Patenting The Process

Who owns the methods of E-commerce? Many companies say they do and that they have the patents to prove it.
Lawyers representing Hill say they're studying methods of payment for the rights to use the patents. Divine won't comment on its licensing strategy, but Acacia's Berman says his company wants between 1.75% and 2.25% of the revenue generated by the patented technology. "Very low by industry standards," he says. And he's right. "There are licenses out there for Internet technology that fall between 2% and 10%" of revenue, says Bose McKinney's Burns.


Inventor and patent attorney Woolston's attempt to start a business based on his E-commerce patents was unsuccessful because it got mired in internal conflicts, he says.
Other litigation threatens E-commerce stalwarts. Thomas Woolston, an inventor and patent attorney, filed suit through his company, MercExchange LLC, in September 2001 against eBay for violating several patents Woolston has on "person-to-person auctions" and database-search technology. That suit is scheduled to go to trial in April.

EBay won't comment on the lawsuit. But in a Securities and Exchange Commission filing last month, the company pointed out that, even if it were to prevail, "this action will be costly and could divert our management's time." And, "if [MercExchange] were to prevail on any of its claims, we might be forced to pay significant damages and licensing fees, modify our business practices, or even be enjoined from conducting a significant part of our U.S. business."

The object lesson here isn't obvious. On the one hand, eBay is the gold standard for success on the Internet. Not only has the company grown tremendously in size and scope since its inception in September 1995, it has created a loyal community of entrepreneurs who depend on eBay for sizable second (or first) incomes.

But Woolston is no Johnny-come-lately to E-commerce. "It's always been my intent to create a company built around this intellectual property," says Woolston, a former Cold War reconnaissance pilot and network engineer for the CIA. Woolston says he got the idea for person-to-person auctions over the Internet during the baseball strike of 1994, when he tried to think of a way for baseball-card collectors to trade their wares. Woolston filed for a patent on his process in April 1995 and received No. 5,845,265 in 1998.

Woolston's attempt to launch a company built around his patent-pending technology was unsuccessful because it was slow out of the gate, he says, and got mired in the Internet-incubator process. EBay officials approached him in 2000 about acquiring the patents, he says, but negotiations broke down. Now he's negotiating to sell the intellectual property "with organizations of the size and scope of eBay."

To a great extent, the Patent Office was created with people like Woolston in mind--the better-mousetrap builders who struggle to be fairly compensated for being first with the Big Ideas. The courts will decide whether Woolston's claims are legitimate, but his case is indicative of the unfolding struggle for ownership of E-commerce methods and functionality.

In its most recent financial filing, eBay acknowledges the Hill litigation and says it's been "notified of several [other] potential disputes." And the company believes there are more to come. "We also expect that we will increasingly be subject to patent-infringement claims as our services expand."

EBay is concerned. Maybe others in the E-commerce community should be, too.

-- with Tony Kontzer

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