OD2 Accused of Patent Infringement.

HMV and OD2 yesterday found themselves the subject of a patent infringement suit for alleged infringement of what is known as “the Freeny patent”. The Freeny Patent was drawn up in 1983 by an inventor of the same name and the 36 page document details the concept of a network of “information manufacturing machines” facilitating distribution of encrypted information. The patent eventually found itself in the hands of a company called Interactive Gift Express who since changed their name to E-data and now apparently operate with the sole purpose of exploiting the patent.

A trawl through case history shows that they litigated actively from May 1995 up until June 1996, during which time they actually managed to convince, among others, IBM and Adobe to pay for license to continue to digitally distribute content. However the remaining 40 or so companies did not, which illustrates the debatable nature of the patent. Though the patent was drawn up long before e-commerce was even conceived of, the concepts had already been widely discussed in academic and trade journals. Thus one of the basic remits of a valid patent – non-prior existence – may well not be met. Furthermore the remit of the patent would appear to be incredibly wide reaching: effectively covering all digital distribution of content where DRM is involved. This has lead defendants to argue that the original patent was not subject to proper review by the patent granting authorities.

The litigation process itself has not exactly clarified things either: in one of the original claims in 1995 the district court largely ruled in favour of the defendants, arguing that the bounds of the patent were both too broad and did not apply to the specific circumstances of the defendants. However, the Federal Circuit over ruled and established a few points which may set a worrying precedent for future and present defendants including establishing that the home is a point of sale location and is covered by the Patent (thus broadening the scope beyond kiosks). One important ruling that the Federal Circuit upheld though, was that the digital device to which the ‘product’ is distributed must be separate from the computer. i.e. that a computer hard drive is not covered, but that, for example, a portable music device or CD would be.

So where does all this leave OD2? Unfortunately it is next to impossible to say at this point. Patent law varies so greatly from country to country that looking at US precedent doesn’t do too much else other than give some pointer as to the type of arguments and strategies that E-Data are likely to use. Patent rules are typically much stricter in the UK so it is unlikely that the UK version of the Freeny Patent will be anywhere as far reaching as the US equivalent. But the fact that E-Data have made their action against OD2 and HMV so public (they issued a press release to announce the initiation of litigation) suggests that they have a fair degree of confidence.

E-Data’s express business model is to make money from a 20 year old patent through litigation and forced licensing. It is feasible that at least one of the 10 European countries in which it is being contested will at the very least make partial rulings in favour of E-Data. Either way, with so many patents forming the assets of now liquidated start-ups and having found their way into the hands of all manner of parties this could well be the first wave of a new dot.com boom, based not on innovation but litigation. The only coffers guaranteed to swell this time round though are those of the lawyers.

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