June 10, 1996 7:00 PM PDT

Small patent may have big impact

E-Data of Secaucus, New Jersey, might not be a household name, but it is quickly becoming a large thorn in the side of companies big and small that are jumping into online commerce.

E-Data, which runs an online gift shop "stocked" with smoked meats, cheesecakes and balloons, acquired the rights two years ago to a patent for a system "for reproducing information in material objects at a point-of-sale location."

Translation: With this patent, originally granted in 1985 to computer scientist Charles C. Freeny, E-Data now says it owns the means by which businesses electronically distribute digital data to a purchaser--software, video, fonts, text, audio--either online or via encrypted CD-ROM. If E-Data's patent holds up in federal court, the company will have the right to extract licensing fees from anyone selling everything from software suites to pay-per-view digital movies and Beethoven symphonies electronically. The potential size of the pie is staggering, and company president Arnold Freilich wants a slice.

"We're certainly looking to make money," said Freilich, who acknowledged the effect of his patent on small online entrepreneurs. "We're open to any conversation if money is an issue. If a startup can't afford a licensing fee, we're looking to help them."

The company has recently adopted an amnesty program entitled "Carrot or Stick: It's Your Choice." About 75,000 companies have received E-Data's offer of a one-year guaranteed renewable license for a fee based on company earnings for the past fiscal year. That's the carrot.

For the stick, E-Data brought suit against 22 companies in March, bringing to 43 the number of firms sued by E-Data for alleged patent infringement. With only three employees, the roaring mouse has already settled with IBM, Adobe and VocalTec, but it would not disclose the licensing terms--raising the possibility that for larger companies, a small licensing fee is cheaper than drawn-out legal expenses.

E-Data has also signed an exclusive license with First Virtual Holdings that employs First Virtual's Internet payment system for all online purchases of E-Data licenses. A First Virtual spokeswoman refused to comment on license details or the nature of the companies' relationship before the agreement.

For 15 companies that refuse to settle, including CompuServe, E-Data is going to court. The discovery phase of the proceedings--witness selection, scheduling and other hearings--begins June 21 in New York federal court. Freilich doesn't expect the trial to begin until next year.

For its part, CompuServe claims befuddlement.

"They're interpreting this patent so broadly," said spokesperson Gail Whitcomb, who maintained that Compuserve has not infringed upon anyone's patent. "We're surprised we're the only online service involved."

The process of issuing patents, administered in the United States by the federal Patent and Trademark Office, is complex and subjective. Critics charge that the organization, overwhelmed by the flood of modern software, often ends up rubber-stamping the claims put before it.

In email to patent reform advocate and E-Data critic Gregory Ahronian, Freilich acknowledged that "patent examiners are deluged today with software patents, thus making it impossible" to do proper research. But Freilich expressed doubt that the same backlog existed in 1985, when the so-called "Freeny patent" was granted. The answer to that question will ultimately come from a federal judge.

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