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In a closely watched patent lawsuit involving e-commerce, a federal appeals court last week ruled for a patent holder and against a group of mostly software companies. The case, Interactive Gift Express Inc. v. Compuserve, et al., is one of the first decisions by the U.S. Court of Appeals for the Federal Circuit interpreting patents that lay claim over the business methods of e-commerce companies. The Federal Circuit is the final arbiter of most of the country’s patent disputes, and so-called business method patents are a controversial area of intellectual property law. The scope of the loss for the 10 companies involved in the case — which include Compuserve Inc., Broderbund Software Inc., Waldenbooks, and Ziff-Davis Publishing Co. — is unclear, as lawyers are still sorting out the Nov. 3 decision. What is certain, though, is that the three-judge Federal Circuit panel unanimously reinstated a 1996 lawsuit by Interactive Gift Express, now known as the E-Data Corp. The case will now go back to U.S. District Judge Barbara Jones of the U.S. District Court for the Southern District of New York. Greenwich, Conn.-based E-Data claims it holds a 1985 patent that covers the basic process for selling content — including downloadable music, books, and films — over the Web. According to the Federal Circuit, the invention at issue lets companies sell directly to consumers at remote locations without having to stock warehouses full of products at those locations. Information can be copied onto a selected type of “material object,” such as a book or a computer disc, one sale at a time. “Consumer demand can thus be met without having to rely on manufacturing estimates and without having to bear the costs associated with overproduction, inventory control, shipping, and warehousing,” the Federal Circuit wrote. E-Data claims the defendants infringed on the patent by selling software or documents over the Internet-services that were not widely available when E-Data was awarded its patent in 1985. In May 1998, Jones held that E-Data’s patent could not be expanded to cover Internet-based technologies. E-Data appealed to the Federal Circuit. Federal Circuit Judges Richard Linn, Jay Plager, and Alvin Schall have now ruled that Jones’ interpretation of the patent was too narrow. The court ordered Jones to review the case again under its broader interpretation of the patent. E-Data lawyer Albert Jacobs, of the New York office of Greenberg Traurig, could not be reached for comment. In a press release, E-Data President Scott Hillstrom called the decision “a strong victory for E-Data.” While the case revives the lawsuit, Broderbund lawyer Claude Stern of Palo Alto, Calif.’s Fenwick & West noted that the Federal Circuit sided with the defendants on some key elements of the suit. “The ultimate effect may not be bad for us,” said Stern. For instance, one of the key issues in the case is whether information delivered over the Web constitutes a “material object” as covered by E-Data’s patent. The Federal Circuit rejected E-Data’s argument that information is a material object. Since many of the defendants sell only information online, that ruling could provide the winning argument. Even if Jones, on reconsideration, rules that the defendants infringed E-Data’s patent, the defense has another plan of attack. Stern says the defendants would still have the opportunity to argue that the patent is invalid because the processes it covers were already in use as early as the 1970s. Edward Reines, an intellectual property lawyer in the Silicon Valley office of Weil, Gotshal & Manges who is not involved in the case, says the ruling “is one of the earliest Internet business method patents to be construed this broadly.” Judge Linn, the author of the decision, is a former patent lawyer who joined the court at the beginning of the year. Reines says that Linn has “made clear he doesn’t view business method patents as applied to e-commerce in a restrictive way.”

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