Copycat And Mouse
Say you're doing a brisk business with a product you've developed and patented. Then a competitor comes along and copies it. Common sense tells you to use, and there's a good chance your lawyer will agree. But talk to small-business owners who have been through patent suits and -- to a person -- they'll urge you to try almost anything else before you get involved in the time and expense of a full-fledged court trial. Since you have to act fast once an infringer is in the picture, however, it's a good idea to consider ahead of time just what that "anything else" might be.
A recent shift in the way courts look at patent disputes may have some bearing on your decision. Until recently, patent appeals were handled by 11 circuit courts of appeal. Depending on the district, a patent could be considered a 17-year monopoly that should be quashed or an example of free enterprise at its best that should be championed. Then, in October 1982, the U.S. Court of Appeals for the Federal Circuit was formed in Washington, D.C., and all patent appeals were directed to it. Many observers of the centralized court credit it with a pro-patent bias. Others disagree, saying it does no better than the best district courts, which uphold patents only 50% of the time. Still, there is no denying that the new court, which hears about 200 patent appeals a year, is making patent law more predictable, a real plus for patent holders. With precedents being set by a single appellate court, it will become easier to gauge whether or not a suit is likely to be successful.
Of course, you may not want to sue at all, in which case your list of alternatives is not a long one. Depending on the circumstances, you might decide to ignore the infringer; to fend off the intruder by threatening a lawsuit; to offer the offender a licensing deal; or to file suit and then hope to settle out of court.
Chances are, you'll know straightaway if it's best for your business to ignore the infringer. It may be that your patent is about to run out, or that the product is not central to your future sales efforts. Sometimes, says patent attorney John T. Roberts, of Roberts & Floyd in Washington, D.C., cases are not clear-cut, or the likelihood of winning seems slim. It may be that the infringement is fuzzy or the patent itself is weak.
Just as you may decide to ignore the problem if your patent is weak, you may find it takes very little effort to deflect a potential infringer if your patent is strong. That's the position Don Bellenger found himself in. Bellenger, executive vice-president of Buscom Systems Inc., a $7-million San Jose, Calif., company, had patented a telephone device to convert rotary dialers to touch tones. In 1979, Bellenger says, "Somebody hired an engineer to copy our product. We sent them a copy of our patent, and then I called them on the phone and said, 'Read it and weep.' It is a very strong functional patent, and there is no alternate way to do it. They agreed it was hopeless to challenge our patent. We never had to sue."
If your product is a hit and is simple to manufacture, it's likely that you'll soon find someone selling a duplicate. In this case, you may do well to offer to license your product. Mike Amer, a patent attorney with Bauer & Amer, in Mineola, N.Y., tells the story of one of his clients who did just that. The client patented, and then imported from Taiwan, a simple exercise instrument made of metal that hooks under a door and, when attached to the feet, is used to do sit-ups. Soon others started importing the same product. Rather than sue, the company worked out licensing agreements with the seven importers -- and earned royalties of 5% of their sales.
Statistics are hard to come by in the patent-infringement area. At least a thousand cases are filed in the district courts annually. And patent attorney Roberts estimates that 9 out of 10 cases that are filed get settled out of court before the trial runs its full course. Buck Wilson, chief executive officer of Automation Electronics Corp., a $9-million company in Oakland, Calif., decided to settle out of court in his last infringement go-around. Just as he was completing one 9-year suit, at a cost of $250,000, to defend his patent on an automatic call sequencer, another suit Wilson had filed was coming up on the court docket. By this time, with 10 years of his 17-year patent used up, Wilson decided to try another tack. "I told the guy, 'Listen, there are four people involved. Two will win and two will lose. The losers will be you and me. The winners will be our lawyers." An out-of-court settlement followed.
There are times, though, when litigation, however costly and time-consuming, seems to be the only course to follow. Wilson, for example, didn't take his first infringer to court without first offering him a license to sell the call sequencer. But the infringer wasn't interested. "He ran a bluff, and I got to the end of the diving board. When you are at the edge, you either jump or fight," says Wilson. "I don't jump." And, without question, there are advantages to winning a patent suit. Chuck Sussman, founder of Pretty Neat Industries Inc., an $8.4-million manufacturer of plastic cosmetic organizers, has had to go to court only once to defend one of his 15 patents. The judge ruled in his favor, which caused six other would-be competitors to stop copying. The advantages went beyond that, in Sussman's opinion. He estimates that the successful suits increased the value of his business by 40% when he sold it in 1985.
Leonard Kent, formerly president of Lam Inc., a Wakefield, Mass., indirect-lighting company, agrees that winning a suit can make a big difference. "We've enjoyed preferential treatment in the marketplace because we won our suit," he says. "Our product at the time promised to be a major profit center for our business, and has since proved to be." In 1976, Lam was bidding on a job to install its patented lighting system in five Miami-area schools, when Holophane, a division of the giant Manville Corp. (formerly Johns-Manville), copied the design, and won the Miami school contract by bidding low. "Johns-Manville's attitude was that no one knew about lighting but Johns-Manville, and our patent wasn't worth the paper it was written on," says Kent. When Lam discovered that Manville was mounting marketing campaigns for its system in other states, there seemed little recourse but to file a patent-infringement suit. Lam, which won the case in 1979 and an appeal in the new Washington appeals court in 1983, was awarded treble damages of $1.6 million. (Unfortunately for Lam, Manville filed for protection under Chapter 11 shortly after the infringement. Lam's legal bills have been paid, but it stands in line with the rest of Manville's creditors for the balance.)
Lam's lost profits, attorney's fees, and expenses topped $400,000 during the years of litigation, and the business was kept alive only through bank loans at above-prime rates. New-product development was put on the back burner. Kent estimates that often he was spending 70% of his time on the patent case. For reasons not related to the patent suit, Lam was sold to Jac Jacobsen Industries, and is now a subsidiary called Lam Lighting Systems, with Kent as its design director.
Reflecting on the suit against Manville, and despite the benefits to the company of winning the case, Kent doesn't hesitate for a second about whether or not Lam made the right decision. "I would certainly try to avoid litigation by negotiating a settlement out of court or licensing the product," he says. And if that failed? "I am sure that if we had realized the dollar cost and the time involved in litigating a patent suit, we would not have gone through with it. Both factors were far greater than we ever imagined. We were totally naive to the horrors of prosecuting a major suit against a major corporation. If we had known, we would have put the time and money into other products."
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