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Date: 04/17/00
By Bruce D. Radin
[Editor's Note: Bruce D. Radin is a senior associate in the New York-based law firm of Morgan & Finnegan, L.L.P. Mr. Radin is a graduate of the University of Pennsylvania and George Washington University Law School. This commentary is part of a series of articles by the firm. Copyright 1999 Bruce D. Radin.]
The surge in the filing of patent applications for Internet related business methods/e-commerce inventions following the decision by the Court of Appeals for the Federal Circuit in State Street Bank & Trust Co. v. Signature Financial Group, Inc. is well publicized. The majority of these patent applications have been working their way through the Patent Office and are beginning to issue in increasing numbers. While some commentators question the wisdom of whether Internet related patents should be issued in the first place, the courts are just now beginning to address the validity and infringement issues concerning such patents.
A strong patent portfolio is an important part of the business plans of many companies in the ever-expanding Internet based industry. Recently, in the high profile case of Amazon.com, Inc. v. BarnesandNoble.com, Inc., a district court upheld Amazon’s “one-click” ordering patent forcing its major competitor, BarnesandNoble.com, to change its website at the height of the holiday season. The case reaffirms the importance of business methods/e-commerce related patents and provides valuable insights into litigation strategies to consider in both asserting and defending such patents.
AMAZON.COM FILES SUIT
On September 28, 1999, United States Patent No. 5,960,411 (“the `411 patent”) issued for a Method and System for Placing a Purchase Order Via a Communications Network. The `411 patent essentially describes “one-click shopping”, i.e. completing a purchase order via the Internet by a single action (such as a single click of a computer mouse button) once information identifying the item is displayed to the consumer.
On October 21, 1999, three weeks after the `411 patent issued, Amazon.com brought suit alleging BarnesandNoble.com’s “Express Lane” ordering feature infringed various claims of the `411 patent. Amazon.com filed a Motion for Preliminary Injunction concurrently with the complaint and a five-day evidentiary hearing began on November 16, 1999.
On December 1, 1999, the district court granted Amazon.com’s Motion for a Preliminary Injunction. In rendering its decision, the district court focused on the four factors considered by courts in patent cases to determine whether a preliminary injunction should be granted: (1) reasonable likelihood of success on the merits; (2) irreparable harm; (3) the balance of hardships; and (4) the impact of an injunction on the public interest.
Infringement and Validity
The district court found Amazon.com was likely to succeed on the merits on the issues of validity, infringement and enforceability. As to validity, BarnesandNoble.com presented a variety of evidence in an attempt to show that Amazon.com’s “one-click” feature was not novel and/or that the feature was obvious in view of what was previously known in the prior art. This evidence fell into two categories: (1) prior art systems for ordering tangible items online (such as groceries or computer equipment); and (2) electronic document delivery systems (as found in prior patents and in a mid 1990’s CompuServe service).
The district court was not convinced by BarnesandNoble.com’s arguments that the `411 patent was not new (anticipated) holding that the prior art cited failed to show the “one-click” feature as required by the `411 patent claims. Similarly, the district court agreed with Amazon.com’s evidence that, based on the prior art presented, the “one-click” feature was nonobvious relying on the testimony of Jeff Bezos, Amazon.com’s founder, CEO and inventor of the `411 patent and expert testimony that the “one-click” feature went against conventional wisdom and was a “major innovation” in online shopping.
As to infringement, the district court first construed the claims noting that the testimony of one of BarnesandNoble.com’s experts on the claim construction issue was confusing and BarnesandNoble.com’s claim construction was inconsistent with out-of-court statements made by its Chief Information Officer. Based on the claim construction, the district court found that Amazon showed a reasonable likelihood that BarnesandNoble.com infringed the claims of the `411 patent.
Irreparable Harm
Because the district found that Amazon.com made a strong showing that it was likely to succeed on the validity and infringement issues, Amazon.com was entitled to a presumption of irreparable harm. To rebut this presumption, BarnesandNoble.com unsuccessfully argued that Amazon.com unduly delayed filing suit 22 days after the patent issued. The district court summarily dismissed this argument finding no authority that filing a motion for a preliminary injunction 3 weeks after a patent issued constituted undue delay.
