Can a company patent Web commerce? Some marketers are accusing Chicago-based software and services provider Divine of trying to do just that. But Divine contends that by charging numerous marketers with patent infringement, it is merely trying to protect its proprietary suite of patents.
At issue are 64 patents that Divine obtained when it acquired Burlington, MA-based software developers Open Market and Eshare Communications in October 2001. Catalogers accused with infringement face thousands of dollars in licensing fees — not to mention the costs of potential litigation.
Cease-and-desist demands
This past September, Divine began contacting marketers with accusations of patent infringement. One estimate has Divine sending 40-50 cease-and-desist letters to marketers each week. Catalogers that have received letters from Divine include Albion, ME-based Johnny’s Selected Seeds, San Francisco-based RedEnvelope, Portland, ME-based Cuddledown of Maine, and Delaware, OH-based Gooseberry Patch. In these letters, Divine says it will sue unless the marketer pays a licensing fee or a percentage of its online sales.
“When we approach these companies initially, we conduct due diligence with respect to what we can observe on their Website and compare those facts to the claims of the patent,” says Richard Nawracaj, assistant general counsel for Divine. “When we come to a point where we believe that our patent is infringed, we approach the company and notify them. We invite them to discuss with us the issues involving the infringement, and specifically any kind of technology they may have under their Websites that we cannot see.”
The patents pertain to specific but core capabilities of online commerce. For instance, Divine’s Network Sales System (U.S. Patent #5715314, filed October 1994) covers the methods and processes used to transact business over networks, including the Internet. The text of the patent concentrates on actions that, some argue, are carried out at nearly every Website, as well as basic systems integration.
Another of Divine’s patents, Digital Active Advertising (U.S. Patent #5724424, filed November 1995), covers the process of purchasing goods and services over the Internet. It specifically patents the shopping cart and checkout processes. And its Internet Server Access Control and Monitoring Systems patent (U.S. Patent #5708780, filed June 1995) covers methods for identifying and tracking online customers throughout the buying process.
Petaluma, CA-based Website design firm Multimedia Live, whose 35 direct marketing clients include Coldwater Creek, Design Toscano, and Norm Thompson, bought licenses for the above three patents in October after being contacted by Divine in late September. Multimedia Live president/CEO Ken Burke says he decided to pay a one-time license fee rather than fight the suit, which the company estimated would cost $250,000-$500,000. The license protects Multimedia’s clients by insulating them from Divine’s claims. In a statement released to clients, Multimedia said: “It is important to note that many e-commerce sites in operation today violate one or more of these patents. Companies that are not clients of Multimedia Live will be forced to settle any patent disputes directly with Divine to the extent Divine believes that they are infringing.”
Catalogers contacted by Divine so far are outraged. Horticultural cataloger Johnny’s Selected Seeds received its letter from Divine in October. Director of operations Bill Gallagher says that Divine has accused Johnny’s of infringing on two of its patents. To license Divine’s patents — and avoid litigation — Gallagher says, Divine is asking for a one-time fee of $20,000 or 1% of Johnny’s gross Internet sales — whichever is greater.
At press time, Gallagher had not decided how Johnny’s would respond to Divine’s claim. “We don’t process our orders the way they are charging,” he says. “Their claims are so broadly interpreted that every commercial Website out there will be in violation.”
Liz Plotnick, chief operating officer of gifts and houseware marketer Gooseberry Patch, says it received a cease-and-desist letter on Nov. 6 asking for 1% of its Internet sales or $10,000. The mailer told Divine that it would address the issue after the holiday season, but as of early December Plotnick wasn’t sure what she would do.
“We are simply surprised that the U.S. Patent Office staff did not see the larger picture of what this patent meant to our new world of Internet commerce,” Plotnick says. “Our staff and outside consultants hired by us worked very hard to develop an ‘original’ system with all-original code, and yet companies like Divine are able to attempt to claim that we are infringing on something they created. This will affect every company that sells anything over the Internet, whether a small company like Gooseberry Patch or a large entity like Amazon.com.”
The wonderful world of patents
“I can’t speak to the legal ramifications on this issue,” says Ernie Schell, president of Southampton, PA-based consultancy Marketing Systems Analysis, “but from a technology perspective these patents appear to be so broad as to be meaningless — or else to cover virtually all secure e-commerce as we know it. With all due respect to our former vice president, the claims for unique methods asserted in these patents have all the authenticity of Al Gore claiming to have invented the Internet.”
