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According to conventional wisdom, corporations often turn to their patents in an economic downturn as a means to supplement their revenues. While this may generally be true, a slightly modified paradigm can be said to apply to Internet patent litigation — and the difference can be attributed to numerous factors, including the burst-bubble stigma regarding the new Internet economy, uncertainty regarding the value and enforceability of Internet patents, and a direct correlation between the value of those patents and the success of the Internet economy. The dot-com boom saw a flurry of activity in the courts, as companies whose businesses were grounded primarily in the Internet hustled to the patent office and then the courthouse to stake their claims to e-commerce. Businesses litigated a myriad of rights to e-commerce, including technologies related to Internet coupons, Web advertising and search engines. The excitement subsided after the spring of 2000 when the bubble finally burst and the new economy came crashing back down to earth. Legitimate concerns were then raised (and arguably substantiated) regarding the viability and profitability of e-commerce. At the same time, many legal commentators were occupied questioning the value of Internet-related patents, and, particularly, business method patents, and pondered whether they would withstand the painstaking scrutiny that patents are normally subjected to when asserted in a patent infringement action. Some viewed patents on Internet technologies as a passing fad, or as a bargaining chip for use in the hunt for venture capital. Recent trends in the economy and the courts and the general perception of Internet patents could now lead to a revival of patent litigation, as businesses that endured the Internet bubble now clamor for space in a crowded market. Several sizeable judgments in high profile litigations underscore a recent upswing in e-patent litigations that shows no sign of abating. In August, the U.S. District Court for the Eastern District of Virginia upheld a decision in MercExchange, LLC v. Ebay, Inc., trimming the $35 million damages awarded by the jury to $29.5 million and possibly further fueling the proliferation of e-patent litigation. According to press reports, it was in that same month that a jury in the U.S. District Court for the Northern District of Illinois awarded Eolas Technologies over $520 million in damages from software and Internet giant Microsoft — by far the largest damages award to date in an e-patent litigation. On the hardware-related end of e-patents, patent holding company NTP Inc. was awarded $53 million in damages and attorney fees against Research in Motion (RIM), the maker of the Blackberry portable e-mail device. These decisions and those in other Internet-related patent litigations, in combination with an economy on the mend that has grown to accept as viable the once-questioned Internet economy, have provided significant new validation of e-patents and their value, and the acceptance of those patents by federal courts. These new indicators of e-patent worth could lead to continued increases in litigation of software- and Internet-related patents. THE ‘MERCEXCHANGE’ DECISION MercExchange filed suit against eBay in September 2001, charging the e-commerce giant with infringement of three of its patents related to online auction technology, fixed-price trading and marketplace search methods. Judge Jerome B. Friedman dismissed the claims concerning online auction technology, but this past May a jury found that eBay and its Half.com subsidiary willfully violated MercExchange’s other patents. In August, the court reaffirmed the jury verdict but trimmed the award from $35 to $29.5 million. The decision could affect one of the most popular features on eBay’s Web site and one of the most successful aspects of its business — its fixed-price sales. With fixed-price sales, eBay shoppers can buy items for a set price rather than bidding in a traditional auction process. THE CASE AGAINST MICROSOFT The $520 million award to Eolas from Microsoft Corp. was for infringement of another Internet technology that allows Web page developers to embed third-party applications in Web pages. A browser, such as Microsoft’s Internet Explorer, equipped with the patented technology, can be confringured to automatically execute third-party applications through embedded instructions in Web pages. The technology is used often with video players, stock tickers, games and other interactive content. If Eolas sustains its success against Microsoft in the U.S. Court of Appeals, the company’s attorneys have promised that Eolas will continue to pursue other browser makers and distributors around the world. In view of the fact that most Internet users access the Internet using browsers, the indirect effects of such a licensing campaign on e-commerce could be staggering. Ironically, Microsoft’s loss in this litigation could ultimately be an even greater loss for its