Amazon.com also presented additional evidence of irreparable harm above and beyond relying on the presumption. Specifically, Amazon.com stressed that the parties are direct competitors and that it spent significant time and effort on marketing. Amazon.com further argued that BarnesandNoble.com’s continuing infringement was likely to undermine Amazon.com’s market position and that BarnesandNoble.com’s infringement would encourage others to infringe. In finding irreparable harm, the district court also considered Amazon.com’s testimony that the upcoming holiday season was critical to the online e-commerce industry and that invaluable customer loyalty and goodwill would be lost to BarnesandNoble.com if the infringement continued.
The issue of damages was also raised. BarnesandNoble.com argued that any injuries could be compensated by money damages, while Amazon.com countered that the lost opportunity to distinguish itself and build customer loyalty at a critical time could not be measured by a simple damages formula. The court noted that neither party could offer any formula that was readily available for determining what damages might be.
Balance of Hardships and Public Interest
The district court found that the balance of hardships tipped decidingly in Amazon.com’s favor. BarnesandNoble.com could easily modify its website to offer “multi-step” clicking. Moreover, failure to grant an injunction would cost Amazon.com the primary value of its patented feature: its role in distinguishing the Amazon.com site from the site of a key competitor.
Finally, the district court found that the public interest favored granting the injunction, noting the public’s interest in protecting intellectual property rights and reaping the rewards of one’s labor, especially “in a rapidly developing industry where the window of opportunity to reap the benefits is likely to be short-lived, given the fertile climate for e-commerce inventions.”
The district court made the preliminary injunction effective December 4, 1999, three days after issuing the opinion.
REACTION TO THE DECISION
To many patent attorneys, the district court’s decision comes as no surprise following the Federal Circuit’s State Street decision. To many in the public, however, the decision was received as “a ridiculous phenomenon [that] could kill e-commerce.” Even Amazon.com’s CEO, Jeff Bezos, in an open letter posted on Amazon.com’s website, while not agreeing to stop obtaining or enforcing business methods/e-commerce patents, called for patent reform which would shorten the life span of such patents to 3 to 5 years. Additionally, Bezos called for a public comment period before the patent issued to give the internet community an opportunity to provide prior art references to the Patent Examiner.
Such negative public reaction against enforceability of business methods/e-commerce patents is a seemingly common reaction anytime the patent system is successfully employed to protect new technological advances. Whether it be Internet related patents or the recent furor over the right to patent the human genome, there will always be naysayers with a “sky is falling” mentality. What commentators such as Mr. Gleick in his N.Y. Times Magazine article fail to realize is that the United States Patent System is perhaps the best system of its kind in the world, admirably serving both the public and private interests. Indeed, it is safe to say that the present system has in no small part contributed to the United States being a world leader in technological innovation and to tremendous growth in the United States economy. Indeed, the European Community is currently proposing a reform its patent system to emulate the U.S. system in an attempt to play catch up with U.S. technological and economic growth.
LITIGATION STRATEGIES FOR BUSINESS METHODS/ E-COMMERCE PATENTS FOLLOWING THE DECISION
In many ways, the Amazon.com litigation was a typical case involving a party seeking expedited relief -- filing suit with a motion for a preliminary injunction, an expedited discovery schedule, a short evidentiary hearing and a quick decision. However, as one of the first Internet patent cases, the Amazon.com decision also highlights some of the unique issues associated with asserting and defending business methods/e-commerce patents.
One advantage a plaintiff has in seeking expedited relief is that it can prepare and strategize its case prior to bringing suit. In Amazon.com’s case, it was successful in part due to the retention of expert witnesses found by the district court to be persuasive and credible. Relying on two experts at the evidentiary hearing, Harry Manbeck, a former Commissioner of Patents and Trademarks, and Geoffrey Mulligan, an e-commerce expert, Amazon.com presented a simple and straightforward case through experts upon which the district court relied extensively in rendering its decision.
Additionally helpful to Amazon.com’s case was that the district court found that Amazon.com made a strong showing that it was likely to succeed on the validity and infringement issues. This strong showing entitled Amazon.com to a presumption of irreparable harm, which BarnesandNoble.com was unable to overcome.
