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As a result of a recent decision by the U.S. Court of Appeals for the Federal Circuit in Interactive Gift Express v. Compuserve, Inc., companies that utilize a certain method to allow customers to download products online may be liable for patent infringement. If the plaintiff, now known as E-Data, Corp., successfully enforces a patent that encompasses downloading software over the Internet, the company could potentially require licensing agreements and the payment of licensing fees for all Internet software downloads. This is a big deal — according to Carl Oppedahl, attorney for one of the defendants, who reportedly stated that E-Data would become “wealthier than Microsoft” if it prevails in this patent litigation. THE FREENY PATENT Years ago, long before “e-commerce” was even imagined, E-Data (then called Interactive Gift Express), obtained what is known as the “Freeny patent” — a patent directed to a system for reproducing information in material objects at point of sale locations. The patented system was originally used on site at retail stores. But once sales began taking place over the Internet, E-Data came to the conclusion that certain defendants, including Compuserve, Inc., Broderbund Software, Inc., Waldenbooks, Ziff-Davis Publishing Company, Intuit, Inc., Internet Software, Inc. (now known as Internet Shopping Network, Inc.), Softlock Services, Inc., Telebase Systems, Inc., The Library Corporation, Apogee Software Limited and Soft & Net Distribution, S.A. were infringing this patent, and initiated patent litigation against them. In March 1999, the U.S. District Court for the Southern District of New York ruled that the defendant companies had not infringed the Freeny patent. Specifically, the court ruled that the patent was not broad enough in scope to cover Internet downloads. E-Data then filed an appeal to the U.S. Court of Appeals for the Federal Circuit. In November 2000, the Federal Circuit dealt the defendants a blow by vacating the judgment and ruling that the district court had interpreted the Freeny patent too narrowly. The defendant companies filed a petition for a Federal Circuit panel rehearing. The petition was granted — but the defendants didn’t get the outcome they wanted. On July 13, the panel issued a new decision that essentially upheld the November 2000 opinion. ERROR IN CLAIM CONSTRUCTION The Federal Circuit found that the district court “erred as a matter of law” in at least one aspect of its construction of each of the five claim limitations upon which its judgment of noninfringement was based. E-Data claimed that the defendants, computer software and publishing companies and one retail bookstore, infringed on the Freeny patent by selling software and documents over the Internet. The Federal Circuit stated that, other than for one exception, “all of the accused systems distribute information directly to consumers’ personal computers without using an intermediate retail location,” as the consumer instead deals directly with a Web site over the Internet. Thus, “information is distributed and downloaded onto a consumer’s own internal hard disk or other storage device without the purchase of any material object such as a floppy disk or CD-ROM.” Contrary to the district court’s ruling, the Federal Circuit found that these accused systems could very well infringe the Freeny patent because “the Freeny patent provides a system for the distributed manufacture and sale of material objects at multiple locations directly serving consumers.” The patent further provides that “information can be copied onto a selected type of material object whenever the consumer requests it,” and “consumer demand thus can 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 panel sent the case back to the district court, ordering the court to rule again consistent with the Federal Circuit’s broader interpretation of the Freeny patent. THE POWER OF THE PATENT If the district court rules as ordered, the Freeny patent may be interpreted to be broad enough to cover the downloading of software over the Internet. This underscores the power patents can confer on patent holders. Given the recent deluge of patent applications at the Patent and Trademark Office, it will be interesting to see which applications ultimately are awarded patents by the PTO, and which patents come to dominate the marketplace. Eric J. Sinrod is a partner in the San Francisco office of Duane Morris, where he focuses on technology and litigation matters. His Web site is sinrodlaw.com and his firm’s site is Duane Morris.Mr. Sinrod may be reached by e-mail at [email protected]

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