TWENTY-FIVE LAWYERS AND A JUDGE

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TWENTY-FIVE LAWYERS AND A JUDGE


E-Data patent finally gets its day
to get ganged up on in court

June 28, 1996

Federal judge Barbara Jones looked down from the bench into the
jammed jury box last Friday afternoon, moments after 4 p.m. on
the longest day of the year, and still managed to find humor at
the end of a long, wet, and hot week in New York's early summer
soup. "A good-looking jury," she cracked.

Their dark suits were actually a collection of patent and trial
lawyers defending clients who have been sued by E-Data Corp.
The New Jersey company's most valuable asset-indeed, one of its
only assets-may be a patent that it believes covers many forms
of electronic commerce (See May 31 issue). The company has been
referred to as three employees and a patent; this hearing was
25 lawyers and a judge.

E-Data's president Arnold Freilich hopes to generate a rich
stream of royalties from the patent, as consumers and
businesses start to buy and sell goods over the Internet. The
company has sent out 75,000 license agreements to potential
infringers. But the effort has not had much success without a
judicial ruling that E-Data's patent is worth more than the
postage it costs to deliver it to potential licensees.

                           KICK START

Although the case has been kicking around the Southern District
of New York docket for nearly a year, there hadn't been much
forward progress. New to the bench and recently assigned to the
case, Jones called a conference to end the inertia.

Considering that she was facing nearly 25 lawyers representing
more than a dozen companies, Jones's first stab at bringing
order to the case was as smashing as she thought the lawyers
handsome.

Jones gave E-Data's attorney, David Fink, 60 days to give each
defendants at least a partial list of which products may be
infringing and which of the patent's 56 claims those products
may be infringing.

If Fink completes his task on time-something he said he would
try to do-it would be a gigantic step forward for mankind-well,
at least for the defendants in this case, who profess not to
have a clue about which of their products may soon be in the
hot seat.

"None of us has been informed by the plaintiffs which of the
claims may be implicated and which activities may be involved,"
argued Claude Stern of Fenwick & West, which represents
Broderbund and Intuit.

Stern was sort of the ringleader among defendants, spending
most of the time at the podium and giving to Jones a proposed
scheduling order that she largely adopted.

Stern also encouraged the judge to hold a Markman hearing
quickly. These hearings, only a year or so old, have grown out
of the Federal Circuit's and Supreme Court's judgment that
judges and not juries should decide the meaning of the claims
of a patent.

Although the practice is still new, these hearings will likely
shorten all patent trials, since they let both sides know
exactly what they are arguing about. Often in patent trials,
both sides would have to prepare cases based on many competing
views of the scope of a patent, not knowing how the jury would
ultimately interpret the claims. One theory is that many cases
will settle once a judge interprets the claims since it will be
fairly easy, in most cases, to know whether there is
infringement.

Jones indicated that she would probably hold a Markman hearing
sometime after the expiration of Fink's 60-day clock.

                            PROFOUND

Carl Oppedahl, who represents defendant Softlock, suggested to
the judge that the benefits of a Markman hearing would ripple
far beyond the walls of her courtroom. "The effort by Your
Honor would have a profound benefit to the 50,000 to 75,000
people who have received amnesty packages," Oppedahl said.

An amnesty packages is E-Data's coy phrase for the 75,000
pieces of mail delivered to potential infringers offering them
licenses.

E-Data's license offer is not cheap on percentage terms,
ranging from 1 percent to 5 percent on sales of infringing
products up to $1 million. By comparison, Hayes Microcomputer
charges 1.75 percent for a feature required of nearly all
modems, but that fee was put in place only after a jury trial
victory.

On the other hand, many of the companies would probably save
money by taking a license if they don't anticipate engaging in
electronic commerce. The minimum license fee is $500, which is
probably less than what many companies paid their lawyers to
prepare for and attend last Friday's hour-long conference.

A cynic might suggest that a company planning a large
electronic commerce rollout tomorrow might want to take a cheap
license today and hope that the remaining defendants
successfully limit [or] invalidate the claims so that there is
no need to renew the license. E-Data's standard license is a
one-year renewable term, with prices going up 10 percent of the
first year amount each year. The patent expires in 2003.

IBM, Adobe, VocalTec, KidSoft, and CyberCash have already
agreed to take licenses. In an interview, Fink said that a few
other defendants in the New York case and a similar one filed
in federal court in New Haven are close to agreements.

At the hearing, Fink did nothing to try to limit the scope of
the patent and give any sense of relief to defendants. It
covers two broad categories of transactions, he said. In the
first, a computer user makes a purchase and downloads that
purchase, whether it is text, software, music, or video, onto
his or her computer. In the second, an individual buys a CD-ROM
that contains valuable information that can be used only upon
payment of additional money and receipt from the publisher of a
key or code to unscramble the information.

The description provoked the only sharp exchange of the
hearing. "From what I just heard, the claims cover all commerce
on the Internet," Stern said. "I was speaking in broad, general
terms. Don't interpret what I said," Fink snapped.


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