Friday, April 01, 2005

Business Week on patents

from businessweek:

Companies that do secure protection often wind up needing it: There were 8,934 copyright, patent, and trademark suits filed in federal court in 2003, up 27% from 1996. Fighting those battles can be expensive. Even in suits asking for less than $1 million, the median cost of bringing a patent-infringement case to court is $500,000, while trademark cases run $298,000, according to the American Intellectual Property Law Association in Arlington, Va. Luckily, having protection in place means you can often keep a case out of court. And it may make rip-off artists think twice before churning out knockoffs.

BY FAR THE MOST rigorous and complex protection to obtain is a patent, but it's often an effort well worth making. Patents are awarded to original inventions and prevent others from making, using, or selling anything with the same appearance or way of working. Approximately 70% of patent applications are approved, according to the Patent & Trademark Office, but it can take two to five years to get one, depending on how many questions the examiners need answered. Patents aren't cheap. Expect to pay $5,000 to $20,000 in filing and legal fees. Those figures are likely to increase: In the last budget Congress included a 15% to 20% rise in fees for the next two years.

The most difficult patents to secure are business-method patents, which cover a specific method of doing business -- say, a unique way of replying to customer inquiries or of processing orders. Once rarely used, a court decision in the mid-'90s gave business-method patents a boost in popularity. Now the backlogged Patent Office can take two years just to look at a new application, says Lowenstein Sandler's Buckingham.

Patience paid off big for SightSound Technologies. Business-method patents helped the Pittsburgh-based company win a six-year court battle against online-music companies CD Now and N2K, both now owned by Bertelsmann. In 1988, SightSound founder Scott Sander filed for several business-method patents for what was then an innovative business idea: downloading music and movies over telecommunications systems. Five years later, SightSound got patent protection. But the business was struggling. In 1998, SightSound sued online-music retailer N2K, which was allowing customers to download music via the Internet, for infringement. According to SightSound, the case settled out of court in 2004 for $3.3 million -- a great deal more than the company's annual revenues of about $100,000. Sander has capitalized on the windfall by turning the four-employee SightSound into a licensing company. A Bertelsmann spokesperson had no comment.

More recently, in October, SightSound sued Los Angeles-based Napster for patent violation, and, in January, filed a preliminary injunction. A Napster spokesperson said that the company doesn't believe there is a legal justification for the injunction and the company "is highly confident the request will be denied."

ONCE YOUR COMPANY files for a patent, your application is kept secret for 18 months. After that, it's public information. Most small businesses can't afford to keep their products off the market that long, so they often launch while the patent is pending. Companies can sue violators going back to the filing date, though.

If you do start selling a product before you've filed, you'll be eligible to apply for a patent for just one year. What happens when two parties file for the same patent? The application that is approved first -- not the one that was filed first -- is the winner.

To speed your approval, you'll want to work with an attorney familiar with your industry. Attorneys specialize not just in patents, for example, but in patents for mobile electronics, food, games, or toys. Having a name-brand lawyer on your side also means that potential competitors will think twice before ripping you off. Ask your regular business attorney, as well as entrepreneurs with businesses similar to yours, for recommendations. The Web site of the American Intellectual Property Law Assn. ( has a list of members.

David Lee, CEO of 15-employee Client Dynamics in Irvine, Calif., started selling software in March, 2004. But he's already spent some $50,000 protecting his company. Lee has been awarded one technology patent and has two pending. He says his lawyer encouraged him to apply for the broadest patents possible, giving competitors less wiggle room. His lawyer also knew the patent reviewers and was able to pick up a phone and ask them questions. "Get the best law firm you can," says Lee. "And I would not skimp on money." That may not be music to your ears, but if you end up in litigation you'll want to have the most robust documentation lawyers can muster.

THE BATTLE AGAINST COPYCATS doesn't end once you have a patent or other protection in hand. You'll have to keep monitoring the market for violators. That can include examining competitors' products at trade shows or hiring a trademark-search firm to seek out possible conflicts. Cosmic Debris makes use of its customers' eyes and ears. It encourages loyal customers to supply information about possible knockoffs and enlists employees to act as watchdogs.

Should you find a possible infringement, you may need to hire an engineering firm to do a reverse-engineering analysis, taking apart a product to figure out how it's made. This is done mostly with technological inventions and can cost "several thousand dollars to $50,000 or more," says Russell E. Levine, a partner with law firm Kirkland & Ellis in Chicago.

Your next move is to decide to act -- or not. Fighting an infringer is not always worth the time and money. Your lawyer can help evaluate the seriousness of a threat and your odds of winning a lawsuit. "A much larger company can come in and litigate you to death until you run out of resources," says Client Dynamics' Lee. Large competitors, aware of the cost of litigation, may continue infringing while the case is in court, hoping you'll give up fighting.

To bulk up his resources, Lee signed a partnership agreement with the far-more-muscular Dow Jones to sell his software. The Dow Jones name is now on the product, so if "someone decides to infringe on our patent, they have to deal with Dow Jones," says Lee.

The good news, says Gabriel Berg, a partner at New York law firm Berg & Androphy, is that you can often protect yourself without going to court. Sending a simple cease-and-desist letter can do the trick. Cosmic Debris, for one, always tries to stay out of court. "We send letters, maneuvering to resolve things short of filing a lawsuit," says Susan E. Hollander, a partner with law firm Manatt, Phelps & Phillips in Palo Alto, Calif., who represents Cosmic Debris. Trade-secret cases are the exception, as they are hard to establish and more likely to be challenged by competitors.

The more rip-off artists you face down, the better your chances of prevailing in other cases. "If you have filed previously in court and received a favorable verdict, it can help your credibility in future negotiations," says Levine. The best strategy, then, might be to aggressively pursue small violations, creating a precedent for later tussles. If you've done your homework, there may not be too many of them.


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