inside/out: A Spoiler Waiting to Strike?

You've just gone live with your new Web site that brings together people ready to buy widgets with the companies that sell them. Your business model makes available technical information and provides the system and method by which buyers can complete the purchase of widgets under terms the buyers propose.

Suddenly your day takes a turn for the worse. A gentleman by the name of Jay S. Walker contacts you to introduce his company, Walker Digital. He asks if you are aware of U.S. Patent Number 5,794,207. Of course you are not. So, he tells you it he owns it. Furthermore, he says it is a patent covering a "method and apparatus for a cryptographically assisted commercial network system designed to facilitate buyer-driven conditional purchase offers." It turns out the patent is the basis of a Web venture he operates known as "priceline.com."

Presently applied to the purchase of airline tickets, hotel rooms and new cars, the patent covers a wider application. Other examples cited in the 42 page patent description are car insurance, selling U.S. silver dollars, selling an industrial commodity, credit card applications, and a reward for return of a lost item. The last paragraph of the description states that the "method and apparatus...has many applications not limited to the representative examples disclosed herein." It even works for a barter system.

Described by Walker as a bilateral buyer-driven system that seeks to consummate contracts between buyers and sellers based on mutual promises to perform, the system he has devised is something like an automated, general-purpose RFP application. It is a "centralized buyer-driven system of bilateral electronic commerce capable of being utilized by even small consumers to communicate their purchasing needs globally to potential sellers."

Jay S. Walker was named Direct Marketer of the Year by Target Marketing magazine and his story is published in the December 1998 issue. He has made and lost several fortunes in direct marketing ventures. In the process he came up with the concept of a "leveraged business method." He tells Target Marketing's Denny Hatch, "In a leveraged business, we don't touch the underlying business or inventory anything."

One of his partners says, "Jay doesn't think out of the box, he thinks out of the planet." After reading a technical article about cryptography with public and private keys, Walker saw a business opportunity in an online casino. He then decided to research U.S. patent law and learned that biotechnology firms patent forms of DNA. "If they invented the code [DNA code] they could patent it and use it themselves or license it to others. Either way they could make a lot of money," he is quoted as saying.

In July 1998, the Federal Court of Appeals for the Second Circuit reaffirmed that a business method can be patented so long as it is new, useful and not obvious to someone with knowledge in the field. Walker's patent for "priceline.com" was issued August 11, 1998. While this is a new approach to patents, he believes Diners Club could have patented the charge card years ago. After winning the patent, he formed a company, Walker Digital, to patent entirely new systems of commerce. This business has become a think tank for potentially patentable business systems. Walker has applications for more than 250 patents based on leveraging existing businesses. Target Marketing reports that the U.S. Patent Office has issued six patents to Walker Digital so far and six more have been granted, but not yet published.

Walker has a checkered success record, so maybe this won't go as far as it might. And I applaud his business acumen in exploiting this avenue of patent protection for business systems. But it is a little frightening that power to control creative uses of the Information Highway is suddenly being given to one whose apparent purpose is to reap financial benefits by acting as an intermediary between buyers and sellers. It's a little like the old highway robber popping out from behind the bush to hold up the stage to Santa Fe. Overall will this help or hinder the development of e-business on the Internet?

Stock analysts are calling electronic intermediaries: "Infomediaries," and some say they will emerge as the new information hubs on the Web. Infomediaries will try to cash in on growing business-to-business commerce on the Web, expected to be, according to International Data Corp., a Framingham, Mass. market research firm, $330.6 billion in 3 years. Holders of patents on systems that control this cash flow may capture a significant portion of this as service fees.

Congratulations, Mr. Walker. Hope you've left a little for the rest of us.

After 18 years in marketing and sales at IBM, Bob Diefenbacher founded Denbrook Systems Associates, an IT consulting firm based in Malvern, Pa. denbrook@aol.com