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IS FREENY PATENT INDUSTRY THREAT?
July 19, 2004
Editor's Note: This story is by Nancy Wolff,Esq., General Counsel for the Picture Archive Council of America (PACA). The article originally appeared in PACA's July 13, 2004 newsletter and is reprinted with permission from Nancy Wolff and PACA. The story takes an exhaustive look at the history of the Freeny Patent some of the legal maneuvering that has taken place recently. Ms. Wolff may be contacted at newolff@wolffgodin.com.
By: Nancy E. Wolff
Is the Freeny Patent a Real Threat to the Stock Industry?
At last months CEPIC International Conference in Copenhagen, Koos Rassner, an attorney representing E-Data Corp (the company that currently owns the Freeny Patent), spoke about the patent. For those that are unaware, E-Data contends that the Freeny Patent applies to the delivery of any content, (i.e. music, books, or images) which a business delivers via an authorization code and that a consumer can download.
With the aid of a power-point presentation, he discussed how he perceived the patent applied to the stock photo industry Rassner stated that if any business thought it was infringing on the patent, it should seek amnesty from E-Data before September. This way, the infringing company would pay a royalty of 2.5% instead of the 5% royalty.
This news came as quite a shock to the majority of the audience who was not familiar with the patent. In addition, as E-Data Corp recently sued Getty Images and Corbis in the UK and Texas, USA, several members questioned whether they could be next.
As per your concerns, I have gathered information since CEPIC to answer your ongoing questions.
Patent Background
In the United States, a "patent" is a property right granted by the Government to an inventor "to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States" for a limited time in exchange for public disclosure of the invention when the patent is granted. Governments grant similar rights to inventors in other countries.
While most people think of inventors as engineers and scientists who create machines, the government also gives patents to processes that do not result in a physical "invention." For example, "Business Method Patents" refers to processes and systems used in financial and business situations that, under certain circumstances, are subject to patent registration. These patents prove problematic for patent examiners who review the claims. The Government does not give patents to ideas, systems, or process that are publicly available; instead, the idea, system, or process must be new, unique, and not obvious. "Prior Art" is the term used for documents that establish the public availability of the same or similar ideas, systems, or processes at the time of a patent application. If "Prior Art" exists, it can prevent a patent from being issued or, if discovered after a patent has been issued, can invalidate a patent claim. (A patent application consists of number of "claims" that describe the invention or method seeking protection).
At the onset of the technology age, examiners had little resources to determine if prior art for the business method described in the claim existed. With standard inventions, patent examiners would review earlier patents for similarities since information on business methods and processes was not easily available. Particularly, with new technology, individuals often experimented with the new technology without necessarily writing about it. As a result, many have criticized business method patents granted in the past. Amazon's "One-click" shopping is an example of a business method patent.
The US Patent Office started looking into these concerns and in early 2000, announced an action plan for business method patents. The plan seeks to improve the quality of the examination process in technologies related to electronic commerce and business methods. This initiative included suggestions such as creating a database of prior art and non-patent literature.
Patent abuse is so prevalent that the Electronic Freedom Frontier, a non-profit organization, recently announced a "Patent Busting Program" to invalidate patents that it considers dangerous to the continuing freedom of use of the Internet and related software. Electronic Freedom Frontier is starting the program with ten internet patents that it believes are either too broad, ignore the existence of prior art, or are so obvious as to be too trivial for patenting. (www.computerworld.com)
The Freeny Patent
In July 1985, the government granted Charles Freeny Jr. patent number 4,528,643 (the "Freeny Patent") for a system that reproduced information in material objects at point of sale locations. The abstract of the claim describes the process as:
The present invention contemplates a system for reproducing information in material objects at a point of sale location wherein the information to be reproduced is provided at the point of sale location from a location remote with respect to the point of sale location, an owner authorization code is provided to the point of sale location in response to receiving a request code from the point of sale location requesting to reproduce predetermined information in a material object, and the predetermined information is reproduced in a material object at the point of sale location in response to receiving the owner authorization code.
