared by so many, against intellectual property." He didn't answer follow-up questions.

Similar criticisms have been leveled against Paul Heckel, president of Intellectual Property Creators in Los Altos, Calif.  Heckel has a patent for the partial display of computer files, allowing them to be presented as an index so users can preview files before opening them.  Heckel now says many online newspapers across America use this technique on their home pages to tease visitors to click on links and read entire articles. He sent license demand letters to 60 of them recently. "Three or four" newspapers have paid license fees to Heckel, he said; the other cases have been dismissed and will be refiled. Hangartner represented one of the newspapers.

Heckel said he couldn't discuss the patent, citing ongoing litigation. But he defended the practice of first suing small companies to win settlements that would then be used to finance lawsuits against larger litigants with bigger legal budgets.

Court ruling critical
Critics blame a sluggish, understaffed federal patent office for the current litigation. Until the 1990s, the patent office generally didn't grant patents for software. A 1998 federal court ruling cleared the way for "business methods" patents.

Before then, as Web sites began springing up like weeds, many firms never considered filing patents for simple processes like credit card checkouts.  Later, when a patent application was filed for an Internet process, even if it was ubiquitous on the Web, patents were often granted. There was no "prior art" on file in the patent office database.  While patent evaluators can look beyond the patent database for prior art, critics say overworked staff rarely do so. The result: Many patents were issued even though there was nothing new or unique about the business method in question.

Even Heckel concedes the process is a mess.

"It's a disadvantage to everybody involved," he said.  "An inventor can think he has a good patent, but he doesn't."

It's all about prior art
The patent challenge comes down to the issue of prior art. Patents are only issued for ideas and inventions that are new.  If the target of a lawsuit can prove that a patent was issued erroneously — that the idea was already in use when the patent was filed — the patent office or a federal court can find the patent invalid.

That's where Nuvocom's work comes in. When facing a patent infringement notice, a Web site can either pay a license fee or challenge the validity of the patent claim. That's what the group decided to do in the PanIP case. The firms' lawyer hired Nuvocom, which dug up examples of online stores -- including one Canadian service named Viewtron --that accepted credit card payments as far back as the early 1980s.  That was apparently enough to convince PanIP to back off the crowd, but Hangartner said the firm is already sending out a fresh batch of infringement notices to other Web sites.  PanIP wouldn't comment.

At the center of many Internet-age infringement cases is an attempt by a patent holder to extend the coverage of the patent to new, unforeseen technologies.  Patent holders who invented their processes before the advent of the Internet can sometimes successfully apply logical extensions of their ideas to the Internet realm. 

In the Red Cross case, Ziarno's patent actually covered an electronic collection plate designed for churches. The plates accepted credit cards, and were networked to a central server in the church.  Ziarno tried to broadly extend the coverage of his patent by claiming that the network he devised was similar to the network of computers that became known as the Internet. He then claimed that the Red Cross practice of using the Internet to accept credit cards was a logical extension of his invention, and therefore an infringement.

That didn't fly in the courts, but Heckel's strategy is similar. His letter demanding a license fee claims that his invention is the "display [of] a series of data fields from a record in which certain characters are selectively suppressed so that the whole or a selected portion of a record is represented."  That's close enough to a Web site displaying partial stories on its home page, Heckel's letters claim.

"The language of patents is always subject to interpretation," Hangartner said. "The plaintiff has a fair amount of leeway."

It's a strategy that troubles Hangartner, particularly when it's used on small companies that might not have the ability to defend themselves from such claims.

"Every person you talk to says it's an outrage when they get the letter," he said. "But within a week, half of them say, 'I'll just write a check.' "It wears people down." 

But with PanIP backing off its first round of cases and agreeing to settle in March, Hangartner is optimistic that smaller companies now have a solid strategy to defend themselves against intellectual property attacks. The only defense, he said, is for small firms to get together and share the cost of litigation.

"You need a leader who is willing to organize the group and keep it together," he said. "We need to convince people that there is an alternative to writing this check."