December 11, 1999
Surging Number of Patents Engulfs Internet Commerce
By SAUL HANSELL
ll over the Internet, from the most popular search engines to
personal home pages, are buttons that offer to send users to an
online store where they can buy books or music or other
merchandise. Hundreds of thousands of sites have added these links
because they earn commissions if any of their users click on them
and then buy something.
This week, those sites suddenly found themselves at risk of
violating a patent just granted to a New York company called
LinkShare Corp. That patent gives LinkShare the right to block
anyone from using such an arrangement for links between sites with
commission payments.
The number of patents related to the Internet has been
skyrocketing. And Linkshare is just one of many companies now
receiving patents that cover not just narrow technological
improvements, but widespread techniques for doing business.
"This is the end of the wild, wild West on the Web," said
Stephen Messer, LinkShare's founder and chief executive. "There
are laws that protect the pioneers from pirates who steal all of
their good ideas. Everything you love to do on the Internet will
have some sort of patent on it."
Messer will not say how LinkShare will enforce its patent
rights. But in recent months a number of other Internet companies
have filed patent-related lawsuits on other matters.
Priceline.com, for example, has sued Microsoft and its travel
service, Expedia, over Priceline's patented arrangement letting
customers name their price for flights and hotels. Yahoo has been
sued by an inventor who claims a patent on a shopping-cart feature
on its site. And DoubleClick Inc., a big Internet advertising
network, has sued two smaller companies over its patent on an
ad-targeting technology.
Some suits are already changing the face of the Internet. Two
weeks ago, for example, a federal judge issued a preliminary
injunction barring Barnesandnoble.com from letting customers buy
goods with a single mouse click, a method Amazon has patented. (The
court's remedy requires Barnesandnoble.com customers to place
orders with two clicks rather than one.)
These cases, and other quiet demands for royalties, have
instilled fear into many Web site operators who are surprised to
learn that techniques that have become commonplace in the short
history of the World Wide Web now appear to be one company's
exclusive property.
"People are getting patents on things that are too general,"
said Jerry Yang, the co-founder of Yahoo. "It's not healthy for
patents to be used to stop other people from doing business."
One reason for the surprise is that patent applications in the
United States are secret until they are granted. And the U.S.
Patent and Trademark office is only now approving applications
filed two or three years ago in the formative stages of the Web.
The office granted 1,390 patents related to the Internet in the
first half of 1999, compared with only 648 in all of 1997. The
backlog of applications is growing even faster, so the patent
office has hired 500 examiners in its software and Internet
section, nearly doubling its staff.
Moreover, the patent office is approving applications to patent
not just specific technologies but broad concepts it calls
"business methods." For example, Sightsound.com of Mount Lebanon,
Pa., says it has a patent on the entire concept of selling music
through digital downloads, one of the hottest trends on the
Internet. Sightsound has demanded that anyone selling music in
digital form online pay it a royalty of 1 percent. It is suing
CDNow, the online music store being acquired by Time Warner and
Sony, to assert that claim.
Most other countries do not allow such wide-ranging patents. But
patent experts say the Clinton administration, seeking to bolster
the technology industry in the United States, has been increasingly
liberal in granting patents for both software and business methods.
And earlier this year, the Supreme Court affirmed a strongly worded
appeals court ruling that backed the administration's stand that
even the most abstract business methods can be patented.
In an obscure section of the budget bill passed last month,
Congress moved to reduce the risk that companies will discover that
their business is violating someone's patent. Some patent
applications will be made public after 18 months, as in the rest of
the world. And companies will have a limited right to continue
using business methods, without paying royalties, if they employed
them before finding out that they had been patented.
Still, many patent experts predict a flurry of Internet-related
patents over the next few years and a resulting flood of lawsuits.
"It's a land grab out there," said Gary Eichhorn, chief
executive of Open Market Inc., an Internet software company that
holds patents on several key building blocks of online stores.
"It's not a surprise that these patents are being issued now. It's
a wide-open field, and a lot of smart people have been looking to
get patents as a strategic weapon or a strategic revenue
opportunity."
At the end of the day, Internet sites may be forced to pay
royalties to use some of the most popular features. And in some
cases, patent holders may keep some of the best ideas to
themselves, the way Xerox, for example, blocked competitors from
offering plain-paper copiers for years.
