The article:
By KATHLEEN SAMPEY
Associated Press Writer
NEW YORK (AP) _ A little-known patent could raise the cost of
doing business over the Internet for companies selling software,
video or other digital products delivered online.
E-Data Corp. of Secaucus, N.J., is suing 17 companies, including
McGraw-Hill and CompuServe, to collect licensing fees on the
patent, which protects downloading of encrypted digital
information. A court hearing is scheduled Dec. 6 in New York on the
company's claims.
Analysts said the patent will not significantly restrain
Internet commerce, but would raise the cost of doing business on
the Internet and cause headaches for small start-up companies.
Some companies, including Adobe Systems and VocalTec, have
grudgingly paid the licensing fee. Others intend to fight it.
``We believe it's important to draw a line in the sand and make
them prove infringement,'' said CompuServe spokeswoman Gail
Whitcomb. ``We think their claim is way too broad.''
Arnold Freilich, E-Data's president, said the company bought
rights to the patent in 1994. He won't disclose how much the
company has made from it, but said it covers digital products such
as text, software, images, music and video transmitted through
phone lines to customers.
Companies that take orders for products over the Internet, then
ship them by mail would not be affected.
The patent was first issued in 1985 to Charles Freeny Jr.
Freeny, an electrical engineer, held the digital encryption
patent until 1989. Unable to make money on it, he sold it for about
$100,000 to a company called Avedas Corp.
``I didn't foresee the Internet,'' he said.
Avedas couldn't make money from it either and has since gone out
of business.
By 1994, when E-Data bought the patent for $290,000, the World
Wide Web had come of age, and so had the possibility of enforcing
the patent, which expires in 2003.
Peter Tracy remembers making the acquaintance of U.S. Patent No.
4,528,643.
His East Haven, Conn.-based company, MicroPatent, operates a Web
ite where users can search and download patent and trademark
information for 25 cents a page.
On March 22, he received a packet from E-Data saying his company
might be infringing on the patent. He could either pay a fee based
on the percentage of his Web site profits, or be sued.
``I felt like I had been sucked into (a) bottomless pit,'' he
said.
MicroPatent agreed to pay the licensing fee, which Tracy will
not disclose.
The cost of the annual fees range from 1 percent to 5 percent of
sales under $1 million, according to David Fink, E-Data's attorney.
For sales over $1 million, the rate is determined on an individual
basis, he said.
everal cases already have been dismissed because either
defendants paid the fees or they were found not to be in violation,
he said. Cases against Dun & Bradstreet, Decision Support and Meca
Software were dismissed. Company representatives either could not
be reached or refused comment.
IBM spokesman Fred McNeese declined comment on questions about
E-Data or the licensing fees.
But companies such as McGraw-Hill are anticipating the December
court hearing.
``We fail to see anything that we do in our businesses that
infringes on this patent,'' said McGraw-Hill spokesman Steven
Weiss. ``We've asked them continually what we've been doing, and
E-Data has not told us _ aside from accusing us.
``We have no plans to pay them anything,'' he said.
But Freilich said the patent is specific in its description of
encrypted digital data, which is how many companies have sold such
information since 1994.
For example, a customer orders a digital product over the
Internet, and pays for it through the Internet with a credit card.
These types of transactions are not all that new, as in
CompuServe's case.
But once the product has been downloaded to the customer's
terminal, an encryption code is provided by the seller to unlock
the encryption, thereby allowing the customer to use the product.
It is this added step that Freilich said the patent describes.
Today's network organization also makes the patent enforceable,
he said. In 1985 when the patent was granted, there was no such
thing as an addressable computer or the Web.
``The technology has brought us to the point where anyone's
computer terminal is addressable, where encryption is commonplace
and that has led to the enforcement of this patent,'' Freilich
said.
Scott Smith, analyst at Jupiter Communications, predicted the
case would not dampen Web commerce.
``I think it's a blip on the radar,'' he said. ``It may hurt
some of the start ups. But larger companies face this kind of thing
all the time. They'll be able to shake it off.''
While some may accuse E-Data of trying to stifle Internet
commerce, Fink sees his client's efforts merely as a means to cash
in on a legitimate, far-sighted investment.
``Besides,'' he said, ``3 cents on the dollar will not put any
company out of business.'' |
