December 26, 2000, 9:55 AM

Patents Impending

First came the techies, then entrepreneurs and giddy investors. Now enter the patent lawyers, as Internet retailing heads to court over questions sure to split fiber optics and rock the Web’s open-source foundation, such as: Is one-click shopping intellectual property?

In the information age, software means hard cash, much like the formula for Coca-Cola. And the business methods enabled by software are guarded like state secrets. These days, software sentries are out in force: Amazon.com recently won a preliminary federal injunction barring Barnesandnoble.com from using its patented one-click ordering. And amid mounting criticism, the Internet’s largest retailer won patent protection on Feb. 25 for its affiliate program setup. Priceline.com sued rival Expedia, a subsidiary of Microsoft, claiming that its name-your-own-price online reservation service violates Priceline’s patent. Online advertising pioneer DoubleClick took L90 to court for allegedly infringing on its ad-serving technology. Postage heavy Pitney-Bowes filed actions against upstarts E-Stamp and Stamps.com. CoolSavings.com sued Emagnet, Marimba acted against Novadigm, and Network Engineering Software filed suit against online auctioneer eBay. Network Engineering contends a third-party application allowing eBay users to post auction listings infringes on its patented technology.

Many e-retailers would rather leave these disputes to the forces of the market, not the intricacies of the law. “It’s a chilling thing if the courts start allowing the tactics that retailers traditionally use to drive business to become part of their intellectual property,” says Michael I. Barach, CEO of Mothernature.com. “We’ll be looking at lots of lawsuits and fear. I would just as soon the government stays out of it and let the wild, wild West endure.”

But experts expect less frontier-style justice and more legal maneuvering, as thousands of Internet patent applications now winding their way through the U.S. Patent and Trademark Office are granted. The number of Internet patents under consideration has skyrocketed nearly 2,000%-from 165 in 1995 to more than 3,000 in 1999. At stake are tens of billions in revenue and ultimately market dominance of key e-commerce sectors.

An old cycle at Net speed

“It may seem shocking, but this has happened time and time again. It’s a very normal process,” says Kevin Rivette, cofounder and chairman of Aurigin Systems, a Mountain View, Calif., firm that develops software to manage intellectual property. “Patents have always helped drive the development of new markets.”

Rivette, a former patent attorney who cowrote Rembrandts in the Attic: Unlocking the Hidden Value of Patents, sees the online legal slugfest in a bigger picture. Patents typically surge at the start of a new industry when few barriers to entry exist. That happened during the Industrial Revolution of the 1870s and ’80s, when new patents soared 56% a year, powered by the railroad, telegraph, telephone and electric industries. It happened again between 1902 and 1916, when patents more than doubled as the auto and aircraft industries geared up.

As an industry takes shape, capital increasingly flows in and large competitors emerge. That’s when patent disputes flare. “New technology companies would never be able to grow and achieve scale without patent protection from large competitors,” adds Rivette. “The only difference today is that it’s happening at Net speed, compressing what used to take 30 to 40 years into seven.”

In today’s knowledge economy, where intellectual assets are rapidly replacing bricks-and-mortar as the source of wealth and competitive advantage, patents are more crucial than ever. The Internet has introduced factors that didn’t exist with earlier technologies, says Chicago patent attorney Tom Scavone, who represents Coolsavings. “The cost of putting up a Web site is relatively small, and the capital is readily available to scale up a business,” he explains. “Patents are critical in protecting innovators from others who would imitate and draw traffic from their site.”

Coolsavings has patented a way to distribute promotional coupons via the Web, but it’s far from the lone player. Coolsavings is suing six Internet companies and is being sued by two others over the use of these promotional methods. It has reached licensing agreements with two others. “We don’t necessarily want to eliminate the competition,” says Scavone. “We want them to respect Coolsavings’ intellectual property.”

Methods behind madness

At the heart of the legal wrangling are business method patents-the latest twist in intellectual property rights. Though a series of cases in the late ’70s and early ’80s confirmed that computer software can be patented, the courts consistently denied patents to ideas, methods and processes. The landscape changed last January, when the U.S. Supreme Court affirmed a lower-court decision in State Street Bank vs. Signature Financial Group, declaring that patents can cover software-enabled business methods as long as they are novel, not obvious and produce tangible results.

Signature Financial, an East Coast investment firm, obtained a patent in 1993 for its “hub and spoke” investment structure, which uses software to link its central assets to a series of mutual funds. After licensing negotiations broke down, State Street Bank challenged the patent. An appeals court sided with Signature, ruling that because its process had a useful result-an updated mutual fund share price-it deserved patent protection.

Patents skyrocket

Since the Supreme Court affirmed that view, applications for business-method patents have escalated by companies trying to lay claim to many basic elements of the Internet. Banks and financial service companies seeking to protect their financial instruments and investment strategies have filed many of these applications. But Internet companies constitute the biggest filers. The patent office estimates it received 350 applications for Internet-related business methods last year-up from 130 in 1998-and some lawyers predict the number of applications could reach nearly 1,000 this year.

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