So first of all, I found it hard to believe that one could actually even patent something like this. The idea of an auction listing having the option to sell immediately at a fixed price can’t be patentable… can it?

This type of patent is a “business method” patent. I found this really good article from Nolo press on business method patents.

Since 1998, an increasing number of patents have been issued to software and Internet companies that have devised novel ways of doing business — for example, new online ordering processes or a unique Internet advertising scheme. These patents, which usually combine software with business methodology, are commonly referred to as business method patents or Internet patents.

These patents are important because any company that develops or acquires such a patent can stop others from using the patented business method for approximately 17 years. And, of course, the owner of the patent can exploit it by licensing the method — that is, charging a fee for others to use it.

What really popularized the filing of patents for e-commerce business methods was the case of State Street Bank & Trust Co. v. Signal Financial Group, Inc. in July 1998. A court ruled that patent law does protect any method, computer-aided or not. A key factor that determines validity of a patent claim is that the described method has a “concrete and tangible result.”

As a result of this ruling in 1998, patent filings for Internet and software-related business methods increased by 40% in the following year. (This statistic is probably a little misleading since 1999 was pretty much the height of the dot-com boom so one would expect a rise in filings). An example that is given in the article is Amazon’s 1-Click ordering feature. Amazon filed a patent claiming rights to this functionality in September 1999 and as a result of it being granted, no other online merchant can offer this feature.

OK. So, yes, business methods such as these are patentable and many such patents have been issued. But if there’s thousands and thousands of such patents being issued all the time, then surely there must be a lot more infringement that’s going on. Right? Yep…

Of course, in the business world, everything isn’t that cut and dry. Patents are like weapons and lawsuits are the ammunition. A typical large technology company often have huge patent holdings (weapons). Just like in the real world, a war between two large countries with rich militaries is usually ineffectual. Each side is depleted in the end. In this sense, both parties lose. Even the victor ends up wasting years of time and money dedicated to fighting the war. Similarly, with patents, company A will only file a suit if it is very confident that there will be a great financial benefit to suing company B AND is very confident that company B cannot retaliate with their own suit. So, it happens rarely.

The big patent suits that we are seeing these days is a tiny company suing a big, profitable company. In many cases, these tiny companies are essentially patent hoarders. They buy up patents for cheap with the intent to find a large company to sue for infringement of the acquired IP. This practice is disgusting and stifles innovation. Smaller companies, which don’t have the resources to fight a drawn-out battle in the courts, often settle. An example of this is Ariba settled with some dump of a company called ePlus which filed a suit claiming – as I understand – that Ariba infringed on their patent on searching several product catalogs at once. Gimme a break! If I recall correctly, Ariba paid about $40 million in cash to settle the suit. Now, ePlus is filing essentially the same suit against SAP except this time SAP, with its deep pockets, is choosing to fight it.

OK. Soooo what’s going on with this eBay case and why is it garnering so much attention?

According to this NY Times article, MercExchange filed suit in 2001 against eBay claiming that eBay’s But It Now feature infringes on three e-commerce patents held by engineer Thomas Woolston, founder of MercExchange, a “network engineering firm”. In 2003, a Virgina federal courty jury ruled in favor of MercExchange saying that eBay is violating two of the three patents and ordered eBay to pay $25 million. The judge in that case refused to issue an injunction to eBay. The judge reasoned that MercExchange “exists solely to license its patents or sue to enforce its patents, and not to develop or commercialize them.” MercExchange responded by arguing that they are in fact commercialing the methods on their website. Rrrrright.

MercExchange appealed and the appeals court sided in favor with MercExchange and said that injunctions are within the rights of the patent holder and must only be disallowed if the invention is necessary for public health or national security. At eBay’s request, the Supreme Court agreed to hear the case.

Again, the emphasis needs to be made that the reason why the eBay vs. MercExchange Supreme Court hearing this Wednesday is so monumental is not about whether there is validity to the patent infringement, instead it’s whether or not the federal court ruling correctly interpreted patent law. As far as I understand, patent law gives a judge authority to issue an injunction but does not require it. However, injunctions have become very commonplace and proponents insist that it is the injunction that gives the “little guy” real leverage against the “big guy”.

According to this NY Times article, an eBay spokesman said that even if the injunction is upheld, it won’t make much of a difference to eBay since they have supposedly redesigned the Buy It Now methods/processes such that it does not violate the patents.

The issue of injunction manifested in many headlines in the recent patent suite against RIMM. An injunction in this case meant that millions of RIMM’s BlackBerry service users would be stranded. Did NTP, the plaintiff, care about inconveniencing millions of people. I doubt it. All they wanted was cash…lots of cash. And $600MM of cash is what they ultimately agreed to. Luckily, for both RIMM and its customers, an injunction was avoided.

I’m all for the rights of patent holders. Patents encourage innovation and are key to a successful, technology-driven free market. However, when patents are used for what I would call exploitation, it’s just wrong and needs to be curtailed. If not, companies lose, the US economy loses, and ultimately the average American – the average Joe who just wanted to sell some stuff on eBay at a fixed price – loses.