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Business Impact

IP's Bleak House

Absurdly broad patents are channeling resources from innovation into lawyers’ pockets.

Have you ever read Bleak House, the Dickens classic in which lawyers fight incessantly over a disputed inheritance until they gobble it all up in legal fees? With the U.S. Patent Office now handing out a staggering number of patents on various methods of doing business-as opposed to actual inventions-it looks like we’re in for a modern-day remake. In today’s version of Jarndyce v. Jarndyce (the interminable Bleak House proceeding), lawyers haggle over these absurdly vague and broad patents, squandering not just money but the very innovation the patent system was established to stimulate.

For a preview of Bleak House 2: The Patent Years, consider last November’s appeals ruling in the case Interactive Gift Express Inc. v. CompuServe et al-a.k.a. the fight over U.S. Patent No. 4,528,643, “System for Reproducing Information in Material Objects at a Point of Sale Location.” One of the first patent infringement claims involving an e-commerce business method to reach the top (the U.S. Court of Appeals for the Federal Circuit), this case has seen almost as many judicial twists as the presidential election. I thought we had reached a sane solution in 1998, when a lower court took a narrow interpretation of the patent’s scope. But now, after several years of litigation that has tied up time and resources at more than 40 e-commerce companies, the appellate court has overturned the lower court on all five contested claims. What’s more, instead of definitively reversing the decision, it has remanded the case for-you guessed it-more legal proceedings.

The question in this case is whether the patent gives E-Data of Greenwich, CT (formerly Interactive Gift Express), an exclusive right to the underlying “method” of selling downloadable material-music, software, books, films and more-over the Internet. E-Data’s lawyers claim it does. They contend CompuServe (now part of America Online), Ziff Davis Publishing, Broderbund, Intuit, Waldenbooks, and other defendants-and by inference thousands of additional online businesses-infringe the patent whenever they sell downloadable material.

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The result has been a judicial mess. But, to be fair, you can’t blame the courts alone. Like many other business-method patents, E-Data’s is so enticingly broad, so vaguely worded and so potentially lucrative it’s little wonder a dizzying succession of lawyers, financiers and small-time entrepreneurs want to cash in on it. (For the hairsplitting legalese of the appellate ruling and related documents, see www.patents.com/ige.htm.)

It all started in 1983, when electrical engineer Charles Freeny envisioned a networked computer system that could allow store owners to offer customers downloaded copies of products like books or sheet music. Freeny never tried to build such a system. Instead, he patented his idea and, finding little interest in it, sold the patent to a speculator in 1989.

After changing hands again, the Freeny patent resurfaced dramatically in 1996. That’s when new owner E-Data sent a letter to 75,000 companies threatening to sue if they didn’t pony up licensing fees. The campaign landed notable licensing agreements with IBM, Adobe and others. But it also sparked outrage, paving the way for the current litigation, which has lawyers on both sides poring over the ambiguous text like alchemists hoping to spin gold from pig iron. Consider the phrase “point of sale location.” The case has hinged in part on whether this can include people’s homes, or just stores. Now, as the case returns to the courtroom, the judge has been ordered to let the participants dive deeper into the quagmire by considering whether the patent covers downloading data to a hard disk or only to some more tangible format like CD-ROM. (More legalistic alchemy, since the patent itself mentions neither device specifically.)

As this case shows clearly, business-method patents tend to be so, well, “fuzzy” they are difficult, if not impossible, to adjudicate by wrangling over such particulars. Rather than affording a limited monopoly on a new, improved design for a mousetrap or vacuum cleaner, as patents are reasonably intended to do, method patents confer a monopoly on a broad concept-the equivalent of inventing the idea of “catching mice with a trap” or “using a suction device to clean carpets.”

This point is fundamental. Because such patents are, by their nature, nearly impossible for competitors to work around, they are likely to stymie innovation rather than spur it. It’s all the more worrisome when you consider that this case is the tip of an enormous iceberg. Thousands of broad business-method patents have issued since Freeny’s, and the Patent Office says it now receives some 2,500 such applications annually in the software field alone. Which means that until Congress can come to its senses and bring the long-running IP Bleak House serial to an end, we’re facing a scenario only a patent attorney could possibly love.

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