Patently Absurd

By Daren Fonda

Cruise around eBay, and you may decide that auctions are too troublesome. If you gotta have that Balenciaga sweater, nothing beats the Buy It Now feature; simply meet the seller's price, and it's yours. Without that feature, in fact, eBay would make a lot less money. Fixed-price transactions accounted for about $14.6 billion in merchandise volume last year, a third of the total. So let's say you came up with that Buy It Now idea and filed for a patent. And let's say a jury concluded that eBay willfully infringed on your patent and owes you damages. Should a judge automatically order eBay to remove that feature? After all, it's your intellectual property, you have a business you would like to build, and eBay basically trespassed.

The question was debated before the Supreme Court last week in a high-profile patent case, one of several the Justices are hearing this term. The caseload reflects the court's mounting interest in patent wars, which seem to be producing lots of headlines lately. That would include the near shutdown of the popular BlackBerry device, owned by Research in Motion (RIM), of Waterloo, Ont., which had "CrackBerry" fans panicking. RIM coughed up $612.5 million to settle litigation brought by NTP Inc., despite the fact that the U.S. Patent and Trademark Office rejected all eight NTP patents that were the focus of the lawsuit. NTP is appealing the rejection, but RIM caved rather than face the potential of an injunction.

Patent lawsuits have soared over the past decade, up about 58% since 1995. The patent office is drowning in filings; one recent application is for a napkin band printed with advertising. The office is getting known as an easy grader, awarding patents too leniently, to such things as basic medical tests and "business methods" like one-click online shopping. That stifles innovation and blocks new products from the market, according to some experts. "There's a consensus in academia and the legal world that the patent system is seriously out of balance and needs reform," says economist Carl Shapiro of Berkeley's Haas School of Business.

eBay's fight against a Virginia company called MercExchange illustrates how small firms swat away at larger ones, at great cost to both. In 2001 MercExchange founder Tom Woolston, a former military pilot and CIA network engineer, sued eBay, claiming that the company infringed on three patents he filed in the mid-'90s, including one that set out methods for fixed-price online auctions (the so-called Buy It Now patent). In 2003 a jury ruled in Woolston's favor and awarded $35 million in damages.

Then, while the case was winding through the appeals process, the patent office in 2005 issued "initial" rejections of all three patents. Woolston, who is appealing the rejections, says eBay's infringements and dominance of online auctions virtually killed off his auction site, MercExchange, and says nothing less than an injunction will satisfy him. "We want the injunction so eBay's power sellers come to our site," he maintains. You can imagine eBay's view of that position. The case is so important that eBay has hired big-name lobbyists in Washington, such as the Ashcroft Group, a lobbying shop run by former U.S. Attorney General John Ashcroft. Juleanna Glover Weiss, an ex--press secretary for Vice President Dick Cheney, is registered as an eBay lobbyist on "patent reform."

RIM may have trumped eBay in terms of high-level access: it appears to have met with the patent office's general counsel, James Toupin, and another senior official, John Whealan. According to a document obtained through a Freedom of Information Act request and provided to TIME, RIM chairman and co-CEO Jim Balsillie was scheduled to meet with patent-office officials on Jan. 4, 2005, along with representatives from the U.S. Department of Commerce (such meetings are highly unusual). In February a Canadian government official contacted a patent-office lawyer to find out if the Canadian Patent Office should "exert an interest or pressure" on its American counterpart. That November Canada's Minister of Industry, David Emerson, wrote to U.S. Secretary of Commerce Carlos Gutierrez, urging that the patent office expedite the review of NTP's patents or at least lay out a timetable in public. "We knew nothing about these contacts and weren't given a chance to respond," says Kevin Anderson, a lawyer for NTP.

No wonder a MercExchange lawyer fumed in early March when the Buy It Now patent was reassigned to a new examiner after staff in the technology center had spent 21/2 years dealing with it. The new examiner rejected MercExchange's application after only a few days, although the shift may reflect the new way the patent office handles re-examinations in cases more than two years old, with an emphasis on speed.

Arcane as it may seem, the eBay case deals with the balance of power between patent holders and users, and corporate America is keenly interested in the verdict. Silicon Valley types from Yahoo! to Intel have lined up behind eBay, while more traditional companies such as General Electric (inventor Thomas Edison's outfit) and Procter & Gamble support MercExchange, along with the entire drug industry, whose business model hinges on patent protection.

At issue is whether judges should automatically issue injunctions against infringers, as they do now in most cases. eBay wants judges to have more discretion, which could weaken patent holders' bargaining power. "The only thing that will bring a major company to the table is that in the end they have to [negotiate]," says Nathan Myhrvold, former chief technology officer for Microsoft, who runs a patent-acquisition shop and knows a bit about how big companies wield power.

On the other side are those who argue that small-time patent holders with dodgy claims and no actual businesses are using the legal system to extract payments from firms with established operations and products--lurking like fairy-tale trolls under bridges, popping out to collect a toll. "The trolls are turning patents into lottery tickets instead of rewards for late nights in the lab," says Rob Merges, a Berkeley law professor backing eBay. Merges says semiconductors and software may be covered by hundreds of patents, each with distinct claims, yet it may take only one case of infringement for a judge to issue an injunction, compelling many companies to pay the trolls to go away. U.S. House Republican Lamar Smith, co-sponsor of a reform bill, wants to slow the litigation gravy train. "We need a judicial system that does not reward people who file shaky claims on patents," he says.

Whatever the eBay verdict, the patent office looks overwhelmed. It received a stunning 409,532 applications in its 2005 fiscal year, up from around 126,000 in 1985. Examiners average just 19.7 hours per application. None of this is news to Jon Dudas, director of the office, who admits that his staff can't keep up. "It's not that we're taking longer," he says, "but the line just gets longer out the door." In January Dudas announced steps to streamline the process and hire more examiners.

That helps the bureaucracy, but it won't end the patent arms race. "Companies know that it's easier to get patents and that patent protection is more powerful than it was in the past," says Harvard Business School professor Josh Lerner. Microsoft alone filed 3,000 patents in 2004. Which is fine, say experts like Lerner. The problem is that companies also file patents defensively, to stymie competition. "There are large firms that used to be big innovators, but no more," he says. Those large firms, he says, aren't much different from small-time trolls.

Woolston, for his part, vows to fight eBay regardless of the Supreme Court verdict. One of his rejected patents was reinstated on appeal, he says, and he plans to sue eBay again. An eBay spokesman says the company has a workaround should Woolston get an injunction. Suffice it to say, this is one patent war that won't end soon.

With reporting by Julie Norwell/ New York, Eric Roston/ Washington