European online music store agrees to settle a patent infringement

Long Island Business News, Jan 23, 2004 by Ken Schachter

A European online music store, whose partners include Microsoft Corp.'s German subsidiary, has agreed to settle a patent infringement lawsuit by E-Data Corp.

Though financial terms were not disclosed, the deal, in which On Demand Distribution GmbH, the prime partner in the Tiscali Music Club, consented to pay past and future royalties, marked a high- profile victory for tiny E-Data, whose sole property is the Freeny patent.

That patent, originally issued in 1985, covers the transfer and recording of data, such as the downloading of music and CD burning.

The patent expired in the United States in January 2003 but runs until March 2005 in Europe. E-Data, majority-owned by Port Washington businessman Bert Brodsky, has made a business out of pursuing patent infringement actions.

E-Data already has begun laying the groundwork for a run at Apple Computer, whose domestic iTunes service has streamed more than 30 million downloads to users since its launch last April.

Koos Rasser, a London-based lawyer with Howrey Simon Arnold & White, MNP, which is pursuing E-Data's campaign, noted that claims against iTunes would be limited to customers who skirt Apple's rules and use the service in Europe.

A potential case against Apple could be far more lucrative, Rasser said, should the Cupertino, Calif., company launch a European service in the spring, as many speculate that it will.

Although the iTunes business itself has thin margins, Apple is leveraging the business by selling more of its iPod digital music players, said Rasser, adding that, in any litigation, claims would not be limited to the profit spun off by the music service itself.

'Within the technology community, patent infringement happens fairly frequently, said analyst Bill Claybrook at the Harvard Research Group Inc. The problem has cropped up frequently enough for some companies to take out intellectual-property insurance in case they are named in an infringement suit, he added.

In the Tiscali Music Club case, the settlement with London-based On Demand Distribution, or OD2, covers the entire service, whose other partners are HMV Group, Tiscali GmbH, a subsidiary of Tiscali S.p.A, and Microsoft Deutschland GmbH. The music tracks are downloaded using Microsoft's Windows Media Player and Digital Rights Management technology. Calls seeking comment from Microsoft were not returned.

Rasser said the pursuit of the European lawsuit began last spring with letters to OD2 outlining the patent issues involving its download service in the United Kingdom.

The company eventually inquired about the standard licensing terms, which is 5 percent of sales, he added.

Amid prolonged negotiations, OD2 and its partners began similar online music stores elsewhere in Europe, including Germany in August, Rasser said. We had the suspicion that they needed radio silence to launch without any cloud of litigation, he said. It was a very convenient coincidence.

Eventually, a lawsuit was filed in Mannheim, Germany. The settlement that resulted covers all of Europe and Canada, Rasser said.

OD2 was at the center of the settlement, he said, because that company offers turnkey music download services to other companies, including Coca-Cola.

They went out and negotiated with the record companies for the right to sell their music online and developed the software and servers that make it technically possible, Rasser said.