Will Distributors Pay The Price For Purchasing Power?

Distributors often point to ease in purchasing as one of their biggest selling points. This is especially true when it comes to their Web sites and online customer ordering, if they offer that capability. However, a new patent recently awarded to Consumers Interstate Corp., a Norwich Conn.-based wholesale industrial supplies distribution company, could change the way distributors currently conduct online ordering and fulfillment. The “Internet Procurement Method,” a method that allows companies to keep track of customer orders, is now protected under patent #6,895,389, and distributors must now pay a licensing fee to use it.

So far, word on the patent has been slow to reach many in the jan/san industry. Several distributors and software consultants contacted by Sanitary Maintenance about the patent and most declined to comment on it due to lack of knowledge of the patent or of specifics of the technology itself.

But the impact of this development promises to be far-reaching, explains Kenn Fischburg, president of Consumers Interstate Corp. “Anyone using a Web site ordering form that remembers and recalls the shopping history of an individual consumer is potentially infringing on Consumer Interstate’s patent,” Fischburg says.

Talking Tech
There are many Web-based purchasing features that companies can provide to customers, so what does this patent apply to?

The Internet Procurement Method could also be called the “favorites list.” It essentially allows companies to provide customers password-protected access to the host’s Web site, where they can view a database featuring organized records of specific products that they regularly order.

These lists are based on an audit of customers’ records or through interviews with customers. The records simplify ordering by providing customers with a custom order form with a list of only the products they typically order.

For example, if Company X orders the same 10 items from Distributor Y every week, and if Y has this ordering capability, it would keep X’s specifics on file, which would pop up in a specialized menu with only those 10 items listed on the ordering form.

With this technology, customers can also see what they ordered last, how much they ordered and they can view data about the products and prices.

“It’s all there, so you just have to say how many of each you want, hit enter and you’re done,” says Fischburg. “You don’t have to search for the products, you don’t have to worry about your pricing, you don’t have to create another purchase order or do paperwork.”

Fischburg says this ordering method is highly popular. In the past three years, Fischburg says, 98 percent of Consumer Interstate Corp.’s new customers have used the method to place orders while 55 percent of their existing customers have given it a try.

John E. Lynch, who along with Russel H. Beatie is serving as Consumer Interstate Corp.’s outside intellectual property counsel, says this technology makes business extremely efficient for distributors and many companies can benefit from its use.

“Kenn is hoping to make this technology available to companies looking to get into using the Internet to do business and will have this method available,” says Lynch.

He says using the technology could serve as a good jumping-off point for companies looking to get into Internet ordering because it is an established and proven system.

Even before this business practice became common for Internet users, Fischburg was using the ordering method in his business. “We have been doing this for 15 or 20 years,” he says. “When the Internet arrived, we applied the technology to the method. Before then, we had a pre-printed order form with the items customers ordered regularly and then they would fax it in.”

Patent Perfect
It took quite a while for the U.S. Patent Office to award Consumer’s Interstate Corp. the patent for this method — Fischburg filed in September 2000 and didn’t receive it until May 2005. The patent remains in effect for 21 years after the filing date, at which time the technology becomes open to the public.

Some distributors and consultants who were contacted by Sanitary Maintenance questioned the validity of a patent applied to a common business practice. Lynch says business method patents, particularly when related to the Internet, are rigorously reviewed; the patent office has to attempt to access all “prior art” — what people did before a certain business practice was established — to determine if the potential patent holder did in fact develop the method.

“The short answer is that is it difficult to get a business-method patent because it receives a greater amount of scrutiny by the patent office,” says Lynch.

Fischburg further explains that in 1998, the federal court allowed patents on methods and algorithms, and since then there have been a few business-method patents related to the Internet.

“It’s such a major new development,” says Fischburg. “One new statistic is there were 176,000 patents given out last year; 282 were for business methods, and out of that 282, only a very small number were for the Internet, so this is a major Internet patent law.”

Steve Epner, a consultant with Brown Smith Wallace, St. Louis, says how far this patent reaches will depend on what, exactly, is protected by the patent, how it is challenged, and what, if anything, happens in the courts. He says distributors should be cautious of these types of claims.

“There are some crazy patents out there,” says Epner. “I think there was even one that claimed to control any business purchases on the Internet … no one should give up what they are doing until a competent patent attorney who understands the technology and business reviews what has been issued.”

License to Sell
With Consumer Interstate Corp.’s attainment of the patent, Fischburg says he and outside counsel are searching for the companies that are using this technology to inform them of the patent. Any company using this method without a license will first be asked to cease and desist, he says.

He is also asking that all companies interested in using the ordering method on their Web sites contact him for a license. “In fact, if I were [a company] thinking about wanting to start an e-commerce strategy and I wanted to know what was successful … this would be perfect because it’s already certified.”

Fischburg opted not to reveal the licensing fee he intends to collect, but did say it will be a “reasonable rate” and that the first 10 licenses issued will be at a reduced rate. So far, no companies have received a license from Consumer’s Interstate.

Licensing for the patent is retroactive, meaning anyone who started using the technology after the September 6, 2000, filing date will have to obtain licensing. “Somebody might say they didn’t know about it and they started up their e-strategy two years ago when there was no patent,” says Fischburg. “The law says that it goes back to the issue date.”

Challenge to the Change
Of course, companies may fight the patent and the subsequent licensing fee, but Epner believes that isn’t very likely. “I am afraid that many patent holders hope most people will be intimidated and just pay a small fee rather than go to court,” says Epner. “This may be a situation where a number of [distributors] may want to get together and hire someone … to research the reality of the situation and give them good advice on how to proceed.”

According to statute, Lynch says, the patent enjoys a presumption of validity. “There is one mechanism where it can be challenged in the patent office — based on prior art that the patent office didn’t consider, and any member of the public can do that if they want to.”

More commonly, however, an “infringer” will put up a defense of invalidity during litigation, says Lynch. “We’ll try to license them or enforce [the patent] in other ways if they don’t want to get a license,” Lynch says.

Epner also says it’s not uncommon for all kinds of patents to be withdrawn when new information comes to light after the patent’s issuance.

Steps to Take
As Consumer’s Interstate wraps up development of its licensing strategy and finds companies to license, the most important thing a distributor using this technology, or planning on using it, can do is to seek legal advice.

“There is a duty of care for companies or individuals to avoid knowingly using a patent that belongs to someone else,” says Lynch. “You discharge that duty of care by retaining counsel.”

John Kepler, practice group chair and intellectual property expert at Polsinelli Shalton Welte Suelthaus, a law firm with several U.S. locations, says distributors using the method should become familiar with what the patent really says.

“It is important for decision makers to read the actual claims in a patent and not just the description,” says Kepler. “You cannot avoid the detail work if you must make an important decision related to your own existing or planned technology in light of an announced patent award.”

Keeping informed on developments related to the patent is important as well. “Do not ignore it, keep watching the trade press and stay on top of early court cases, if there are any,” says Epner. “The advertised capabilities of the patent and the reality of what is claimed may be two very different things.”

Fischburg hopes people will take the patent seriously, and also hopes people will see the value in the technology. “It’s a very rare, valuable patent that will affect the distribution industry,” he says. “The e-commerce strategy is still in its infancy, but it is a very successful e-strategy that can benefit distributors.”

Creating controversy is not Fischburg’s goal in obtaining this patent, he says. “My objective is to have no conflict and to have reasonable relationships, but on the same token, it is an invention … that is what America is all about — the right to invent something and if it’s valuable, to get it protected.”