Auction of Internet Commerce Patents Draws Concern

By John Markoff
November 16, 2004
The New York Times

San Francisco, California, USA. November 15, 2004.

More than three dozen patents said to cover key facets of Internet transactions will soon be auctioned off by Commerce One, a bankrupt software company. But even before the sale, some technology executives and lawyers are worried that potential buyers might wield the patents in infringement lawsuits against companies that are engaged in online commerce, like I.B.M. and Microsoft.

The 39 patents cover basic activities like using standardized electronic documents to automate the sale of goods and services over the Internet. Some intellectual property experts said that these patents, which have broad reach, could be used to challenge Web services like the .Net electronic business system from Microsoft or Websphere software from I.B.M. Those companies declined to comment, saying any discussion would be speculative at this point.

Bidding for the portfolio of patents will begin at $1 million in the auction, which is scheduled for Dec. 6 in federal bankruptcy court in San Francisco. Earlier this month, the patents were carved out from the rest of Commerce One's assets.

One of the inventors involved, Robert Glushko, who no longer holds the patent rights, fears the winner of the auction might use the patents mainly to impede other companies or to press competitors to pay licensing fees for practices already common in Internet commerce. He is not alone.

"The big issue is what people call 'patent terrorism,' " said Jack Russo, an intellectual property attorney in Palo Alto, Calif.

The patent sale and the controversy surrounding it is a striking example of a change in the use of patents in high-technology industries. The historic role of patents, as envisioned by the Constitution, is to encourage science and invention through the grant of exclusive rights to inventors for a limited period of time. But increasingly, patents are emerging as a competitive weapon used by corporations in their efforts to control markets.

Indeed, there are now intellectual property companies in the business of acquiring large patent portfolios to sell patents to the highest bidder.

"There is a potential risk to society in business models that says we're neither going to come up with an innovation nor create products ourselves," said Mark A. Lemley, a patent law expert at Stanford University. "As a business model it makes sense, but it's not clear that innovation is going to flourish."

The Commerce One patents cover a technology known as "Web services," software at the heart of computerized systems designed to automate the buying and selling of goods and services online.

If the patents are upheld by the courts and are used "offensively" in an effort to obtain licenses from Internet commerce companies, they could limit innovation, said a representative of the World Wide Web Consortium, an Internet standards body.

"The consequences are potentially substantial," said Daniel J. Weitzner, the head of the technology and society group at the Web consortium. "We've had a number of situations where technology development has been blocked because there has been confusion about whether particular patents apply."

Mr. Glushko, for one, said that Commerce One had originally intended to create a public standard with its work, not constrain the use of online commerce processes.

"We filed these patents to describe a standard method for using documents to connect services into business networks," said Mr. Glushko, who is now an adjunct professor at the University of California at Berkeley in the School of Information Management and Systems. "At Commerce One, our business model depended on an open infrastructure for doing that. It is completely antithetical to our intent to use the patents to prevent it."

Commerce One, founded in 1994 and based in Santa Clara, Calif., developed software applications for electronic commerce. In 1999, it acquired a small start-up firm, Veo Systems, which had developed electronic commerce technology based on set of protocols known as Extensible Markup Language, or XML. The idea was that a publicly available technology like XML would help electronic markets grow rapidly.

Mr. Glushko said that as a co-founder of Veo he had contributed the ideas in several of the key patents to industry standards groups, a move that may have placed those ideas in the public domain. Mr. Glushko contends that those contributions make the patents harder to enforce. However, a representative of Commerce One in the bankruptcy proceeding said that his firm had explored that issue and that the patents were enforceable.

"I don't think there is any exposure" as a result of the standards bodies activities, said John Amster, an executive at Ocean Tomo, an investment bank representing Commerce One. He said that the issue had been reviewed as part of an effort to determine the value of the patents. One potential buyer has already submitted a bid, Mr. Amster said. He added that he expected a number of additional bids by the filing deadline of Dec. 2.

Mr. Glushko said one of the bidders in the bankruptcy auction would be a small Silicon Valley law firm, Haynes Beffel & Wolfeld, which had approached him to join in an effort to bid for the patents.

One of the partners of the law firm, Mark A. Haynes, was one of the lawyers who helped write the patents while working at Wilson & Sonsini, a leading Silicon Valley law firm, in the late 1990's. He declined comment.

Microsoft executives also declined comment on whether the company was interested in bidding on the patents. A Silicon Valley investor who is in contact with potential bidders, however, said that Intellectual Ventures, a venture capital firm founded by Nathan Myhrvold, a former top Microsoft executive, was considering making a bid. The company also declined comment.

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