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E-Data royalty claims challenged

The discovery of an earlier system could threaten E-Data's patent on online sales.

A company that was run out of a programmer's garage and went out of business a decade ago could come back to haunt E-Data, a New Jersey software firm with a patent that it says entitles it to royalties for most online purchases of electronic data.

In a controversial claim that has swept the industry, E-Data maintains that its patent on digital data purchases allows it a piece of all revenue generated through online sales by other companies. Under the patent, which was originally granted in 1985 to Charles Freeny for an "on-demand electronic distribution" system, the small software company is suing such large firms as CompuServe, Intuit, and Broderbund Software, as well as 15 others, in an effort to collect royalties.

But new questions have been raised about the validity of E-Data's patent because of an earlier, similar system employed by an even smaller company that was run by a software programmer from his garage before being folded seven years after it was founded in 1979. That company, Telephone Software Connection, was run by Ed Magnin, a computer programmer for Apple Computer in the late 1970s.

"As a patent-buster, you could do a lot of damage with this," said Greg Aharonian, publisher of the Internet Patent News Service. "I did a lot of work for law firms busting patents, and a lot of them would be happy getting something of this quality."

A patent is granted on the proviso that examiners can't find any precedence known as prior art--examples of comparable technology or inventions--that were made public before the patent application was filed. Opponents to E-Data's case now say the Telephone Software system, brought to their attention by a former customer, could be defined as prior art by the U.S. Patent and Trademark Office, thereby invalidating E-Data's royalty claims.

At Telephone Software, Magnin set up a system by which customers could dial in via modem, order software, then download their purchases. The description is similar that of the system Freeny has been credited with inventing.

Contacted yesterday, E-Data president Arnold Freilich said he had not heard of Telephone Software until this week, and he defended his patent.

"We do believe there are definitely distinctions in our patent vs. the system that was active in 1979," Freilich said. "We don't believe the technology in our patent could have been present in 1979, including automatic networking sequences and encryption and decryption."

Freilich acknowledged that certain claims of the Freeny patent might be similar to those of the Telephone Software system but added, "We still believe our patent is valid and enforceable."

On August 25, E-Data will present detailed explanations of each of the claims to the defendants in the infringement case. U.S. District Court Judge Barbara Jones also ordered E-Data to submit to each defendant an explanation of how the defendants' products and services infringe upon the patent.

On the advice of his attorneys, Magnin would not comment on the case when contacted last night.

Related story:
E-Data ordered to prove its point