E-Commerce Battles ‘Me’-Commerce

It took seven years and tens of thousands of dollars in legal fees, but Lawrence Lockwood was finally awarded U.S. Patent No. 6,289,319 in September 2001.

The former San Diego travel agent believed that the patent, for an “automatic business and financial transaction processing system,” gave him significant control over shopping on the Internet.

He promptly sent letters to 100 e-commerce firms, saying they were violating his new patent as well as one from 1996. He politely suggested they buy a license from him for $10,000, although he hinted that the price was negotiable.

Ten companies told him to get lost. The 90 others didn’t bother to reply.

“American businesses do not respond when you ask them nicely,” Lockwood said.

So he started suing them -- a New Jersey plumbing supply company, a New York ski shop, an Oregon fabric store. This has gotten their attention, and often their money too.

Lockwood’s targets complain that he is practicing “legalized extortion,” an accusation he denies.

“If you saw someone infringe property rights given you by the U.S. government, what would you do?” he asked. “Move forward and try to enforce your rights? Or just throw them down the drain?”

Lockwood, whose firm is called PanIP, is one of a new group of patent holders who say they own the rights to key Internet technologies. They are blanketing hundreds of small and large Web sites with lawsuits, threats of suits and demands for licensing payments.

A former CIA technology officer is bringing EBay Inc. to trial this spring, claiming that the hugely successful trading site is infringing an online auction patent he applied for in 1995 -- six months before EBay began.

Charles E. Hill & Associates, a software firm, is suing 18 e-commerce companies, including EBay, alleging that they violated its patents on an “electronic-catalog system” and a “method of updating a remote computer.”

Acacia Research Corp. in Newport Beach has filed legal complaints against 27 adult entertainment Web sites, alleging that they violated its patents on “the transmission and receipt of digital audio and/or video content.” The company is demanding licenses from mainstream music and movie companies too.

All these lawsuits were predictable, said Jonathan Hangartner, a patent lawyer with Sheppard, Mullin, Richter & Hampton in San Diego who represents a group of PanIP defendants.

“Anytime there’s a major technological breakthrough, there’s a spike in patent litigation,” Hangartner said. “It happened with automobiles, telephones, trains. Now it’s the Internet’s turn.”

Proliferation of Patents

The U.S. Patent and Trademark Office has been generous in assigning Internet-related patents, nearly all of which involve systems, procedures or methods of doing things rather than actual physical inventions.

Lockwood’s September 2001 patent, for example, outlines how a group of self-service terminals could be connected via telephone to a central processor at a financial institution. The patent, which was filed in 1994, specifies a method of screening loan applications, but in a loose sense the system it describes also resembles the Web.

It is far from the only patent that either touches on the Web or might seem to do so.

“If you’re selling online, at the most recent count there are 4,319 patents you could be violating,” said David E. Martin, chief executive of M-Cam Inc., an Arlington, Va.-based risk-management firm specializing in patents. “If you also planned to advertise, receive payments for or plan shipments of your goods, you would need to be concerned about approximately 11,000.”

Patents used to be far down on a Web merchant’s list of worries. A patent, which is essentially a government-sanctioned right to a monopoly on a process or invention, went against the early spirit of the Internet.

“The Web was a freewheeling, low-barrier-to-entry, everyone- can-copy-from-everyone-else place, which was a powerful model that took us a long way,” said Tim O’Reilly, a computer manual publisher. “There was a lot of innovation as people got up to the level of their competitors and said, ‘What can I do to leapfrog that?’ ”

These days it can be a better financial model for Internet companies to license patents rather than build something new.

Chicago-based Divine Inc. went public in 2000 as an Internet incubator, a company that would spawn other companies. When that possibility evaporated in the stock market slump, Divine tried to reinvent itself as a software consulting and services firm.

In late 2001, Divine acquired Open Market Inc., an e-commerce trailblazer that had fallen on even harder times. Among Open Market’s assets were a number of patents, including one filed in 1994 and granted in 1998 for a “network-based sales system.” It resembles that ubiquitous e-commerce tool, the shopping basket.

