Playboy, Citigroup, and Google's Patent Problem

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We're about to get a hands-on lesson in the Law of Unintended Consequences. A small company is suing lots and lots of major businesses for patent infringement. While little Eolas is looking for a quick cash boost, its lawsuit has the potential to change how the patent system works.

What's going on?
Eolas' lawsuit targets 23 companies you may have heard of, like megabank Citigroup (NYSE: C), adult publisher Playboy (NYSE: PLA), and chip designer Texas Instruments (NYSE: TXN). As you can see, Eolas is casting a wide net across many industries. About the only thing these targets have in common is that they all have Web sites. And of course, Eolas is also focusing on the online sector, naming both Google (Nasdaq: GOOG) and Yahoo! (Nasdaq: YHOO) in the suit.

Eolas' claim to fame so far is that the company sued Microsoft (Nasdaq: MSFT) a few years ago over Mr. Softy infringing on a patent. Its patent covers certain methods for making Web pages richer and more interactive, in a way that seems obvious to programmers these days. Nevertheless, Eolas won $565 million in damages from a 2004 ruling. Some of the award was later reversed on appeal, and then Eolas and Microsoft settled the case without disclosing the final tally. The point is, Eolas got something out of Microsoft -- and this lawsuit is partly based on the same patent. No joke, kids.

OK, so what's the damage?
The suit is for real and might cost millions of dollars in legal fees, possible settlements, and potential court-ordered damages. But it also builds on a patent for seemingly obvious technology in the controversial field of software patents. The patents at issue deal with Web browser technologies like plug-ins and scripts -- technologies that Web developers often take for granted because they seem so ubiquitous. But Eolas seems to have a patent or two on these ideas.

I can see Eolas' side of the story: if I invented the wheel, I'd be furious to see people using it for free all around me. But then again, you can't patent math or universal truths, like the fact that a circular object can roll, or "2+2=4." Linux veteran Red Hat (NYSE: RHT) is arguing that software should fall under this un-patentable umbrella, recently telling the Supreme Court so in an amicus curiae brief. "Far from encouraging innovation, this proliferation of patents has seriously encumbered innovation in the software industry," said Red Hat. "Software is an abstract technology, and translating software functions into patent language generally results in patents with vague and uncertain boundaries." And I generally agree with Red Hat on this. So do a few other technology giants.

What's next?
The new Eolas suit is big enough that it might force a rethink of what you can and can't patent. I don't know which side of the fence our courts will land on, but either way, the ramifications of the rethinking process will be huge. Going far beyond just software patents, that close-up examination could raise questions about granting patents on other abstract ideas such as business models.

Keep a close eye on this suit, Fools. If Eolas comes out with a big win, the company might be able to collect damages and license fees from pretty much anybody with a modern Web page. And then we'd have a new set of legal thumbscrews that places additional pressure on entrepreneurs with a software-based idea or innovative business model: "What if there's some prior art for what I'm doing? I can't afford to go to court!" There'd be much more legal muscle and enforcement powers behind these suits than what they have today.

Or on the other side of the pendulum, we could end up with a looser or nonexistent framework of patent protection for these abstract concepts. Businesses would compete on how well they can put good ideas to work rather than on how their lawyers can protect those ideas. That might be bad news for some innovators, but I believe we would end up with more innovation, less courtroom wrangling, and a healthier digital economy. On the whole, that's my preferred outcome because it's better for almost everyone. At the very least, putting a leash on patents with "vague and uncertain boundaries" would be a boon to innovation in the industry.

Nothing personal, Eolas, but I sure hope you lose -- and lose big.

Is Anders a clear-eyed visionary or just plain insane? Discuss in the comments below.