Lawsuit Puts Priceline.com Patent On the Line
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The patent infringement lawsuit Priceline.com has slapped on Microsoft is a risky strategy that could send the high-flying, name-your-price e-commerce firm crashing back to earth, legal experts said Thursday.
Filed Wednesday in U.S. District Court in Connecticut, the lawsuit alleges that Microsoft and its Expedia travel service violated Priceline's U.S. patent number 5,794,207, "Method and Apparatus for a Cryptographically Assisted Network System Designed to Facilitate Buyer-Driven Conditional Purchase Offers."
Priceline (PCLN) specifically claims that the Hotel Price Matcher service recently launched at the Expedia site violates the '207 patent, which Priceline incorporated into its site in April of 1998, and which is one of a portfolio held and applied for by co-founder Jay Walker, through his firm Walker Asset Management.
Some Internet patent and intellectual property attorneys have all along questioned the validity of Walker's business-model patent, and they view the suit against Microsoft as the first major test of whether the US Patent and Trademark Office made a mistake in issuing such a broad patent.
While taking on Microsoft's (MSFT) well-endowed legal machine is daunting, this is no David versus Goliath match-up, according to John B. Farmer, an intellectual property attorney with Mezzullo & McCandlish. He believes Priceline's market capitalization and assets will enable it to mount a strong legal attack on Microsoft. Indeed, the firm said it has enlisted the help of some of the nation's top patent attorneys, with lead counsel from law firm Cravath, Swaine & Moore.
But Farmer said Priceline could quickly lose the faith of investors, who've been sold on the idea that it owns reverse-auction business model on the Web, if the firm doesn't prevail against Microsoft.
"Their claim to fame is that they have the patent on these kinds of businesses. Now that's in play. By suing Microsoft, they have put into question the strength of the patent. If the patent is invalidated or narrowed and doesn't preclude competitors, then Priceline has lost a lot," Farmer said.
Like most patent-infringement cases, the Priceline suit is likely to move slowly, particularly since Priceline has not asked the court for a preliminary injunction that would bar Microsoft from using its Hotel Price Matcher service until it rules on its request for permanent injunctive relief. The Priceline suit also seeks unspecified actual and punitive damages.
While such cases often never make it to trial and instead spawn out-of-court settlements, it's not clear at this stage how the parties might approach such negotiations. Typically, there's a swap or cross-licensing of patents, according to Moore, but it's more likely in this case that Priceline is hoping to generate a revenue stream from its patents.
"I would imagine that Priceline is angling for Microsoft to take a license and pay a nominal royalty so they can say `We've gone to the biggest and they've acceded' and therefore everyone else will fall into line," Moore said.
Earlier this week, Priceline announced that Alliance Mortgage Company had agreed to pay $1.5 million to license Priceline's business model. The company said it has signed similar licenses with Budget Rent A Car and WebHouse Club. The firms didn't reveal whether those agreements contain provision for ongoing royalties.
Microsoft may feel pressure to dispatch the suit quickly with a settlement. The company has plans to spin off Expedia and take it public, and the cloud of the Priceline lawsuit could scare away some potential investors. Microsoft officials haven't yet seen the lawsuit, but Wednesday they called it "a transparent and desperate attempt by Priceline to slow us down and avoid competing with Expedia on the merits."
Should Microsoft decide it's at a legal disadvantage, it might propose a marketing or promotional deal involving one of its online properties, according to Bill Whyman, an Internet analyst with the Legg Mason Precursor Group. But Whyman said Microsoft will be very wary of settlements that could put its brand at a disadvantage.
"A lot of this comes down to everyone wanting to own the customer. They want the brand. I'd be surprised if Microsoft agreed to a 'Priceline at MSN' type of arrangement," Whyman said.