Patent Fight Could Add to Cost of Inter

["Alan Pugh" <Alan.Pugh@MCI.Com>]

By KATHLEEN SAMPEY 
Associated Press Writer 

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.'' 

AP-DS-11-19-96 2327EST 

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