The Impossibility Of Patents

Either patents are the first line of defense for the garage-based inventor, or they're tools of the ruling class intended to block innovation and maintain lucrative monopolies. Either the U.S. Patent and Trademark Office is spinning wildly out of control, or it's stretching to meet the demands of a changing business landscape. Both sides of the argument have their adherents, and both are simplistic and flawed. Patents are a fact of business life, one that many companies have to come to terms with, whether it's through litigation, settlement, or something as drastic as what eBay may be facing--a change in business model. True to form, Microsoft wants to be both patent powerhouse and arbiter of change.

EBay Faces Patent Problems
EBay Inc., the online-auction powerhouse, was dealt a blow last week when an appeals court decided in favor of MercExchange LLC in a long-running patent dispute. The ruling means eBay may have to pay MercExchange $25 million or more and may have to alter or drop one of its E-commerce capabilities.

MercExchange, a small online vendor, was started by Tom Woolston, an inventor who was granted three patents in 2000 and 2001 related to online auctions and shopping. Woolston filed for his patent on the process of conducting online auctions (No. 6,202,051) several months before eBay started its service in 1995. Woolston claims eBay approached him in 2000 about licensing his patents, then broke off negotiations. MercExchange subsequently sued eBay.

MercExchange won a district court ruling in 2003 that held that eBay violated its patent

for direct online buying (No. 5,845,265), as represented by eBay's "Buy It Now" feature, and its patent for searching the Web for merchandise from other vendors (No. 6,085,176), which is the role of eBay's Half.com subsidiary. The district court threw out MercExchange's patent for the online-auction process, claiming it wasn't explained well enough.

Both sides appealed, and last week the appeals court reaffirmed not only the validity of MercExchange's direct-buy patent but ruled that eBay had willfully violated that patent. The appeals court recommended an injunction against eBay over that feature, which means it will have to either stop using it, come up with a different way to do it, or license the MercExchange patent. At the same time, the appeals court denied the validity of the online search patent, effectively ending that litigation.

In a statement, eBay claimed it was pleased with the appeals court ruling to eliminate one of MercExchange's patents, and that any injunction issued by the district court "will not have an impact on our business because of changes we have made following the District Court's original verdict."

The most surprising result of the appeals court ruling was its decision to reinstate MercExchange's patent on the online-auction process itself, which means another trial. The appeals court ruled "the [lower] court made a mistake and now we're entitled to a jury trial," says Greg Stillman, lead counsel for MercExchange. An injunction in connection with that very core capability could be problematic for eBay. "Any injunction would be narrowly tailored to avoid shutting down eBay and may only apply to eBay's Buy It Now feature," says Dennis Crouch, a patent attorney with McDonnell, Boehnen, Hulbert & Berghoff LLP, in an E-mail.

Or eBay could license the MercExchange patents--if the owner will let it. "We're not looking to license the patents to anybody else," says Woolston, who's working with online-auction site Ubid.com, a direct competitor of eBay. Ubid licenses Woolston's patents.

--John Soat

RIM Settles Case With NTP
Research In Motion Ltd., maker of the popular BlackBerry mobile device, said last week it has agreed to pay $450 million to settle a patent-infringement suit filed by NTP Inc. Under terms of the agreement, RIM licensed NTP technology covered by all current and future patents, RIM officials said. The deal covers all customers and providers of RIM products and services, including wireless carriers, distributors, suppliers, and independent software vendors.

NTP claimed that RIM infringed on 16 of its patents, including its radio-communications technology. A federal court in Virginia had ruled against RIM in 2003, but that decision was reversed on appeal and sent back to the Virginia court for reconsideration.

RIM also will have the right to grant sublicenses under the NTP patents to anyone for products or services that interface, interact, or combine with RIM's products, services, or infrastructure. "The resolution permits RIM and its partners to sell its products, services, and infrastructure completely free and clear of any claim by NTP," the company said in a statement.

The settlement amount primarily relates to past damages and includes the judgment and money escrowed to date. RIM expects to expense $313 million of the settlement in its fourth quarter, ended Feb. 26.

--TechWeb News

Symbol Countersues
In a move typical of escalating patent disputes, Symbol Technologies Inc. is countersuing archrival Intermec Technologies Corp. over patents related to radio-frequency identification technology.

The lawsuit, filed March 10 in U.S. District Court for the District of Delaware, alleges Intermec infringed on Symbol's patents for wireless communications standard 802.11, specifically in Intermec's bar-code-scanning terminals. Also, Symbol terminated an agreement by which it supplies Intermec with laser scan engines.

Intermec filed a lawsuit last June against Matric--subsequently acquired by Symbol--accusing it of infringing on Intermec's RFID patents. "Symbol believes Intermec's imposition of its RFID IP on the industry is potentially harmful to the industry and customers," Symbol senior VP Peter Lieb said in a statement.

Symbol and Intermec had sought to address the intellectual-property issues through cross-licensing, but that proved unsuccessful.

--Laurie Sullivan

Microsoft Urges Reform
A longtime critic of the worldwide patent system, Microsoft recently issued a proposal to improve the system's efficiency and lower the risk and cost of patent litigation. The company cautioned that a lack of reform by the U.S. Patent and Trademark Office and corresponding patent offices worldwide would slow the pace of technology innovation, lead to escalating legal costs, and exclude small businesses from the patent process.

"It's too easy for a litigant to manipulate the U.S. system and look to a patent lawsuit as the ultimate lottery ticket, hoping to confuse jurors with technical jargon that will yield the payment of a lifetime," Brad Smith, Microsoft's senior VP and general counsel, said two weeks ago at an intellectual-property conference in Washington, D.C., hosted by the American Enterprise Institute for Public Policy Research.

The Patent Office has seen a tripling of patent applications since the 1980s, with more than 350,000 applications now filed each year. Yet the increased patent activity hasn't resolved legal issues surrounding intellectual property. Recent estimates show that the number of patent lawsuits filed annually in the United States has risen from less than 1,000 in the early 1980s to more than 2,500 today, Smith said. "The Patent Office has reached a crisis of confidence," says David Kaefer, director of business development for Microsoft's intellectual-property and licensing group. "We're calling for a debate about how to correct the system."

One of the government's top priorities should be to ensure that the Patent Office has the resources it needs to give every patent application the deliberate, expert review it deserves, Smith said. Another proposed reform would allow interested parties an opportunity to alert the Patent Office to questionable patents while those applications are under review. "Under current law, parties have no effective means to raise such concerns during the examination process," Smith added.

Microsoft has experience on both sides of the patent issue. It will file more than 3,000 patent applications with the Patent Office this year alone. On the other hand, Microsoft typically spends close to $100 million annually to defend against an average of 35 to 40 patent lawsuits simultaneously, Smith said. For instance, earlier this month a federal appeals court agreed to give Microsoft a second chance to prove it didn't infringe on a browser-technology patent and that it shouldn't have to pay more than $520 million in damages.

Another proposed reform with potentially more global scope is "international harmonization," which requires increased collaboration among patent offices worldwide, particularly in the United States, the European Union, and Japan. Said Smith, "Both Congress and U.S. industry should support the [U.S. Patent Office's] ongoing efforts to strengthen cooperation and information sharing among national and regional patent offices."

--Larry Greenemeier