For Once, Law Anticipates Technology: The E-Data Patent Saga

by Edmund B. Burke

Educom Review, Volume 32, Number 2, March/April 1997

The most intriguing bit of Web-related litigation for 1997 may well be the now-notorious E-Data patent case, which will continue to wind its way through the judicial system in 1997.

The case illustrates ways in which technological changes may suddenly make certain older patents, which were thought to be commercially meaningless, extremely valuable. The result is in effect a "hidden tax" assessed upon those who find new commercial applications for previously unused technology ideas.

Mr. Charles C. Freeny, Jr. obtained U.S. Patent 4,528,643 in 1985 but was unable to make any money from his invention. He eventually sold the patent for about $100,000 in 1989 to a company named Avedas Corporation, which did not have much better luck and which eventually went out of business.

In 1994 the patent was acquired by E-Data Corp. for nearly $300,000. This was still no doubt a bargain since, as Mr. Freeny has recently observed, "I didn't foresee the Internet."

Mr. Freeny's humble observation is probably an oversimplification. In Mr. Freeny's defense, the lack of foresight was not so much of the Internet as of the commercial applications for the Internet, which are still taking shape. It is the Internet as a true and complete instrumentality of commerce - as a means for browsing, product delivery and payment, so that transactions are started and entirely completed on the Internet - that is bringing fame (or notoriety) to the E-Data patent. Companies that simply take orders for products over the Internet, and then ship the products by regular means to customers, will not find themselves entangled with the E-Data patent web, because product delivery is accomplished by a non-Internet means.

E-Data has already licensed the patent to some 18 companies, including IBM and Adobe. It has patent lawsuits pending against some 13 companies, including Broderbund Software, CompuServe, Internet Shopping Network, Intuit, McGraw-Hill, Waldenbooks and Ziff-Davis. The most prominent lawsuit is being conducted in the U.S. District Court for the Southern District of New York.

In a December 20 hearing, Judge Barbara Jones set an April 21, 1997 target date for the defendants to file motions specifying their interpretations of the patent's claims, and how these patent claims relate to the underlying commercial transactions at issue. E-Data will then have one month in which to reply to and contest these interpretations. The good news for E-Data is that the lawsuit is very much alive and is being seriously considered by the court, which has now set up a fairly elaborate procedure to sift through the competing contentions. E-Data's patent counsel announced that the company was "pleased with the Judge's ruling and with the procedures in moving towards her decision on legal interpretation of the patent's claims." But E-Data will have to convince the judge to read the claims expansively, while the defendants will argue strongly for a more limited interpretation, especially with respect to critical elements of the claims concerning the encrypting and decrypting of authorization codes.

What does the patent cover and what will be the impact on the use of the Internet? If E-Data prevails on the interpretive arguments around the claims, the patent, entitled "System for reproducing information in material objects at a point of sale location," may cover many applications in which information (which may be software programs, video, audio, text files or any combination thereof) is downloaded to a user's computer and then stored on hard disk or other permanent media. If E-Data's interpretation is upheld, then the patent's coverage could be wide indeed, giving E-Data the right to control (and require royalties for) many forms of electronic distribution.

The patent claims a method for transferring information from a remote computer (such as an Internet host machine) to an "information manufacturing machine" (IMM) at a "point of sale location." The IMM then employs the transferred information, along with certain critical "authorization codes" at the point of sale location to make a "material object." If a user computer in fact qualifies as an "information manufacturing machine" which resides at a "point of sale location" and the computer's permanent storage medium qualifies as a "material object," then E-Data will have gone a long way toward proving its case, provided that it can establish the usage of the required "authorization codes" in the downloading of information.

The patent as drafted really contemplated the remote manufacture of "material objects" such as records or tapes or software programs at a "point of sale" such as a retail store. For instance, a customer would visit the local computer store (or record store) and preview the items to be purchased. After making a purchase decision, the retail "point of sale" location would then use the IMM to manufacture a "material object" such as a software diskette or a cassette tape, which the customer would then purchase from the merchant.

This basic method would solve many of the problems inherent in the retail distribution of information-bearing merchandise, such as stocking inventory (a problem for the retail merchant) and manufacturing products (a problem for the information-owner, who doesn't know in advance how many copies to manufacture or where to ship them).

The E-Data patent controversy is principally interesting because it stretches the concept of a "point of sale" location to extend to the computer in your home office, which also contains the "material object" that you purchase. Where does the sale take place when you order software that is Internet-delivered and paid for by credit card, all electronically? Is the user computer a "point of sale"? And if not, why not? Is a third-party intermediary (such as a retail merchant) really required to have a "point of sale"?

It does not appear that ordinary Web-browsing will be affected by this litigation. E-Data would face quite a hurdle in trying to establish that temporary copies made by your home computer in the course of Netscape-like browsing could be "material objects"; other patent requirements would probably not be satisfied either. However, if a permanent item of useful information is transferred and stored by your home or office computer, then the information-provider may end up paying the "E-Data" tax on this item, which E-Data says will be about three percent. By the way, it's up to you to guess how the information-providers manage to recover this additional three percent cost.

Good news for information-using taxpayers, however. The patent will expire in July 2002 and any E-Data "tax" will end. It is a very good bet that you will not be so fortunate with the Internal Revenue Service.

Edmund B. (Peter) Burke practices intellectual property and information technology law in Atlanta with Sutherland, Asbill & Brennan, a law firm with offices in Atlanta, Austin, New York and Washington, D.C. [email protected]

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