Los Angeles Times – Greg Miller and Davan Maharaj


Internet: Debate swirls as rights are granted for delivery of movies online and other business models.

Disney, Sony, Time Warner and other entertainment giants are preparing for the day when they can pipe their movies and music into consumers’ homes over the Internet.

But a Hollywood nobody named Scott Sander says they’re going to have to go through him first. “We are the only company that can legally sell or rent movies downloaded over the Net,” says Sander, chief executive of Sightsound.com near Pittsburgh. As for Disney and the rest, he says, “It’s too late.”

Sander could be right, according to the U.S. Patent & Trademark Office. His company may not have developed any key piece of software or technology, but it has managed to patent the very concept of delivering movies and music over the Net.

In fact, SightSound is part of a growing stampede by Internet companies into a new and hotly disputed area of intellectual property law. After centuries of patenting such tangible inventions as the telephone and the light bulb, the patent office is now issuing patents on what amount to business models.

Enabling consumers to place online bids for airline tickets and other goods has been patented by Priceline.com. The notion of paying consumers to view Internet ads has been locked up by Cybergold. Hundreds more of these kinds of patents are pending.

Officials in the patent office say the trend reflects a necessary evolution in intellectual property law. Business models are the currency of the Internet Age much the way inventions fueled the Industrial Age. Besides,says Q. Todd Dickinson, commissioner of the patent office, critics have complained every time the agency has moved to cover a new category of innovation.

“They said the same thing about chemicals and polymers and biotech,” Dickinson said. But aided by the protection of the patent office, he said, “These areas have helped to drive the economy for the last 20 years.”


Nevertheless, many in the tech industry are dismayed.

“This just encourages a land grab of the obvious,” said Vinod Khosla, a venture capitalist at Kleiner Perkins Caufield & Byers in Menlo Park. “What if Amazon.com had patented the idea of selling goods on the Internet? The online world would be a ridiculous place.”

But even Khosla acknowledges that some of the young companies his firm is funding have pursued business model patents because they want to stake claims to their business plans before others do.

The stakes are considerable. If Sightsound and others are able to defend their patents, they could have monopolies on markets that may someday be worth billions of dollars. More likely, they could be in a position to levy licensing fees on others who want permission to pursue similar businesses.


Executives at Disney, Warner Bros. and other major Hollywood studios say they have met with dozens of patent-holders in recent months who claim to have exclusive rights to various methods of delivering entertainment over the Net.

“Everyone in Hollywood is taking this very seriously,” said one studio executive, who asked not to be identified. He said patent-holders are coming to big studios and asking for up to $10 million in cash to back their firms, which gives them both the cache of major studio backing and enough money to finance infringement lawsuits against others.

Often, patent-holders imply that for an investment now they will give studios discounts on licensing fees on these conceptual rights down the road.

“It’s pay us now or pay us later,” the studio executive said. So far, his company has declined. “Our strategy right now,” he said, “is to wait until we get sued or get a letter saying we’re going to be sued.”

For some companies, stockpiling business model patents is a business in itself. Jay Walker, the billionaire founder of Priceline.com, has built a virtual idea factory in Connecticut.

Walker aims to become the Jerome H. Lemelson of the Digital Age. Lemelson, a prolific inventor who patented technology used in grocery store scanners and other devices, made a fortune not by marketing his inventions but by extracting licensing fees from others. Lemelson died in 1997, but the checks continue to pour into his estate.

Walker’s company, Walker Digital, has hired a team of inventors to churn out patentable business ideas. Walker has already won 12 patents, and another 240 are pending.


Meanwhile, Walker’s most valuable patent may soon face a major test. Microsoft Corp., on its Expedia travel site, has begun allowing consumers to place bids on hotel rooms, copying Priceline’s patented business model. A Priceline spokesman has said the company’s lawyers are weighing whether Microsoft’s move constitutes patent infringement.

There are four categories of innovation that the patent office considers: machines, articles of manufacture, compositions and processes. Patents
on business models are categorized as “processes” and have been granted intermittently for years. In fact, Sightsound’s patent on movies over the Internet was awarded in 1993.

But most business model patents considered worthless until a federal appeals court in Washington last year ruled that business models can be considered patentable “processes.”

The case involved State Street Bank & Trust Co., which patented a computerized system for managing mutual funds. A lower court invalidated the patent, saying it was a mere “business method.” But the appeals court reinstated it, and in so doing, triggered an avalanche of applications from entrepreneurs seeking to sew up the rights to their own business models.


The number of business model patents granted surged from two in 1995 to 125 by the end of last year, according to the patent office. Similar exponential growth is expected this year.

Skeptics say the trend is a sign that the patent office is woefully out of step with the Internet Age.

“The patent office just doesn’t translate well to the Web,” said Tim Draper, a venture capitalist in Menlo Park whose company evaluates hundreds of technology start-ups every year.

“We’ll see an interesting business plan and within two days we’ll have seen five more just like it, all arrived at independently,” Draper said. “It’s ludicrous for any one of them to say, ‘It’s my idea.'”

Faced with verifying such claims, the patent office has beefed up its screening program. Dickinson said his examiners have access to about 900 electronic databases, the most in the agency’s history. He said the office also plans to hire 2,100 new examiners by the end of next year, doubling the current staff. Many new hires, he says, have science doctorates and graduate degrees in business.

Nevertheless, some legal experts say many business model patents will crumble under legal challenge, and they predict an avalanche of litigation.

Priceline.com has already been hit with two challenges to its online bidding patent. An entrepreneur filed a suit against the company last January contending that the Priceline.com business model was his idea first.

Separately, a Washington inventor and attorney claims to have filed for a patent on essentially the same business model six months earlier. The attorney, Thomas Woolston, has filed a petition with the patent office to void the Priceline patent.

Priceline officials say both challenges to its patent are without merit. But Woolston is enjoying the irony of the situation.

“Isn’t that rich?” Woolston said. “You live by the sword, you die by the sword.”

Sightsound.com’s patent doesn’t even specifically mention the Internet. In typical legalese, its patent describes a “method for transmitting a desired digital video or audio signal stored on a first memory of a first party to a second memory of a second party.”

Sightsound is eager to show that the company is more than just a piece of paper. In fact, earlier this year the company claimed to have become the first firm to rent a full-length film-the cult hit “Pi”- to a consumer over the Internet.

But emboldened by the State Street ruling, Sightsound has also begun brandishing its patent. Earlier this year it filed a patent infringement suit against CDNow.com, one of the largest music retailers on the Net. It has also sent letters to MP3.com, demanding 1% of the popular music download site’s revenues.

CDNow is fighting the suit, and MP3 has mocked Sightsound’s claims by posting the threatening letters on its Web site.

But Sander is sure he and his patent will prevail. “I don’t want to seem arrogant,” he said. “But we will be the Blockbuster Video of the Internet.”