the way of the patent fights
washingtonpost.com
On Trial: Whose Online Marketplace?
EBay Suit Showcases 'Business Practice' Patent Issue
By Jonathan Krim
Washington Post Staff Writer
Tuesday, April 22, 2003; Page E01
Since online commerce began, no amount of competition or dot-com downturn has slowed the juggernaut of Internet auction giant eBay Inc. But that could change at a trial opening today in federal court in Norfolk, where a Northern Virginia businessman who once worked for the CIA is claiming he holds key patents that cover how eBay does business.
Thomas G. Woolston, a Great Falls-based electrical engineer with a law degree and a history of working for military and intelligence services, wants eBay to pay him for how it runs parts of its popular business, which last year earned the Silicon Valley firm $249 million in profit on income of $1.2 billion.
EBay, which has battled furiously to limit or dismiss Woolston's claims since they were filed in October 2001, has told the judge that the claims are groundless and it will not settle.
But in November, when the case was cleared for jury trial, the company warned shareholders in a federal filing that if it loses, it "might be forced to pay significant damages and licensing fees, modify our business practices or even be enjoined from conducting a significant part of our U.S. business."
Although lawsuits claiming patent infringement are increasingly common, legal experts said that allowing the eBay case to go to trial shows that it is not frivolous.
"Patent cases are notoriously difficult," said Megan E. Gray, a Washington lawyer who specializes in privacy and intellectual property. "Judges are inclined to throw them out if there's any way possible. The fact that this guy has gotten to trial speaks volumes."
Woolston has successfully enforced his patents with other firms, including online car seller AutoTrader.com, which offers auctions as part of its service.
The case is a window on the increasingly contentious world of patents, especially those that evolved with the advent of the Internet. Four years ago, courts upheld a patent on Amazon.com's "one-click" system for online payment. The patent focused not on a product or its underlying technology but on a method of doing business that made use of available technologies and applied them to the Internet.
A non-Internet analogy would be the Post-it note, which brought together paper and glue in a new application.
As the Internet ignited and began transforming business and culture in the mid-1990s, such "business method" patents proliferated. According to the U.S. Patent and Trademark Office, applications for business-method patents soared from 584 in 1996 to 8,700 in 2001.
The patent office has been criticized for its approval process, at one point awarding a patent to a Minnesota boy for his method of moving sideways on a children's swing, rather than in the traditional back-and-forth style.
"They cause a lot of controversy," said Lisa A. Dolak, an associate professor of law at Syracuse University, even though the patent office has heightened its scrutiny of business-method applications. "But the phenomenon of Internet business-method patents is established."
Dolak said that under the law, the same basic threshold for patent approval -- that an idea must be new and not obvious -- applies to methods as well as to products or technologies.
Patent officials note that in 2001 they only approved 433 of the 8,700 applications, and that overall, business-method patents account for a tiny fraction of the roughly 180,000 patents issued each year.
Nevertheless, patent litigation has increased as the Internet bubble has deflated, said Jeffrey D. Sullivan, a New York patent lawyer.
"The cliche is that as business and the economy go down, litigation often does go up," Sullivan said.
Business-method patents have exacerbated the trend, Sullivan said, because most Internet companies don't have old-economy products to fall back on. Their primary asset is their intellectual property, leading some companies to aggressively enforce their patents as a source of revenue.
Woolston, 39, said he first came up with the idea of Internet auctions in 1994, during the Major League Baseball strike.
Woolston, who said he flew "airborne electronic warfare" missions in the 1980s before moving to the National Security Agency and then the CIA, said he wanted to electronically bring together buyers and sellers of baseball cards.
He failed to attract any venture capital for the idea, but filed for his first patent for an online auction system in April 1995, several months before eBay launched its service.
Ultimately, Woolston would receive two additional auction-oriented patents, and he formed an Alexandria-based incubator for online auction sites that tried to be a niche player in the world that eBay had popularized.
The ventures, Cheapfares.com and Leftbid.com, were sold to partners or failed because large firms like eBay and Priceline.com were simply too big and sucked up too much inventory of products that could be auctioned, Woolston said.
"The moral of this story is that patents or no patents, nothing's going to replace the first-mover advantage," he said. "No one in 1994 thought that a company with this idea could get so big so fast. Once companies get big, they don't need IP [intellectual property]. They've got market power, and they are willing to use a lot of resources to prevent enforcement."
Nonetheless, in what his attorney calls a "bet the company" decision, Woolston decided to focus his business, MercExchange, on patent creation, licensing and enforcement. He now holds five patents and has several others pending, but was forced to lay off his 30 employees.
Woolston also asked the patent office five years ago to overturn a patent awarded to Priceline.com, claiming that one of his patents should have been honored instead. The case is still pending.
In court filings, Woolston claims that he met with eBay representatives in 2000 to discuss the possible licensing or acquisition of his patents, which he argues is evidence that eBay has willfully infringed on his patents, making him eligible for triple damages.
One of his attorneys, Gregory N. Stillman, said that he has not seen all of eBay's patents, but that he has seen no evidence eBay has one that conflicts with Woolston's. EBay attorneys declined to comment. A company spokesman said only that the firm expects to prevail in court.
The company has argued that Woolston added patents as he watched how eBay's business evolved.
In a series of pretrial hearings, a judge narrowed Woolston's claims, ruling that his claim against eBay's core auction process was overly broad.
But U.S. District Judge Jerome B. Friedman is allowing Woolston to press ahead with claims involving his later patents that involve selling fixed-price items and having an integrated payment processor.
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