The Ultimate Weapon: It's the patent -- and critics say it threatens to undermine the very nature of the Internet
By Scott Thurm
04/17/2000
The Wall Street Journal
Page R18
(Copyright (c) 2000, Dow Jones & Company, Inc.)

Before launching their Web site, before raising their first
million dollars, the founders of CoolSavings.com Inc. in 1995
sought a potentially more valuable asset for a young Internet company: a patent. Shortly after receiving the patent in June 1998, CoolSavings put it to use. It sued nine other companies, also in the business of distributing coupons and promotions via the Internet, for infringement.

Those lawsuits quickly became the opening salvos in a multifront war. Three rivals of CoolSavings acquired patents of their own and countersued. And Henry Von Kohorn, an 86-year-old man in Florida, joined the fray, claiming he had invented electronic distribution of coupons in the 1980s. Mr. Von Kohorn sued five market contenders, including CoolSavings.

Now, executives in the crowded market grouse that they spend as much time managing lawsuits as running their rapidly growing businesses. "It's like the old days of the Cold War and mutually assured destruction," says Mike Scroggie, a co-founder of Catalina Marketing Corp., St. Petersburg, Fla., which has filed two countersuits against CoolSavings. "It's actually out of control."

That's a common complaint from Internet companies today, as rivals rush to the U.S. Patent and Trademark Office to certify their latest innovations. Those smart, or lucky, enough to have obtained patents for which they applied four or five years ago increasingly wield them as weapons to prohibit others from employing the same technology. The disputes involve the biggest names in electronic commerce. Amazon.com Inc., the Seattle-based online retailer, for instance, has won a court order barring New
York rival Barnes & Noble.com Inc. from using its patented
"one-click" checkout system, which allows a shopper to place an order with a single tap of the mouse, instead of re-entering billing information. Priceline.com Inc., the Stamford, Conn., Internet discount retailer, wants to stop Microsoft Corp.'s Expedia unit from using "reverse auctions," in which buyers name their price and sellers decide whether to take the bid, to fill airplane seats and hotel rooms.

Statistics suggest many more legal scuffles lie ahead. The
Patent and Trademark Office, in Arlington, Va., issued a single patent in 1995 for what it now calls "Internet-related business methods." Last year, the total grew to 301. The number of applications is doubling annually; it takes two to three years, on average, to obtain a patent.
To critics, these patents, and the disputes they spawn, are
evidence of a system run amok, rewarding "inventors" for doing nothing more than devising Web-based versions of
well-established business practice, or for trivial advances in
technology. The proliferation of Internet-related patents, they complain, will wind up restricting the use of some fairly simple and universal ideas, making it harder for e-commerce to flourish.

"You can't describe these Internet patents as anything but
theft," says Tim O'Reilly, founder and chief executive of the
technology publisher O'Reilly & Associates Inc., Sebastopol,
Calif. "It's a fundamen-tally destructive approach to
innovation." Not so, insist patent holders. Mark Ogram says three programmers at his company, Net MoneyIN Inc., took six months to devise an e-commerce credit-card verification service for small merchants. Now he's not shy about asserting the patent awarded in 1998 to his Tucson, Ariz., company, which provides financial services for the Web.
"It's like any invention. Once you see it, it's simple," says
Mr. Ogram, himself a patent attorney and one-time software engineer. Net MoneyIN has sent letters demanding royalties to 12 companies providing payment services, to little effect thus far.

The company also has lawsuits pending against two of the
companies. A patent is like a piece of property, Mr. Ogram
argues. "These people are using our house to sleep in. They
should at least pay us."

Patents are supposed to encourage innovation by offering an
incentive: the legal monopoly to make use of an invention for a limited time. But each wave of invention -- from bicycles to
aircraft -- has been accompanied by concern that the granting of exclusive rights to patent holders would discourage competition and ultimately retard innovation.
Patents and the Internet are a particularly volatile mix.
Because it's much cheaper and easier to copy Internet technology than to build an auto or aircraft factory, the legal protections of a patent can be that much more important in cyberspace. And because readily available capital has led to a flowering of Web companies built around a single idea -- such as Priceline's reverse auctions -- an entrepreneur is apt to guard that idea with singular jealousy.

Adding further tension: Most of the software developed before the mid-1980s wasn't patented, making it difficult for examiners to determine whether an idea is truly novel.
"Fortunes are being bet and made on technologies and practices that may or may not have any basis in law," says Lisa Allen, a senior analyst at Forrester Research Inc., Cambridge, Mass. Patents have become key marketing tools in obtaining financing and, ultimately, customers. For some, merely applying for a patent is enough.

In September, dotNow Corp., Des Moines, Iowa, wrote letters to nine companies with Web interests, including software giant Microsoft, Redmond, Wash., and Internet-service provider America Online Inc., Dulles, Va., warning that it had applied for a patent for what it does: provide advertiser-supported "free" Internet service. Then the company put out a press release "alerting" investors that rivals may ultimately owe royalties to dotNow.

