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Patent Fight Could Add to Cost of Internet Commerce

November 20, 1996

NEW YORK (AP) _ A little-known patent could raise the cost of doing business over the Internet for companies selling software, video or other digital products delivered online.

E-Data Corp. of Secaucus, N.J., is suing 17 companies, including McGraw-Hill and CompuServe, to collect licensing fees on the patent, which protects downloading of encrypted digital information. A court hearing is scheduled Dec. 6 in New York on the company’s claims.

Analysts said the patent will not significantly restrain Internet commerce, but would raise the cost of doing business on the Internet and cause headaches for small start-up companies.

Some companies, including Adobe Systems and VocalTec, have grudgingly paid the licensing fee. Others intend to fight it.

``We believe it’s important to draw a line in the sand and make them prove infringement,″ said CompuServe spokeswoman Gail Whitcomb. ``We think their claim is way too broad.″

Arnold Freilich, E-Data’s president, said the company bought rights to the patent in 1994. He won’t disclose how much the company has made from it, but said it covers digital products such as text, software, images, music and video transmitted through phone lines to customers.

Companies that take orders for products over the Internet, then ship them by mail would not be affected.

The patent was first issued in 1985 to Charles Freeny Jr.

Freeny, an electrical engineer, held the digital encryption patent until 1989. Unable to make money on it, he sold it for about $100,000 to a company called Avedas Corp.

``I didn’t foresee the Internet,″ he said.

Avedas couldn’t make money from it either and has since gone out of business.

By 1994, when E-Data bought the patent for $290,000, the World Wide Web had come of age, and so had the possibility of enforcing the patent, which expires in 2003.

Peter Tracy remembers making the acquaintance of U.S. Patent No. 4,528,643.

His East Haven, Conn.-based company, MicroPatent, operates a Web site where users can search and download patent and trademark information for 25 cents a page.

On March 22, he received a packet from E-Data saying his company might be infringing on the patent. He could either pay a fee based on the percentage of his Web site profits, or be sued.

``I felt like I had been sucked into (a) bottomless pit,″ he said.

MicroPatent agreed to pay the licensing fee, which Tracy will not disclose.

The cost of the annual fees range from 1 percent to 5 percent of sales under $1 million, according to David Fink, E-Data’s attorney. For sales over $1 million, the rate is determined on an individual basis, he said.

Several cases already have been dismissed because either defendants paid the fees or they were found not to be in violation, he said. Cases against Dun & Bradstreet, Decision Support and Meca Software were dismissed. Company representatives either could not be reached or refused comment.

IBM spokesman Fred McNeese declined comment on questions about E-Data or the licensing fees.

But companies such as McGraw-Hill are anticipating the December court hearing.

``We fail to see anything that we do in our businesses that infringes on this patent,″ said McGraw-Hill spokesman Steven Weiss. ``We’ve asked them continually what we’ve been doing, and E-Data has not told us _ aside from accusing us.

``We have no plans to pay them anything,″ he said.

But Freilich said the patent is specific in its description of encrypted digital data, which is how many companies have sold such information since 1994.

For example, a customer orders a digital product over the Internet, and pays for it through the Internet with a credit card. These types of transactions are not all that new, as in CompuServe’s case.

But once the product has been downloaded to the customer’s terminal, an encryption code is provided by the seller to unlock the encryption, thereby allowing the customer to use the product. It is this added step that Freilich said the patent describes.

Today’s network organization also makes the patent enforceable, he said. In 1985 when the patent was granted, there was no such thing as an addressable computer or the Web.

``The technology has brought us to the point where anyone’s computer terminal is addressable, where encryption is commonplace and that has led to the enforcement of this patent,″ Freilich said.

Scott Smith, analyst at Jupiter Communications, predicted the case would not dampen Web commerce.

``I think it’s a blip on the radar,″ he said. ``It may hurt some of the start ups. But larger companies face this kind of thing all the time. They’ll be able to shake it off.″

While some may accuse E-Data of trying to stifle Internet commerce, Fink sees his client’s efforts merely as a means to cash in on a legitimate, far-sighted investment.

``Besides,″ he said, ``3 cents on the dollar will not put any company out of business.″

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