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Net music faces patent squeeze

A recent court decision could make it more expensive for companies including AOL, Microsoft and Amazon to offer streaming audio, music samples and other services over the Net.

Online music companies may have a new headache to deal with after a recent court decision on a download-technology patent.

While patent adversaries feud publicly over the terms of a confidential settlement and the significance of the ruling, the underlying suit could make it more expensive for companies including AOL Time Warner, Microsoft, RealNetworks and Amazon.com to offer streaming audio, music samples and other services over the Internet.

The patent in question belongs to Intouch Group, a 15-employee digital music company in Berkeley, Calif., that has sued Amazon, AOL Time Warner's Entertaindom, Liquid Audio, Muze, Listen.com and Loudeye Technologies' DiscoverMusic, accusing them of infringing its patent covering a potentially wide range of downloadable and streaming music.

Intouch also has designs on subscription-based streaming audio services, including MusicNet--a joint venture of RealNetworks, AOL Time Warner, Bertelsmann and EMI Group--and the Microsoft-allied Pressplay, a joint venture of Sony and Vivendi. Not named in the lawsuit, those services are now in licensing negotiations over the patent, according to Intouch.

The defendants won a key point in a June decision by the U.S. District Court for the Northern District of California, which limited the patent's scope to music files "substantially less" than full-length. In what sources close to the case described as an "ask for the moon" strategy, Intouch had argued that the patent applied not only to short portions of songs but to compressed versions, including MP3s, of full-length songs. If the court had granted that interpretation, the patent's reach would have extended to virtually all downloadable and streaming music.

Nevertheless, Intouch said the court granted or even expanded its key interpretations of the patent, putting it in a strong negotiating position with defendants and licensing candidates.

"In our eyes, (the decision) was a clear win for Intouch, and because of this, we feel several of the Defendants will now seek settlement vs. moving to trial," Intouch Chief Executive Josh Kaplan wrote in an e-mail interview.

A Loudeye Technologies representative said the case lacks merit. AOL Time Warner and MusicNet declined to comment on the patent. Amazon, Liquid Audio, Listen.com and Pressplay did not return calls seeking comment.

Intouch holds two patents in the area of downloadable music samples. The first, known as the "157" patent, covers a method of downloading music portions at a kiosk. The second, known as the "916" patent, covers downloading music portions over a computer network. Both patents require that the music downloaded be significantly shorter than the full-length file and that the listener be uniquely identified--for example, by placing a cookie on the computer.

Intouch's allegations that the defendants are violating the "916" patent are of particular concern to online music retailers such as Amazon, which offer customers samples of music before they buy.

The threat to Pressplay and MusicNet
But the threat to streaming subscription services, such as those offered by Microsoft, Sony and Vivendi's Pressplay, and RealNetworks' MusicNet, could be more sweeping and lucrative for the small company, enabling it to collect licensing fees on most online music distribution.

Should its patent be upheld in a trial scheduled for April 15, Intouch expects to be able to charge licensees either 1 percent to 5 percent of sales, or anywhere from a half-cent to 1.6 cents per download, depending on volume, according to a damages expert retained by the company.

The Intouch case has elicited comparisons with the ongoing litigation between software makers and E-Data, another small company with a potentially far-reaching patent. That case, entering its sixth year, inched forward last week with a ruling favorable to the patent holder.

Companies including IBM, VocalTec and Adobe have chosen to license E-Data's technology rather than fight its patent claim.

New York-based Muze, which catalogs album and artist data, said it settled its dispute with Intouch in a confidential agreement. But despite the confidentiality of the settlement, both companies vociferously contradicted each other's interpretation of the deal.

Muze showed CNET News.com a copy of its dismissal from the case. But Intouch attorney Rene Tatro said Muze was hardly out of the woods on the crucial 916 patent claim.

"The ONLY settlement we reached with Muze came from the '157' kiosk patent suit," Tatro wrote in an e-mail interview. "Further specifics of the settlement are confidential...We're expecting to take this all the way through trial, and will be seeking injunctive relief against infringers." Muze claimed that the dismissal included both of Intouch's patent claims.

In a decision dated June 20, the U.S. District Court for Northern California clarified the patent's parameters in a so-called Markman hearing. Both sides claimed victory in that decision.

Intouch had argued that the patent's use of the term "portion" should include compressed versions of songs, even if they were full-length. The court rejected that argument.

"There are several bits and pieces of this decision cutting down the exposure of the defendants," Smith said. "But most important to the industry is that the judge ruled that these patents don't cover (full-length versions) of MP3 or other compressed versions of songs."

Tatro called the Markman decision a win for Intouch.

"A good many of the interpretations urged by Intouch were adopted by the court, verbatim," Tatro wrote. "Even if the 'portion' interpretation stands up through trial or on appeal, it is quite clear that there are numerous infringers, including many of the present defendants in the lawsuit...In our view, we think overall the Markman interpretations were a plus for Intouch."

The patent will undergo new scrutiny at the April trial. Now that the court has defined its terms, the patent will have to pass the tests of being new and nonobvious.

Defendants may get a lift from a recent contest held online to find "prior art," older examples of the invention that would invalidate its patent in court. BountyQuest, a site co-founded by Amazon Chief Executive Jeff Bezos after a challenge to one of Amazon's own patents, granted a $10,000 bounty for an example of prior art thought to be relevant to the Intouch patent.

The prior art recovered by the bounty "could significantly damage Intouch's patent infringement case by knocking out several of its key claims," the company said in announcing the winner, Perry Leopold, founder of the PAN Network, a Web site devoted to downloadable music.

Leopold reacted with derision to the notion that technology in question could be patented.

"In my view, downloadable digital audio always has been, and always should be, public domain," Leopold said in an interview. "Anyone who attempts to patent it has not done their homework. The Patent Office also dropped the ball on this one. The patent bar has been lowered so far you can trip over it if you're not watching."

Intouch dismissed the threat posed by Leopold's invention.

"BountyQuest is a service funded by Amazon, a defendant in this case," Kaplan said. "We have looked at the BountyQuest submission in detail, and they apparently awarded $10,000 to somebody who put forth a system that does not reflect the claims of our patent."