In an interview, dotNow Chief Executive Ed Andrews says he is looking forward to "absolute ownership in a multibillion-dollar market." But it may be years before dotNow receives a patent. To do so, it will have to persuade the Patent Office that no one else had thought of an advertiser-financed Internet service before mid-1998, when dotNow applied for the patent. Mr. Andrews says dotNow sent the letters because it has a "provisional" patent, but a spokeswoman for the Patent and Trademark Office says it doesn't issue provisional patents.

The stakes can be large for Internet companies. Losing an
important patent can leave a company vulnerable to unexpected competition. Infringing on another's patent could force a company to change its business and pay millions of dollars in damages. "Any ruling or legislation that reduces the validity or enforceability of our patents will seriously harm our business," CoolSavings warned potential investors in a January filing for its anticipated initial public offering. More recently, some players in the Internet-patent debate are having second thoughts. Patent officials vow tougher reviews and more thorough literature searches for Internet-related applications.

In addition, Amazon founder and Chief Executive Jeff Bezos last month suggested that software and Internet patents should have a shorter term than other patents, and should be subject to public comment before they are issued. (He posted his comments on Amazon's Web site after a month-long exchange, conducted largely by e-mail, with Mr. O'Reilly. The discussion was triggered by antipatent comments posted on the publisher's Web site.)
"I now believe it's possible that the current rules governing
business methods and software patents could end up harming all of us," Mr. Bezos wrote.

Anyone watching the free-for-all over patents for
Internet-related coupons would have difficulty arguing. Tom
Scavone, an attorney for CoolSavings, says company officials
felt they had no alternative but to sue, after seeing other
sites using technology protected by their patent. "Innovation is a risky business," he says. "They want to protect their
investment." But CoolSavings may not have been prepared for the response.

Although three of its targets have settled, one of them,
emaildirect Inc., Aliso Viejo, Calif., claims to have won
favorable terms, with the company's president, Gary Brooks, saying in a news release that the company obtained a license from CoolSavings that "didn't cost us anything." (On the other hand, emaildirect's chief financial officer, Sandy Brooks, says the suit consumed a chunk of her time for several months and hindered the company's efforts to arrange a new round of financing.)

Others are fighting back. BrightStreet.com Inc., Mountain View, Calif., which makes software to create promotions and coupons, filed papers with the Patent Office challenging CoolSavings's patent, claiming it had developed some of the same ideas first. CoolSavings is "using patents as a way to market themselves and bully other people," says Scott Wills, BrightStreet's chief executive.

Kamran Amjadi, chief executive of e-centives Inc., Bethesda,
Md., deplores the trend toward Internet-related patents.
Nonetheless, his company is among the three companies that, after being sued by CoolSavings, obtained patents of their own and filed countersuits. He says he felt he had no choice. "When one company starts using land mines, ultimately you have to start protecting yourself, and you come up with land mines yourself," he says.

In at least two cases, CoolSavings sued not just its rivals in
the coupon business, but companies that do business with them. As part of a July 1999 settlement with CoolSavings, the female-oriented Web-site iVillage Inc., New York, agreed to stop doing business with a subsidiary of Catalina Marketing. A suit is pending against Brodbeck Enterprises Inc., which operates the Dick's Supermarkets chain in Wisconsin and offers coupons through Planet U Inc., San Francisco, another Internet-promotions site. Mr. Scavone says CoolSavings sued iVillage and Brodbeck because
they were "active participants" in infringing on CoolSavings's
patents. "We're not in the business of bullying people," he
says. "We're in the business of protecting our intellectual
property."

Meanwhile, Mr. Von Kohorn, the independent inventor in Florida, has sued at least five companies, including CoolSavings, BrightStreet and Catalina, claiming that he owns patents dating from the 1980s that cover electronic distribution of coupons. Mr. Von Kohorn linked his patents to interactive television, but says they apply equally to the Internet. A chemical engineer by training, Mr. Von Kohorn says his company, Response Reward Systems, which up to now has been only a vehicle for him to collect license fees on the patents, will begin operating its own Internet coupon business in a few months. Competitors are "shocked to find they are infringing on our patents," Mr. Von Kohorn says.
Others are trying hard to stay out of the line of fire.
CouponSurfer.com Inc., Bedford, Mass., settled CoolSavings's lawsuit against it last May, just a few months after it was filed. Chief Executive Adam Schwartz says he wanted to focus on his business rather than the lawsuit. But Mr. Schwartz doubts this will protect him for long.

"I think this problem is going to get worse for a little while
before it gets better," he says.
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Mr. Thurm is a staff reporter in The Wall Street Journal's San Francisco bureau.

Copyright © 2000 Dow Jones & Company, Inc. All Rights Reserved.