Microsoft, EBay, Others Feel Sting Of Patents

Poking fun at the cavalier attitude government sometimes displays in its appropriations, Everett Dirksen, Republican senator from Illinois in the 1950s and 1960s, supposedly quipped: "A billion here, a billion there, and pretty soon you're talking real money." The terms of recent court decisions regarding patent disputes in the technology industry haven't quite reached those levels yet, but it's obvious that real money is increasingly at stake.

Last week, a judge ordered Microsoft to pay $521 million to Eolas Technologies Inc., a Chicago startup, and to the University of California for using their patented technology in its Web browser. Also last week, eBay Inc. restated earnings for its fiscal second quarter to accommodate a judge's order the week before that the online auction house pay a Virginia company $29.5 million for violating its patents.

Intellectual-property disputes in the technology industry are nothing new. But these developments, and several others, including the SCO Group's aggressive claims about its rights to Unix code, point to an increasingly hostile environment, one that could stifle business and technology innovation.

Microsoft says it will appeal the decision by a U.S. District Court in Illinois that its Internet Explorer Web browser infringed on a 1998 patent for executing remotely stored programs held by the university and Eolas, which was founded by a University of California professor. The plaintiffs claim their software technology for plug-ins and applets made it possible for Microsoft to compete in the market for Web browsers. Microsoft says its technology is part of Windows' ActiveX controls and was developed independently. Jim Desler, a Microsoft spokesman for legal issues, says Microsoft's size makes it "susceptible" to patent lawsuits. "It's a legal ambush. Large businesses are a target for frivolous lawsuits," he says. Since 1998, Microsoft has been named as a defendant in some 35 patent-infringement cases. In its previous 22 years of existence, the company was a defendant in seven. It has lost only once: in 1994, to data-compression technology vendor Stac Electronics Inc.

Microsoft isn't the only technology company ponying up for Internet patents. Last month, portal company Yahoo Inc. settled a legal dispute with NCR Corp. by licensing 10 of its patents for E-commerce transaction technology. NCR won't discuss terms of the settlement, but Bruce Langos, VP of business operations and IP management, says the company has licensed those patents to several other companies and is in negotiations--and litigation--with several others.

Internet patents, or patents that relate to E-commerce capabilities, can belong to a controversial area of intellectual-property protection known as business-method patents. And no business-method patents have been more closely watched than those of MercExchange LLC, a three-man partnership in Great Falls, Va.

MercExchange founder and managing partner Tom Woolston was granted three patents in 2000 and 2001. It was for violating two of MercExchange's patents that eBay was ordered to pay nearly $30 million. Those patents relate to eBay's "Buy It Now" fixed-price feature and its Half.com online-comparison-shopping subsidiary. Not only did eBay lop off $18 million from its second-quarter income to reflect the potential impact of the ruling, but a spokesman says the company is trying to figure out how to revamp its technology to avoid infringing the MercExchange patents. EBay plans to appeal the judgment.

Woolston's patent for online auctions (No. 6,202,051), which he filed several months before eBay started its service, was thrown out of the court case because the judge found it "lacked an adequate written description," according to Greg Stillman, the attorney representing MercExchange. "We're clearly going to appeal the court's ruling on that," Stillman says.

Woolston says he has no intention of going after other E-commerce companies for infringement--but that doesn't mean somebody else won't. Woolston says he's in negotiations with several major Internet players to sell the patents. But those companies all wanted to know one thing: "That you can enforce [them] against eBay," Woolston says. "We were able to show that."

The U.S. Patent & Trademark Office continues to grant patents related to Internet or E-commerce processes. EPlus Inc., a supply-chain software vendor, was recently granted patents for electronic-sourcing systems that have the capability to search multiple vendor catalogs to compare pricing and product features, as well as make purchases. Kley Parkhurst, ePlus senior VP, says ePlus has been analyzing public information of companies that may be patent infringers but hasn't made any definitive moves yet. Parkhurst says a lot of people recognize that "we seem to have a root patent for a great deal of the system functionality." And while ePlus, with $300 million in revenue in 2002, might appear poorly equipped financially to launch lawsuits against deep-pocketed companies, "the opposite is true," Parkhurst says. "We have the resources to fight and defend these patents vigorously."