“The universe of potential infringers is the universe of people doing e-business,” said Divine general counsel Jude Sullivan. He said the company had issued about 150 licenses.

Ken Burke, who runs a Web design firm in Petaluma, said Divine started sending cease-and-desist letters to his clients in September.

“Just answering the letters would have required a $60,000 retainer for lawyers,” Burke said. So he willingly, even eagerly, paid Divine an undisclosed six-figure fee for a license that covered all 100 of his clients, including Beringer Vineyards, Big Dog Sportswear, Whitman’s chocolates and Pet Food Express.

“It kind of stinks,” Burke said. “I knew settling would strengthen Divine’s case against other people. But it was a good business decision.”

He has just one worry.

“We’re vulnerable now. We run the risk of being a prime target of PanIP,” Lockwood’s firm. “When does it stop?”

Few Cases Go to Trial

Lawrence Lockwood has two points he wants to make clear: He’s in the top ranks of inventors, and he doesn’t understand what all this fuss is about.

When the patent office is deciding whether to issue a patent, it checks the “prior art” -- previously issued patents that are relevant to the current application. It then lists these as references in the new patent. Lockwood says his 1982 patent for a “self-service terminal” has been used as a reference by the patent office 122 times.

“A highly cited patent corresponds to a Nobel Prize winner,” he said while eating a sandwich at a Coco’s restaurant near the La Jolla house where he grew up and still lives.

Fewer than 5% of patent cases make it to trial. Although some of the rest are dismissed by a judge, most are settled out of court. That was the route taken by the first 10 Web companies Lockwood sued last spring in U.S. District Court in San Diego, alleging they violated his 1996 and 2001 patents on automated sales and processing systems.

“Every one of us was so small,” said one of the defendants. “None of us knew about the others. The scheme was beautiful in its simplicity.”

The price of a license was supposedly $30,000, but that was just an opening gambit. A few firms settled right off by paying a fraction of that, but five of the companies learned they weren’t alone and banded together. They hired a lawyer, set up a Web site. But after six months they too came to terms.

“It became a money thing,” said one participant, who spoke on condition of anonymity because the settlement terms forbid him from discussing it. “We gained a lot of efficiency simply by being in a group, but $750,000 to $1 million could still get spilled.”

The total probably would have been even greater if the case had gone to court. In 1999, the American Intellectual Property Law Assn. said the average patent infringement case in California cost each party $2 million.

Lockwood took the summer off, then resumed litigation at a fast pace. Between Aug. 30 and Oct. 4, he filed lawsuits against 40 Web sites. Aside from the fact that none was within easy driving distance of the San Diego court, they seemed to have little in common. They ranged from Can-Do National Tape in Nashville, Tenn., to Advanced Battery Systems Inc. in Stoughton, Mass., to Caffe Vita Coffee Roasting Co. in Seattle.

Such a broad spectrum of retailing lends weight to the defendants’ assertion that Lockwood claims control of all e-commerce. (PanIP’s full name, Pangea Intellectual Properties, might also be a clue here. “Pangea” is Greek for “all of the Earth.”)

Lockwood says his patents apply only to a specific segment of online sales. He would not identify it but promises it eventually would be revealed in court.

He won’t say much about himself, either. He declined to be photographed or to furnish even such basic information as his age. His desire to keep a low profile was reinforced after online vigilantes electronically harassed him, defacing his Web site.

“It’s an elementary school type of thing,” he said. “They’re also making wild statements. But patent cases are decided in the courts, not in the court of public opinion.”

Lockwood graduated from La Jolla High in 1965 and attended three area colleges and universities, pursuing liberal arts studies without receiving a degree. During much of the 1970s, he worked for his father’s small travel agency as well as his father’s printing shop.

That information comes from depositions in a lawsuit Lockwood filed in the early 1990s against American Airlines, claiming its Sabre reservation system was infringing three patents he had been granted in the early 1980s.

Asked by American’s lawyers what he did for a living, Lockwood replied, “I’m currently litigating my patents.” For money to eat every day, he added, “I assist my family in leasing office space.” He said he had “never, for any length of time, used a personal computer.”

The case was dismissed, and significant parts of the patents were invalidated. Lockwood called it “a very expensive learning process.”