competitors and an indirect gain for Microsoft. If competing software applications can no longer be embedded in the new version of the Internet Explorer browser that Microsoft is developing to work around the patent, competitors could be deprived of the extensive use and exposure that they are currently afforded as a result of Internet Explorer’s majority share of the browser market. Conspiracy theorists speculate that Microsoft may have secretly hoped to lose the litigation to promote its continued dominance over the browser market and to solidify its stronghold as an out of the box software solution for most ordinary computer users. Indeed, should Microsoft be required to exclude competitors from running embedded applets within the browser, Microsoft would likely package and/or incorporate its own technologies within Internet Explorer to provide the same functionality, a configuration that was the subject of heated debate in Microsoft’s antitrust litigation. The Eolas decision could have such wide-sweeping ramifications for the Internet that on Oct. 23 the World Wide Web Consortium (W3C) filed with the U.S. Patent and Trademark Office (PTO) a request for reexamination of the Eolas patent in light of HTML+, a technology previously considered by the judge in the Eolas case but barred from evidence at trial. Acting on the advice of the W3C HTML Patent Advisory Group, W3C has presented the PTO with prior art allegedly establishing that the patent is invalid. W3C Director Tim Berners-Lee wrote an unprecedented request to James E. Rogan, U.S. Under Secretary of Commerce for Intellectual Property, to take action to remove the patent to allow operation of the Web. ‘NTP INC. V. RESEARCH IN MOTION’ The ruling in favor of NTP Inc. came in its case against RIM for infringement of five NTP patents related to the use of RIM’s popular RF wireless Blackberry devices. In addition to ordering RIM to pay over $53 million, the judge issued an injunction that prevents RIM from selling, using or importing its wireless e-mail devices and server software in the United States. OTHER NOTABLE LITIGATIONS Not only will the eBay, Microsoft and RIM defeats likely buttress the recent push toward increased litigation, but they are significant enough that they could bring to bear a substantial impact on many already-filed e-patent infringement lawsuits. Though the largest awards have received the most media coverage, numerous other notable e-patent cases have been vigorously contested over the past year. The outcomes of these other disputes could, in turn, have a profound impact both on e-commerce generally and specifically on the litigiousness of e-patent holders. In March of 2002, Pangia Intellectual Properties (PanIP) began a patent enforcement campaign by filing suit against 10 small online merchants (notably, this was the same month that the company was incorporated). In the following year, another 50+ lawsuits were filed by PanIP claiming infringement of its two main patents, which cover an “automated sales and services system” and an “automatic business and financial processing system,” respectively. According to a conglomerate of PanIP defendants, any business that uses graphics and text to sell products online, or uses the type of credit card acceptance system that drives e-commerce, could be a potential defendant. “Under PanIP’s theory, virtually every business in the United States that sells products using the Internet would be liable to PanIP for patent infringement, and could be required to pay a royalty.” According to a spokesman for one defendant, PanIP claims it essentially “has patented electronic commerce.” A Web site (and subsequently the PanIP Group Defense Fund) was formed to inform the business community about PanIP’s actions and to aid the defendants in combatting the lawsuits. The PanIP defendants enlisted the help of the public, both for funding and to aid in the substance of their defense. In May they filed requests with the PTO to reexamine both of PanIP’s patents, which requests were later granted. In June, the court granted a motion to stay the cases pending the outcome of the proceedings in the PTO. If the broad PanIP patents survive reexamination, the already-aggressive PanIP licensing campaign could continue with increased intensity. 