A cataloger who was contacted by Divine, and who spoke on condition of anonymity, agrees: “Essentially these guys are trying to patent e-commerce. Their claims could not be any more broad.” Nonetheless, rather than slog through a legal battle, the cataloger decided to buy a license from Divine.
That’s because fighting the matter in court would be expensive. According to Houston-based patent attorney Hugh Kress of Winstead Sechrest & Minick P.C., defending oneself from charges of patent infringement can easily cost hundreds of thousands — or even millions — of dollars. Just to file a single motion with the court called an invalidation defense costs $20,000-$25,000, he notes, and that’s not including lawyer fees. Many of the smaller marketers that Divine has contacted so far are unlikely to be able to afford the option of fighting the infringement charges.
Then again, says Curt Barry, president of Richmond, VA-based catalog consultancy F. Curtis Barry and Co., “it will be more expensive for our industry to ignore Divine until they find us one catalog at a time.” Several of the catalogers contacted for this story were in fact considering forming a coalition to fight back.
The e-commerce industry has actually become a hotbed of patent disputes. This stands to reason, since according to Kress, the number of patent filings in the e-commerce field — so-called business method patents — has skyrocketed in recent years, overwhelming the patent office.
Some users have successfully contested patents. In October 2000, Amazon.com alleged that online competitor BarnesandNoble.com illegally copied a patent involving Amazon’s one-click shopping technology. The following February, a Court of Appeals overturned an earlier decision in favor of Amazon. The decision, according to a statement from BarnesandNoble.com, “raised substantial questions as to the validity” of the one-click patent. But a BarnesandNoble.com spokesperson says the marketer settled with Amazon within the past year; terms were not disclosed.
The crux of the matter
If the Internet protocols that Divine has patented are as broad as some say, are the patents then valid? That’s tough to say. For an invention to be patentable, Kress explains, it must be deemed “new, useful, and nonobvious.”
In challenging a patent, one must prove there was “prior art” available on the subject showing that the claimed invention was not novel or would have been obvious to a person of ordinary skill. Prior art includes any patent or publication published prior to the filing date of the application. The challenger is responsible for conducting a search for prior art to identify relevant references that the patent examiner didn’t consider during the application process.
A challenger can also show that statements made by the patentee during the patent application process limit the scope of patent protection. For example, in distinguishing the claimed invention from prior art cited by the examiner, a patent applicant may have made statements that required the claims of the patent to be interpreted in a particular way, misled the examiner, or mischaracterized the prior art. For instance, a word in a patent claim such as “network” may have a broad meaning in everyday use, but a more limited definition when interpreted during the application process.
Considering that the rights to the basic underpinnings of their Websites are at stake, it seems it would behoove catalogers to band together to fight the e-commerce patent claims. “With the growing importance of the Internet to traditional cataloging, this issue has broad ramifications and could affect any of our industry businesses,” Barry says.
For Divine’s part, Nawracaj says the company is trying to “maximize our intellectual property and maximize the value to our shareholders. But we’re also looking for an equitable and fair solution of our technology.” Apparently Divine is anticipating more Internet patent litigation, as it has retained Chicago-based law firm Bell, Boyd & Lloyd.
And Nawracaj notes that Divine’s portfolio includes 64 U.S. and international patents, with 150 or more additional patents pending. Included in these suite of patents are 44 related to telephony and call centers. “All these patents are subject to our pursuit efforts,” says Nawracaj.
Patent Indemnity
Patents give one “the right to exclude others from making, using, or selling” the claimed invention, explains Hugh Kress, a patent attorney with Winstead Sechrest & Minick P.C. So if a cataloger has outsourced the development of its Website to a third-party software development company, both the cataloger (the licensee and “user” of the allegedly infringing software) and the software developer (the “maker” and “seller” of the allegedly infringing software) are potentially liable to the patentee.
Prudent licensees typically demand indemnity clauses to shield themselves from infringement for use of licensed software, Kress says. For instance, a cataloger may insist that a software developer agree to defend it against charges that the software developed infringes a third party’s patent. As was the case with Multimedia Live, most software developers will step in as indemnitors to protect existing — and future — clients, Kress says.
— MDF
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