A web of legal trouble

  • Business
  • Saturday, 15 Feb 2003


IT took seven years and tens of thousands of dollars in legal fees, but Lawrence Lockwood was finally awarded US Patent No. 6,289,319 in September 2001.  

The former San Diego travel agent believed that the patent, for an “automatic business and financial transaction processing system,'' gave him control over shopping on the Internet.  

He promptly sent letters to 100 e-commerce companies, saying they were violating his new patent as well as one from 1996. He politely suggested they buy a licence from him for US$10,000, although he hinted that the price was negotiable.  

Ten companies told him to get lost. The 90 others didn't bother to reply.  

“American businesses do not respond when you ask them nicely,'' Lockwood said.  

So he started suing them – a New Jersey plumbing supply company, a New York ski shop, an Oregon fabric store. This has gotten their attention, and often their money, too. 

Legalised extortion  

Lockwood's targets say he is practising “legalised extortion,'' an accusation he denies.  

“If you saw someone infringe property rights given to you by the US government, what would you do?'' he asked. “Move forward and try to enforce your rights? Or just throw them down the drain?''  

Lockwood, whose company is called PanIP, is one of a new group of patent holders who say they own the rights to key Internet technologies. They are blanketing hundreds of small and large Web sites with lawsuits, threats of suits and demands for licensing payments.  

A former CIA technology officer is bringing eBay Inc to trial this spring, claiming that the hugely successful trading site is infringing an online auction patent he applied for in 1995 – six months before eBay began.  

Charles E. Hill & Associates, a software company, is suing 18 e-commerce companies, including eBay, alleging that they violated its patents on an “electronic-catalogue system'' and a “method of updating a remote computer.''  

Acacia Research Corp in Newport Beach, California, has filed legal complaints against 27 adult entertainment Web sites, alleging that they violated its patents on “the transmission and receipt of digital audio and/or video content.'' The company is demanding licences from mainstream music and movie companies, too. 

Lawsuits were predictable  

All these lawsuits were predictable, said Jonathan Hangartner, a patent lawyer with Sheppard, Mullin, Richter & Hampton in San Diego who represents a group of PanIP defendants.  

“Anytime there's a major technological breakthrough, there's a spike in patent litigation,'' Hangartner said. “It happened with automobiles, telephones, and trains. Now it's the Internet's turn.''  

The US Patent and Trademark Office has assigned scores of Internet-related patents, nearly all of which involve systems, procedures or methods of doing things rather than actual physical inventions.  

Lockwood's September 2001 patent, for example, outlines how a group of self-service terminals could be connected via telephone to a central processor at a financial institution. The patent, which was filed in 1994, specifies a method of screening loan applications, but in a loose sense the system it describes also resembles the Web.  

It is far from the only patent that either touches on the Web or might seem to do so.  

“If you're selling online, at the most recent count there are 4,319 patents you could be violating,'' said David E. Martin, chief executive of M-Cam Inc, an Arlington, Virginia-based risk-management firm specialising in patents. “If you also planned to advertise, receive payments for or plan shipments of your goods, you would need to be concerned about approximately 11,000.'' 

Merchant's worries  

Patents used to be far down on a Web merchant's list of worries. A patent, which is essentially a government-sanctioned right to a monopoly on a process or invention, went against the early spirit of the Internet.  

“The Web was a freewheeling, low-barrier-to-entry, everyone-can-copy-from-everyone-else place, which was a powerful model that took us a long way,'' said Tim O'Reilly, a computer manual publisher. “There was a lot of innovation as people got up to the level of their competitors and said, 'What can I do to leapfrog that?' ''  

These days it can be a better financial model for Internet companies to license patents rather than build something new.  

Chicago-based Divine Inc went public in 2000 as an Internet incubator, a company that would spawn other companies. When that possibility evaporated in the stock market slump, Divine tried to reinvent itself as a software consulting and services firm.  

In late 2001, Divine acquired Open Market Inc., an e-commerce trailblazer that had fallen on even harder times. Among Open Market's assets were patents, including one filed in 1994 and granted in 1998 for a “network-based sales system.'' It resembles that ubiquitous e-commerce tool, the shopping basket.  

“The universe of potential infringes is the universe of people doing e-business,'' said Divine general counsel Jude Sullivan. He said the company had issued about 150 licences. 

Cease and desist 

Ken Burke, who runs a Web design company in Petaluma, California, said Divine started sending cease-and-desist letters to his clients in September.  

“Just answering the letters would have required a $60,000 retainer for lawyers,'' Burke said. So he willingly, even eagerly, paid Divine an undisclosed six-figure fee for a licence that covered all 100 of his clients, which include Beringer Vineyards, Big Dog Sportswear, Whitman's chocolates and Pet Food Express.  

“It kind of stinks,'' Burke said. “I knew settling would strengthen Divine's case against other people. But it was a good business decision.''  

He has just one worry.  

“We're vulnerable now. We run the risk of being a prime target of PanIP,Lockwood's firm. When does it stop?''  

Lawrence Lockwood has two points he wants to make clear: He's in the top ranks of inventors, and he doesn't understand what all this fuss is about.  

When the patent office is deciding whether to issue a patent, it checks the “prior art'' – previously issued patents that are relevant to the current application. It then lists these as references in the new patent. Lockwood says his 1982 patent for a “self-service terminal'' has been used as a reference by the patent office 122 times.  

“A highly-cited patent corresponds to a Nobel Prize winner,'' he said while eating a sandwich at a restaurant near the house where he grew up and still lives.  

Fewer than 5 per cent of patent cases make it to trial. Although some of the rest are dismissed by a judge, most are settled out of court. That was the route taken by the first 10 Web companies Lockwood sued last spring in US District Court in San Diego, alleging that they violated his 1996 and 2001 patents on automated sales and processing systems.  

“Every one of us was so small,'' said one of the defendants. “None of us knew about the others. The scheme was beautiful in its simplicity.''  

The price of a licence was supposedly US$30,000, but that was just an opening gambit. A few companies settled right off by paying a fraction of that, but five of the companies learned they weren't alone and banded together. They hired a lawyer, set up a Web site. But after six months they too came to terms. 

A money thing  

“It became a money thing,'' said one participant, who spoke on condition of anonymity because the settlement terms forbid him from discussing it. “We gained a lot of efficiency simply by being in a group, but US$750,000 to US$1 million could still get spilled.''  

The total probably would have been even greater if the case had gone to court. In 1999, the American Intellectual Property Law Association said the average patent infringement case in California cost each party US$2 million.  

Lockwood took the summer off, and then resumed litigation at a fast pace. Between Aug 30 and Oct 4, he filed lawsuits against 40 Web sites. Aside from the fact that none was within easy driving distance of the San Diego court, they seemed to have little in common. They ranged from Can-Do National Tape in Nashville, Tennesse, to Advanced Battery Systems Inc. in Stoughton, Mass, to Caffe Vita Coffee Roasting Co in Seattle.  

Such a broad spectrum of retailing lends weight to the defendants' assertion that Lockwood claims control of all e-commerce. (PanIP's full name, Pangea Intellectual Properties, might also be a clue here. Pangea is Greek for “all of the Earth.'')  

Lockwood says his patents apply only to a specific segment of online sales. He would not identify it but promises it eventually would be revealed in court. – LAT-WP 

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