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IP: A review of the EData patent situation
From: Dave Farber <farber () central cis upenn edu>
Date: Wed, 19 Jun 1996 11:19:44 -0400
Date: Wed, 19 Jun 1996 10:15:40 -0400 From: srctran () world std com (Gregory Aharonian) !19960529 How much bad software patents will cost you As many of you know, the first of the "threaten/sue everyone on the Internet using a questionable software patent" lawsuits is making its way across the American software industry. With the 40,000+ software patents to be awarded in this decade providing countless opportunites for such actions, expect what follows to be the equivalent of the annual "hay fever" distraction of being forced to pay money to treat just the symptoms. The first case is the so-called Freeny/EData patent that has been talked about much in the press, mostly because its stock price seems to be rising each time it makes some announcement. In July of 1985, Charles Freeny was issued a patent, 4,528,643, "System for reproducing information in material objects at a point of sale location". A simplified view of the patent is that it claims secure electronic commerce, which given the endless talk about secure electronic commerce on the Internet today, makes it not surprising that the current patent holders are sending out infringement notification packets to 70,000 companies. I have expressed my skepticism for this patent at least a few times in print, because like many of the 40,000+ software patents to be issued in the 1990's, the Freeny patent cites no non-patent prior art, even though before the effective priority date of January 1982, there was much written about electronic commerce and/or encrypting business communications (providing grounds for an obviousness argument, if not a lack of novelty argument). Had those materials been in the hands of the examiner, I am sure a different set of claims would have issued. Interestingly, one of the early licensees (which EData touts all the time) was IBM, even though I think IBM could do some real damage to this patent with IBM's own prior art, since in the 1970's, IBM did a fair amount of work for industry and the government with regards to securing network business communications. The patent has been reassigned five times, and expired/reinstated once, and is currently owned by EData (formerly Interactive Gift Express). A few days ago, I received an infringement notification packet in the mail from EData, very pretty (almost as pretty as Lemelson's CDROM he sends out to notify people infringing his patents). EData is offering "amnesty" (they even include a dictionary definition of the word in their materials) to potential infringers before they start suing. They are going after three Internet groups: content providers, resellers and service providers (what's left?). In the words of Arnold Friedlich, president of EData, "Part of our marketing strategy was to sue everybody and get noticed," Freilich said. "Well, we went ahead and sued, and everyone now knows that we're very serious about defending our claims." In mid-April, the price of EData stock was about $1.50, though by mid May after a flurry of announcements, the stock was over $11.00. Good notice. The interesting part is a licensing agreement they include which has a table of payment schedules, a table that illustrates the "taxes" everyone is going to have to pay as questionable software patents continue to issue and provide a "license to sue". Here is the table, with dollar figures slightly rounded to fit on an ASCII screen: Initial and renewal limited license fees ($) Company Net sales($) 1996 1997 1998 1999 2000 2001 2002 < 25,000 500 550 600 650 700 750 800 < 50,000 1000 1100 1200 1300 1400 1500 1600 < 100,000 2500 2750 3000 3250 3500 3750 4000 < 200,000 4000 4400 4800 5200 5600 6000 6400 < 400,000 7500 8250 9000 9750 10500 11250 12000 < 750,000 10000 11000 12000 13000 14000 15000 16000 <1,500,000 15000 16500 18000 19500 21000 22500 24000 <3,000,000 25000 27500 30000 32500 35000 37500 40000 <5,000,000 40000 44000 48000 52000 56000 60000 64000
5,000,000 subject to individual negotiation
Interesting fee levels - enough to make some good money - but not enough to make it worth while for any one company to fight the patent on its own. A few small Internet companies I know are already paying a few thousands dollars a year to avoid dealing with EData's license to sue - one less ad they could place to promote their businesses. These fees are lots of money each year, when multiplied by the number of copycat actions as others with similar software patents from the late 1980's / early 1990's see EData succeed and decide to pursue similar license fees. It would be a lot cheaper for the industry to honestly and sincerely fund the development of a comprehensive prior art database and nip these potential lawsuits before they can sprout (couldn't resist - I just had another shouting match with a Software Patent Institute member who asked for help for free). At some point the cost of doing so will be cheaper than dealing with all of these lawsuits (and I have seen a good argument that the PTO's reexamination of the Compton's patent was wrong, which if Compton's lawyers succeed with the appeal, brings the Compton's patent back into the picture). Certainly it is going to cost members of the Software Publishers Association more than the $300,000 the SPA donated to the SPI without getting anything of value for SPA members (who might want to ask the SPA why they gave their dues money away so cavalierly). The future? A lot of people are going to be looking at how well EData succeeds, because what EData is doing isn't that expensive (say a few million dollars for the direct mail campaign, etc.) for a potential substantial reward (how about getting $1,000 a year from 50,000 companies). It is the type of risk/reward ratio that is common on Wall Street, and could lead to a investment pools being formed to invest in software patent lawsuits (as well as growing number of insurance agencies offering software patent infringement insurance at a more reasonable price, since current premiums are about $50,000 a year). It is as risky as investing in commodities, and tens of billions are being invested there every year. I estimate that every month for the last three years at least one software patent has issued that I would class in the same category as the Freeny patent - potentially infringed by everyone on the Internet / overly broad independent claims / little-to-no non-patent prior art submitted. As people start making money on the Internet, expect these patents to start being asserted. Consider that for interactive television, another potentially lucrative area, there are over 60 issued patents and 180 pending patents, most for putting menus on your television screen. So multiply the potential number of such patents, by the potential licensee annual fees that will be sought plus annual insurance fees, and you have a pretty good idea of what funds you might want to consider to set aside in an escrow account to be prepared for what is inevitable. Maybe the SPA should write a spreadsheet to help its members calculate the escrow amount. By the way, anyone using 3D pie charts on their computers, you are probably next to be sued (but don't pay more than $3000, my fee to help you kill the recently issued patent :-). Either that, or Oracle's recent but questionable parallel processing of electronic mail patent. What's the Blondie song? Right, "One way or another, we're going to get you ......" :-) Greg Aharonian
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- IP: A review of the EData patent situation Dave Farber (Jun 19)