The patent envisions a "kiosk" type transaction, such as ordering a CD-ROM book from the manufacturer and having it delivered to a kiosk where, in this case, a consumer could purchase a CD-ROM book and have it delivered. Ideally, this method would allow publishers to avoid over-manufacturing books or music by essentially offering "print on demand" or "music on demand." As book publishers did not move into the "kiosk" business, there was little demand for his patent. As a result, Freeny sold it.
E-Data subsequently purchased the patent from an assignee years later for the sole purpose of suing infringing users and collecting fees. E-Data contends that the Freeny Patent applies to the delivery of any content, (i.e. music, books, or images) which a business delivers via an authorization code and that a consumer can download. As the Internet did not exist in any meaningful commercial manner when Freeny developed this method of doing business, many say it should not apply to Internet transactions. E-Data, the current owner, contends that is irrelevant and the Internet is just a system of delivery for the Freeny process.
Past Litigation
Around 1995, E-Data brought lawsuits against 43 companies, including many publishing companies, which it accused of infringing its patent. Despite the number of initial lawsuits, to date, no court has determined the validity of the patent or whether it applies to the stock photo industry.
To date, E-Date relies on one Federal Circuit decision for support. In 1999, a district court found that certain publishers had not infringed the Freeny patent by selling books on the internet (Compuserve, Broderbund Software, Waldenbooks, Intuit, Ziff-Davis Publishing Company and other software companies). In November 2000, the Court of Appeals vacated the decision because it disagreed with the lower court's interpretation of various terms used within the patent claim; however, it did not validated the patent or determine whether publishers infringed on the patent. It merely found that the lower court interpreted the construction of terms within the patent claim too narrowly. These terms include "point of sale location", "material object", "Information Manufacturing Machine" and "Authorization Code", each of which has very specific meaning within the context of the Freeny Patent. For example, the Appeals Court ruled that a "point of sale location" could include a computer located at the user's home.
Although E-date touted this ruling as a victory, the ruling simply meant that the lower court was required to use a different interpretation of that part of the patent claim. The Appeals court directed the lower court to reexamine the decision based on the revised definitions provided by the Appeals Court. However, the case settled before the lower court issued a subsequent order so there was no additional court ruling. Nonetheless, E-Data viewed this decision as positive and received financial funding by backers to pursue litigation. E-Data did not disclose the final settlement terms. It is believed that many settlements were made based on the cost the defendants would have incurred to fight the lawsuit, a common business reason to settle a lawsuit that frequently is referred to as a nuisance value settlement.
E-Data filed another case in 1996 that included some photo libraries, including PNI, Photodisc, Weststock and Index Stock. The court dismissed the case against Getty Images on summary judgment based on jurisdictional grounds, not on a substantive basis. My understanding is that E-Data did not pursue the other photo libraries named in the litigation. In order to allege that blue chip companies had entered into licensing agreements, it is believed that E-Data settled with some large companies (IBM and Adobe) for nominal amounts in order to state that it obtained a license from those companies to use as leverage against others. In addition, in settling, E-Data did not have to test the validity of the patent in court.
As a result of this "victory", E-Data flooded many industries with cease and desist letters, seeking royalties for the infringement of its patent. In March 2002, many PACA members, even those without any Internet presence, received identical letters from an attorney in Long Island representing E-Data. The recommended strategy at the time was to "stay below the radar" and not respond. If E-Data pursued the matter further, consultation with an experienced patent attorney in the area of Internet business methods patents was recommended, perhaps with PACA directly on behalf of all members. Members who received a letter from E-Data in March 2002 were not pursued.
A second waive of letters was sent to PACA members in August 2002, as part of a letter campaign in which thousands of letters were sent by certified mail to companies in twenty industries. Again, the strategy of no contact remained the same, and E-Data sued no PACA member at that time.
Current Industry Litigation
All was quiet until the end of last year when E-Data brought an action for an expedited preliminary injunction against Corbis and Getty Images in Brussels, based on a European version of the patent. (A preliminary injunction attempts to cease the alleging infringing activity before a trial on the validity of the claim. Accordingly, the court must be convinced that the case has merit and the patent owner will be irreparably harmed if the activity is continued through the trial). Corbis and Getty Images worked together to fight this claim, bringing to the court evidence of "prior art". E-Data was denied additional time to reply and withdrew the Brussels lawsuit before a ruling on the merits was issued by the court. E-Data then commenced two separate actions against both Corbis and Getty Images, the first one in the UK and most recently in Austin, Texas but did not seek an expedited preliminary injunction. Getty Images and Corbis have continued to cooperate and are working together to fight both these new claims.
