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Will patents help e-commerce?

A recent court decision means some Net merchants may find that their basic business model or technology has already been patented by a rival.

A recent decision by a patent appeals court appears to give smooth sailing to a flurry of e-commerce patents issued this year, cheering e-commerce patent holders but potentially creating big headaches for Internet shopkeepers.

The U.S. Court of Appeals decision means some Net merchants may find that their basic business model or technology has already been patented by a competitor. And that rival may be in a position to demand licensing fees.

More broadly, the decision raises a question: Do patents on ways of doing business on the Net help or hinder Internet commerce?

Consider this scenario:

You're an Internet merchant ramping up for the holiday shopping season. Your store uses a "shopping cart" for buyers to select purchases, accepts credit card payments, and offers airline frequent flyer miles for purchases.

You pay people who click on your banner ads and send email to notify regular customers of promotions, including a URL so they can go directly to the right page. For close-out items, you let shoppers name their price for an item, letting consumers say how much they'll pay.

Call your patent attorney, because you may be violating six e-commerce patents, all issued since March.

In State Street Bank vs. Signature Financial Group, the Federal Circuit Court of Appeals ruled on July 23 that patents for a way of conducting business are legitimate.

"Basically, it said that software patents directed to methods of doing business should be treated the same way as patents involving any other area of technology," said patent attorney Woody Higgins of Cooley Godward, an intellectual property law firm.

That ruling, which now applies to all patents, doesn't just boost holders of the new Internet commerce patents, it also could spur a new round of e-commerce patent applications.

Getting a patent approved generally takes two to three years, so the burst of Internet commerce activity in late 1995 may account for the recent flood of new patents--and suggest that more will be forthcoming.

The first major e-commerce patents were granted in February to Open Market, an e-commerce software firm that won patents on electronic "shopping carts," tracking, and secure credit card payments.

Open Market CEO Gary Eichhorn said in March that the company intended to license its patents broadly, but no licensing deals have been announced.

Other patent holders also intend to license their technologies--CyberGold would be thrilled if anyone wanted to pony up for using its patented idea of paying Net users for looking at ads.

Ditto for NetDelivery, a firm that presents utility bills online for consumers to pay. On August 4, it received a patent on certain forms of "push" technology. It's creating a licensing program, but "will act to protect its intellectual property," chief technology officer Dave Ladouceur said.

An earlier push patent, with associated "ticker" technology, issued to V-Cast, also is available for licensing.

Likewise, Priceline has indicated a willingness to license its patent, issued August 11, for letting consumers say how much they'll pay for an airline ticket or new car, then let major vendors decide if they'll sell at that price.

Netcentives, which won a patent June 30 on its use of incentives for making online purchases, hasn't announced that patent or its approach to licensing.

"Patents are a key part of our strategy," said Netcentives cofounder Eric Tilenius. "They help us protect our core business." Yet his company's business plan isn't counting on any patent licenses revenue.

Even patents that have been issued won't necessarily stand up to legal challenges. The key criteria are that the patent be original and "not obvious." That means even a patent issued by the U.S. Patent and Trademark Office can be overturned if "prior art"--an earlier instance of someone creating the same technology or technique--is found.

Patent strategies vary from shutting down competitors, to snaring a piece of their revenues based on patents, to putting the patent in the public domain where anyone can use it for free, as Netscape did with the technology behind Secure Sockets Layer, the dominant method of security now used on the Internet.

Having a patent in your pocket also can prove helpful if someone with a fat patent portfolio, like IBM, contends you've infringed on its patents.

"It helps you keep from being bullied around if you have a patent," said Netcentives' Tilenius. Cross-licensing patents is a common outcome of patent disputes.

Tilenius also says patents can help a start-up attract venture capital, and he contends they help build confidence in nascent markets.

"Markets take off the fastest when there is a clear leader because companies are interested in signing up with clear market leaders," he added.

But Nat Goldhaber, CyberGold CEO and holder of the patent on paying Net users to look at Internet ads, argues that unselfish terms for patent licenses can benefit a patent holder.

"One company cannot [create a flourishing market ] successfully--it needs several companies with different angles, attitudes, and business models," Goldhaber said. "While we would be pleased to derive royalties from everybody, it is not our intention to stand in the way of invention or competition."

Indeed, he agrees with critics who argue that software patents can stifle creativity in the marketplace.

"I would agree, if people don't want to license their patents," Goldhaber said. Congress, he suggested, should address whether standard patents are appropriate for the fast-paced Internet, whether reasonable licensing terms should be required, or whether 17 to 20 years--the standard life of a patent--is too long.

He cites Pitney Bowes, which invented the postage meter and then owned the market for the life of its patent.

Pitney last week said it owns patents relevant to selling postage over the Internet, a market where it has lagged behind more nimble competitors like E-Stamp and Stamp Master. Pitney is talking to both about patent licenses.

"Why should they not be able to do the same thing in the [online] world if they can do it in the offline world?" Goldhaber adds.

A new medium like the Internet lends itself to both new technologies and new business models, but patent attorney Higgins contends that anyone who argues patent rules should be different on the Net must make a strong case. Patents have long influenced new technology markets.

"I don't think there's anything different about electronic commerce that would say that it makes sense to have a different rule or exception for patents in that area," he said.