From a defendant’s perspective, the task in defending an infringement action on a business method/e-commerce patent, especially when faced with a preliminary injunction motion, can be more complex. As is evident from Amazon.com, the litigation can move forward in “Internet time,” placing an enormous time pressure on an alleged infringer’s ability to defend itself. For example, in Amazon.com, the evidentiary hearing took place 26 days after the complaint was filed, giving BarnesandNoble.com less than 4 weeks to prepare its case.
In view of these time pressures, a lesson for those in the Internet industry is in the possible need to continuously monitor newly issued patents. This can involve reviewing the Patent Office Official Gazette for newly issued patents as well as monitoring press releases which are frequently released by companies after the issuance of a patent or, occasionally, after the Patent Office notifies a company that a patent has been allowed. The extra time in being able to evaluate a patent and prepare to defend against a possible suit can be significant. As with the plaintiff’s case, it is also crucial for a defendant to obtain competent expert witnesses.
In defending a patent infringement action, one of the most time consuming and difficult problems is locating prior art, which can be used to invalidate a patent in suit. In Amazon.com, BarnesandNoble.com had a very limited amount of time to develop prior art defenses. The prior art it did find was held by the district court to be insufficient to render the ‘411 patent claims invalid.
An effective search for prior art business methods/e-commerce patents is not an easy task and requires a great deal of resources and ingenuity. A starting point is to search for prior patents and publications which can be done by patent searchers in the Patent Office or through various online sources such as the U.S. Patent Office web site (www.uspto.gov) or the IBM web site (http://patent.womplex.ibm.com). Since the Internet is a relatively modern technology, the ability of finding effective prior art can be a long, tedious process, a problem especially in the context of a preliminary injunction motion. The industry itself is calling for ways to solve this problem. Indeed, in Bezos' open letter, he stated that he agreed to help fund a prior art database, which could be used to find prior art. In view of this problem, potential defendants should be prepared to spend considerable resources searching for prior art.
Besides challenging a patent’s validity and infringement, a defendant may also show that the plaintiff is not entitled to a preliminary injunction based on the other preliminary injunction factors, such as by making a showing that there is no irreparable harm, that the balance of hardships tips in defendant’s favor or that the public interest favors denial of an injunction. For example, a defendant can show that there is no irreparable harm because plaintiff’s injuries can be compensated with money damages. In Amazon.com, the district court noted that neither side provided any formula for determining what damages might be. Needless to say, in a close case, it may be prudent for a defendant to develop a damages calculation formula which may help tip the decision in its favor.
CONCLUSION
Amazon.com is one of the first court decisions to enforce an Internet related patent by granting a motion for a preliminary injunction. With the growth of the Internet economy, Amazon.com is just the beginning of litigation involving business methods/e-commerce patents. Consequently, Internet related companies should diligently monitor their own patent portfolio as well as the patent portfolio of others in the industry.
ENDNOTES
1149 F.3d 1368 (Fed. Cir. 1998), cert. denied, 525 U.S. 1093, 142 L. Ed.2d 704, 119 S. Ct. 851 (1999). In State Street, the Federal Circuit held that mathematical algorithms used in computer programs can be patentable. Specifically, the patent at issue covered a data processing system, known as the Hub and Spoke®, for implementing and t racking an investment structure for administration and accounting of mutual funds. The system is an investment structure in which mutual funds (Spokes) combine their assets in a single investment portfolio (Hub) that is organized as a partnership. The Federal Circuit reversed the district court’s holding that the patent was invalid as directed to unpatentable subject matter under 35 U.S.C. § 101, finding that the system constituted a practical application of a mathematical algorithm because it produced a useful, concrete and tangible result.
273 F.Supp.2d 1228 (W.D. Wash. 1999).
373 F.Supp.2d. at 1231.
473 F.Supp 2d at 1239.
573 F.Supp.2d at 1228.
673 F.Supp.2d at 1236.
773 F.Supp.2d at 1243-44.
873 F.Supp.2d at 1246.
973 F.Supp.2d at 1247.
1073 F.Supp.2d at 1248.
1173 F.Supp.2d at 1249.
James Gleick, Patently Absurd, The New York Times Magazine, March 12, 2000 at 47.
1273 F.Supp.2d at 1245.
1373 F.Supp.2d at 1228.
Publication:
Mealey's Litigation Report: Intellectual Property
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