24/7 Real Media recently acquired new e-patent rights relating to targeted advertising on the Internet that the company plans to enforce. The online ad-serving industry is one that experienced a bout of litigation in the early days of the dot-come era, but the litigation has since subsided. Consistent with the recent trend, 24/7 Real Media’s chairman and chief executive David Moore indicated in March that the company would continue to pursue its aggressive licensing campaign, and to that end did not rule out the possibility of litigation. Online targeted advertising could once again become the subject of protracted disputes in the federal courts, particularly in light of the recent successes of other e-patent holders in federal courts. Likewise, the online coupon industry had experienced a reduction in patent litigation following a flurry of litigation during the dot-com boom era. In March of this year, however, online coupon company E-centives filed suit against Coupons, Inc. for patent infringement. E-centives holds patents related to techniques for securely enabling print-at-home coupons. E-centives has not ruled out a return to the litigiousness that marked the early days of the online rewards sector. Several other companies have aggressively enforced their patent rights to Internet-related technologies. Acacia Media continued with its campaign to license its patents related to online streaming of data by filing suit against RadioIO Webcasting. Acacia’s current licensees include computer and media giants Microsoft and America Online. More recently, Netratings filed a patent infringement suit against The NPD Group alleging infringement of a Netratings patent directed to tracking computer use. TREND SEEMS LIKELY TO CONTINUE The deluge of activity in the courts seems to represent an increase in e-patent litigation, and several factors suggest that the upward trend will continue. First, the recent judgments against companies such as Ebay and Microsoft are substantial. Such eye-popping numbers may prove irresistibly tempting to companies holding e-patents, particularly Lilliputian companies like MercExchange and Eolas that are situated against media giants. Not only were the judgments in these cases substantial, but the litigations were high-profile against dominant Internet corporations. The subjects of the litigations were hotly contested, and even controversial, patent rights. The media exposure and the resulting verdicts will undoubtedly cast an additional spotlight on e-patents, and could lead some patent holders to take more aggressive enforcement positions than they might have otherwise in the absence of those verdicts. More generally, the new economy has materialized as a viable one. Today’s eBay, Amazon and AOL have the potential to be the blue-chip equivalents of their 1980s counterparts. Since the impossible boom of the late ’90s and the subsequent inevitable bust in the spring of 2000, the Internet has emerged as a global economic medium that few could have envisioned. The end result is that exclusive rights to Internet technologies, or, more properly, the rights to exclude others from practicing Internet technologies, have become exponentially more valuable. Indeed, the Internet commerce sector has become so competitive, and the proclivity of Internet companies to engage in patent litigation so strong, that some analysts now advise investors to carefully investigate a company’s Internet patent portfolio before considering investment. The trend in e-patent litigations will likely be accompanied by parallel licensing trends. Patent lawsuit filings in the United States were up 30 percent last year from 1997 — most settling out of court, and a significant portion being Internet-related. Microsoft and Yahoo are among large companies in the sector to have also settled patent lawsuits in recent months via license agreements. With the increased validation of e-patents, more settlements and licenses are likely to emerge as companies grow increasingly wary of the specter of e-patents and defending an infringement suit. Accordingly, Internet-related intellectual property has recently been, and should continue to be, protected with increasing intensity. These elevated enforcement efforts will likely be accompanied by an increase in filings of e-patent litigations. The culmination of these factors can be seen in litigations and licensing campaigns that have been instituted in the last year. CONCLUSION In the wake of the victories of MercExchange and Eolas, many legal experts believe that there will be more litigation over Internet patents — and furthermore, that the litigations will be more likely to result in favorable outcomes for the patent holders than in litigations from the dot-com era. The odds of success in these kinds of cases may have increased now that e-patents have survived battle-testing in the federal courts and the patent holders have realized substantial judgments. Critics liken the recent wave of e-patent lawsuits and licensing campaigns to a form of “legalized extortion,” through which patent holding companies are abusing the State Street Bank ruling to obtain and exploit patent rights for old ideas as applied in a new medium. Justified or not, the fact remains that the recent court decisions, combined with the validation of the new economy and emergence of the Internet as a thriving business medium, will likely result in a continued upswing in the filing of patent litigations and more aggressive pursuit of wide-sweeping patent licensing campaigns. Neil P. Sirota is a partner in the Intellectual Property group of the New York office of Baker Botts (www.bakerbotts.com) . Robert L. Maier is an Intellectual Property associate in the same office. 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