With the Internet, he said, his contribution was “a layering or improving.” In other words, he realized that the early text-only Internet soon would include graphics, and he sought patents in that area. But his interest in the commercial Web is professional, not personal. Lockwood said he doesn’t shop online.

One thing his critics are missing, he says, is that he’s taking the more restrained path.

“A patent holder can either create a monopoly or he can license,” Lockwood said. “What these people would really be crying about is if I said, ‘You cannot sell on your Web site whatsoever and I want it discontinued.’ ”

But for at least one defendant, the lawsuit produced just that result. River City Meat, a Missouri-based wholesaler, pulled down its Web site after getting sued.

Lockwood, of course, doesn’t want companies to shut their Web sites. If they do, he doesn’t get paid. He suggests they think of his licenses as an inevitable part of doing business, “like their telephone bill or the sign they have in front of their establishment.” And if they don’t like it, their complaint is really with the system, not him.

James E. Rogan, director of the U.S. Patent and Trademark Office, declined to address specific patents. But he noted that, in general, a claim of infringement is not necessarily true.

“There’s a whole cottage industry of shysters out there,” he said.

Rogan’s advice for those who believe they are being exploited: Get a lawyer.

Lockwood says that’s good advice -- for anyone who wants to commit financial suicide.

“Do they really want to spend $1 million and two years of their life to invalidate a patent they can license for a couple of thousand dollars?” he asked. “People get divorced over this stuff. They have strokes over this.”

Making a Stand

About half of the 40 latest defendants decided, however unwillingly, that Lockwood had a point and bought licenses for as much as $5,000.

More were on the verge of coming to the same conclusion, until a guy who spent his days making mint meltaways, orange creams, white pecan truffles and breakup bark decided the whole thing stuck in his craw.

Like many small businesses, DeBrand Fine Chocolates was born out of love. Cathy Brand, whose family sold cake-decorating and candy supplies, started making chocolates at age 8. In 1987, when she was 25, she began selling them from her family’s Fort Wayne, Ind., home.

Tim Beere was in marketing and advertising when he married Cathy but was drawn into the chocolate business. The couple now has three stores, with a fourth on the way, and a thriving Web operation.

PanIP’s lawsuit was delivered to their offices in early September. An accompanying letter, written by Lockwood’s lawyer, informed the Beeres that they had 45 days to pay a “very reasonable” and “nonnegotiable” $5,000 for a lifetime license to his patents.

Cathy describes the 43-year-old Tim as the calmer, more easygoing and more patient one in the relationship. The lawsuit upset both of them, but she was the one most inclined to settle. She knew what it would cost to fight it.

Tim Beere may be as relaxed as his wife says, but he didn’t like being pushed around.

“It was like a bully promising a little kid, ‘I’ll protect you if you give me your lunch money,’ ” he said. “These patents don’t apply to our Web site. No person I’ve talked to seems to even think it’s a possibility.”

Proving this, however, would be arduous. To make sure the Beeres knew it, Lockwood included some news clippings with his letter and lawsuit. “Supreme Court Bolsters Protections for Patents,” read a headline in the Los Angeles Times.

Tim Beere did some research on the Web. He learned about some of the defendants -- the ones who tried to fight back. He hired their lawyer, Hangartner of Sheppard, Mullin. He began calling the other defendants, introducing himself, laboriously stitching together a defense group of 15 companies. He became a little obsessed. He would wake in the middle of the night, stewing.

The Beeres set up a Web site, first called PANIPdefendants .net and then Youmaybenext .com, which offered information about PanIP’s lawsuit and solicited donations. Lockwood’s response was to sue the Beeres again, this time for trademark infringement and defamation.

Tim Beere says he is undaunted.

“My goal is to send a message that one person can stand up for what’s right and make a difference. Imagine how much better things could be if more people believed that,” he said.

The patent infringement case is getting ready to begin its long trip through the courts. The defamation and trademark case has been narrowed but continues as well.

Lockwood is serene.

“If I win, I have a patent that has been validated by the court system,” he said. “It will be a very powerful weapon. And if they win, they get nothing. Absolutely nothing.”