Courts Give Small Firm Outsized Role on Data Swaps.

IF you download songs off the Internet, the record labels might not be the only ones who think you owe them money.

A little-known New Jersey company called E-Data holds a patent over the process of selling products by sending them digitally from a central location to a remote device. While the company never got around to actually building such a system, the rest of the world came up with a little something called the Internet that does the trick quite nicely.

So why should anybody care? Because thanks to a recent Federal Court ruling, this little company can now claim the right to extort a licensing fee from thousands of companies that have been distributing songs, movies, electronic books or other content online.

The patent dates back to 1983, well before the Internet was a household word. It envisions a "system for reproducing information in material objects at a point-of-sale location," a jumble of legalese that describes a novel solution for inefficiencies in the publishing business.

The problem is that publishers basically have to guess about how many books or records they might sell. Missing the mark in either direction is costly, leaving them with either unsold books and CDs or a missed opportunity to sell more. The system described in the patent offers a solution that many have imagined since then: instore kiosks that print books, tapes or other media on demand.

After filing for the patent, Charles C. Freeny Jr. of Fort Worth, Texas, sat back and waited for bookstores and record labels to license his system. But after more than a decade, on-demand kiosks were still just a vision and the business world was beginning to focus on the Internet as a tool for content delivery.

That's when E-Data came into the picture. The company acquired the patent in 1994 and began sending out demand letters to tens of thousands of online businesses. Recipients were offered a chance to pay E-Data a percentage of their earnings for the right to sell access to stories, software, songs and other data files on the Internet. If they refused, they were threatened with a lawsuit.

The company followed through on its threat, filing patent infringement lawsuits against 43 companies. It won settlements from companies including IBM and Adobe, but others opted to fight the claim in court.

A federal judge in New York ruled in 1999 that the patent applied only to in-store kiosks, not Internet sales. But an appeals court reversed that decision in November, and a full panel of judges affirmed that ruling last month.

As it stands now, the patent doesn't apply to the sale of products that remain stored on the hard drive of the user's computer. But anything distributed over the Net that can be printed out, burned to a CD, ported to an MP3 player or stored on any other medium could be covered by the patent.

"For too long, corporations have been using their wealth and powerful attorneys to prevent us from asserting our rights," crowed E-Data president Tibor T. Tallos in a post-judgment press release. "Now they will have to face the music, however inconvenient for them it may be."

Well, maybe. The ruling revived the company' s lawsuit against defendants including CompuServe, Intuit, Broderbund Software, Waldenbooks and Ziff-Davis Publishing. But it didn't conclude that those companies had infringed on the patent or whether the patent itself could be invalidated for other reasons. Those issues will now be debated in court, and E-Data may have to wait even longer before staking its claim to other potential infringements.

Also, the patent is set to expire 20 years after it was issued. That means the deadline for the E-Data's world domination plans arrives in 2003, unless its lawyers can convince a judge to put some time back on the clock.

Still, the company could do some serious damage in the short time it has left as the disputed king of Internet downloads. I'm sure it'll come as a surprise to many Internet companies when they're asked to pay protection money for the right to carry out their business online.

But the only real surprise is that Microsoft didn't think of the idea first.