Both these lawsuits are in their infancy; however, Corbis and Getty Images have found what they believe to be convincing "prior art" that could both invalidate the patent and demonstrate that it does not apply to the delivery of images via the Internet as is common practice within the stock industry. In the UK, where the losing party must pay attorneys' fees, Corbis and Getty Images have asked the court to require that E-Data put up a bond of approximately £90,000 as a precondition for continuing to pursue the litigation. Nothing substantive has happened in that action to date.
In Texas, both Corbis and Getty Images have made a motion to relocate the case to a court in Seattle, Washington, where both companies are located. E-Data is located on Long Island, NY so there appears to be no connection to Texas that would require the case to be heard there. In addition to answering the Texas claim, Getty Images has brought a counterclaim against E-Data asking the court for a declaratory judgment that Getty Images is not infringing the patent. In its affirmative defenses to the action, Getty Images asserts, among other defenses that the patent requires that the information be downloaded to a "material object" at a "point of sale location" and that the information be intended for use on a device separate from the "Information Manufacturing Machine". Because the stock industry does not sell images to be used on a separate device at a point of sale location, but licenses images for use by publishers, advertisers and image users that are stored digitally and incorporated in final products, the argument is that this process does not cover our activity. The court is presently deciding the motion to change venues.
Getty Images and Corbis have both expressed interest in supporting PACA and sharing information that would be helpful. They have amassed what they believe is a solid library of prior art to establish that there were other similar technologies at the time of the patent (1985). They have suggested that they will make this prior art available on a website that could be accessed by PACA members. While neither company can say with certainty that they will prevail at trial, both have stated that they plan to vigorously defend this claim and feel confident that there is sufficient prior art to defeat the patent, and additional arguments pointing to the patents inapplicability to our industry.
E-Data Press Releases
E-Data has made news in Europe as well by settling disputes with OnDemand Distribution, Microsoft and Italian ISP Tiscali over their on-demand music systems. The amounts of the settlements are undisclosed and confidential. E-Data has been issuing press releases, touting its settlement as part of an aggressive new licensing and patent enforcement campaign. Because patents only last twenty years and the Freeny Patent expired in the US at the end of last year, E-Data may be looking more closely at European companies where the patent is not due to expire until the end of this year. After that date, the patent owner can look back to infringements that occurred before the expiration of the patent.
If you read E-Data's press releases, or go to its website http://www.e-data.com/, E-Data will naturally sound positive about its patent and contend that it applies to most companies that distribute content over the internet using passwords. Of course, Koos Rasser who spoke at the CEPIC conference is an advocate for E-Data and will only present the patent's validity in a most positive light. Articles based on the information found on the E-Data website will also have a positive slant as it is intended to encourage enforcement and the voluntary payment of royalties. (For example Jim Pickerell based his March 2004 article about the Freeny Patent in part on the information found on the Freeny site and information obtained in questioning representatives of E-Data. No independent sources were consulted). Pickerell has been retained by E-data as a consultant, a fact that PACA members should take into account when reviewing such articles.
Recommended Strategy
There is no way to determine if E-Data will sue other PACA members or any European company while the Corbis and Getty Images actions are still pending. E-Data may wait and see how the litigation unfolds or try to sue other stock companies hoping to obtain royalties to fund its other litigations. I believe a threat like this should be dealt with on an industry basis. If anyone receives any communication from E-Data or its attorneys please let me know. Similarly, international members should contact CEPIC for the latest information. If PACA members are contacted, the most efficient approach would be to jointly obtain the services of a patent attorney, preferably an attorney who is already familiar with the industry and the Freeny patent to avoid unnecessary costs. Getty Images and Corbis have agreed to continue to provide PACA with relevant information that can assist us in assessing this claim as their actions proceed.
(c) Nancy E. Wolff, Wolff & Godin, LLP