"We will see some Internet companies become industry giants
because they can exclude others from doing what they do, just as
Xerox did," said Kevin Rivette, the chairman of Aurigin Systems,
an intellectual-property management firm.
One company that became a giant because of its intellectual
property was the Gemstar International Group of Pasadena, Calif.,
which owns a series of patents related to electronic program
guides. Indeed, TV Guide Inc. found its prospects of moving online
so threatened by potential litigation that it agreed earlier this
year to be acquired by Gemstar for $9.2 billion.
One of the more ambitious efforts to develop patentable ideas
for electronic commerce was undertaken by Jay Walker, the owner of
a magazine subscription company, who in 1992 set up a think tank of
business executives and patent lawyers.
"We saw an opportunity to invent entirely new methods of doing
business for the digital age and we could own them," Walker said.
He invested $20 million in the lab, called Walker Digital. So far
it has received 30 patents and has 300 pending. One of the ideas,
now patented, turned into Priceline, in which Walker holds stock
worth $2.8 billion.
Walker Digital is hoping to come up with ideas to license to a
wide range of industries. Its most recent patent is for vending
machines that sell things by subscription: For example, a
soft-drink machine in an office building could have a Web site that
would sell a dozen cans in advance; that way people would not need
change when they wanted a drink.
Walker rejects criticism that ideas like Priceline are too broad
to be subject to patents.
"The information revolution isn't some minor thing, it's a big
deal," he said. "Our patents are no different than the patents
granted after the invention of electricity caused a revolution in
how industrial processes worked."
This thinking, however, is anathema to the pioneers of the
Internet, many of whom emerged from academia, with a culture based
on the free exchange of ideas and information. Even now, with much
of the Net's cooperative culture drowned out by the value of stock
options, many executives believe that speed rather than patents
determine success.
"In my three years here, I don't think I've spent half an hour
thinking about what I could patent," said Stuart Wolff, the chief
executive of Homestore.com, the largest real estate Web site.
Wolff, a physicist who worked for Bell Labs and IBM, received his
own patent on an aspect of computer memory technology, but he says
the Internet is different.
"Ideas are cheap," he said. "Execution is everything."
Rivette argues that this sort of thinking has led companies to
lose rights to some of the most valuable inventions on the
Internet. The magazine Wired, he said, could probably have patented
the idea of the banner advertisement, the now-ubiquitous graphical
rectangles on Web pages that, when clicked, take a viewer to the
advertiser's Web site.
Similarly, patent experts say, eBay, the online auction house,
missed the opportunity to patent its method of combating fraud by
having buyers and sellers post ratings of each other, opening its
market to competition from the likes of Yahoo and Amazon.
Patent lawyers say Internet companies are now much more likely
to file for patents than they were a few years ago, if for no other
reason than to have weapons in reserve to fend off potential patent
suits by others.
Some patent experts argue, however, that ultimately the courts
will rule that the Patent Office has been too liberal, and that
they will invalidate many of the broader Internet patents. A patent
can be challenged in court with the argument that the invention is
not actually new, or that it is a development so incremental that
it was obvious.
"A number of these patents are vulnerable to a claim that
applying a well-worn business technique to the Internet is not
sufficiently novel," said James Pooley, a lawyer with Gray Cary
Ware & Freidenrich of Palo Alto, Calif., who defends companies
against patent suits.
Nonetheless, the recent patent lawsuits have already had a
chilling effect on some companies.
One of them is Escalate Inc., a new Silicon Valley company
backed by James Barksdale, the former chief executive of Netscape,
which is building computer systems to operate online stores on
behalf of other companies. Keng Lim, the chief executive, said the
company had developed its own one-click-buying software but decided
not to offer it to customers for now because of the Amazon patent.
"There is some stuff, like one-click, that is so fundamental
that I don't think it should be patentable," Lim said. "But we're
a young company and we don't want to get into a lot of legal
trouble."
Escalate has filed for a patent of its own, however, that would
allow online stores using its system to display merchandise geared
to what the customer has bought in the past.
But Lim said this application is more useful for marketing now
than any potential intellectual-property rights later.
"Patents pending are a good way to convince potential partners
they should work with us," he said. "But how you win is by
gaining market share, not technology. We'll be a success or a
failure long before the patent is issued."
