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Protecting Your #1 Asset
By Michael A. Lechter

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 Protecting Your #1 Asset

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Protecting Your #1 Asset
By Michael A. Lechter
ISBN: 0446678317
Genre: Business & Money

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Chapter Excerpt from: Protecting Your #1 Asset , by Michael A. Lechter


To illustrate some of the pitfalls, I pose the following hypotheticals (based very, very loosely upon actual situations).

Horror Story 1

Ackman developed a new video game conceptually different from all previous video games. In addition, this game's program employed radically new data manipulation techniques, which permitted the generation of amazingly lifelike images on conventional displays. Ackman began marketing the game software in both ROM "cartridge" and disk form. Each article sold was dutifully marked with a copyright notice.

The game was an instant success and the programming technique was proclaimed a major breakthrough. Within a matter of months, competing games, conceptually the same as Ackman's but employing different audiovisual effects and minor functional differences, began to appear. Ackman sued for copyright infringement. He lost.

Ackman also learned that a number of companies were employing his display programming techniques in other products and games. His attorney advised him that his copyright provided no recourse and that he should have obtained patent protection on his program. Ackman learned the hard way that a copyright provides only a very limited form of protection.

Horror Story 2

After years of R&D, Z-Corp develops a revolutionary new microcomputer that takes the market by storm. Only a little more than a year after its in-troduction, Z-Corp's product has literally become the premium micro on the market. Then, suddenly, sales begin to drop. Z-Corp learns that its archcompetitor, CopyCo, has purchased, then copied a Z-Corp unit and is now marketing a competing product. The CopyCo unit differs from the Z-Corp product only in the details of the casing and the unmistakable "CopyCo" decal on the front of the unit. However, since CopyCo has essentially no research-and-development costs to recoup, its unit is being sold at a substantially lower price. At this point, Z-Corp for the first time seeks legal advice on how to protect its R&D investment. Z-Corp is out of luck.

Horror Story 3

Dr. A is employed by Y-Corp in its R&D section and has developed a new semiconductor device with phenomenal frequency characteristics. Anxious to receive credit for developing the new device, Dr. A immediately publishes a technical paper. Within the next few months, Y-Corp perceives that the primary market for the new device is in Japan and Germany, and attempts to protect its rights in the device there. But Y-Corp is too late for patent protection in those countries.

Horror Story 4

Mr. D had an idea for a new product. He approached his employer, Ms. E, to see if she was interested in manufacturing it. Ms. E immediately saw great potential for the product, and agreed to pay Mr. D a substantial sum for rights to it, but only if they were successful in obtaining a patent—showing Ms. E as the inventor, even though both knew Ms. E had no part in making the invention. Mr. D agreed, and a patent application was immediately filed in Ms. E's name. The Patent and Trademark Office determined that the product was indeed patentable. However, because Mr. D and Ms. E intentionally misidentified the inventors, the patent was vulnerable to invalidation.

Horror Story 5

Ms. B had an idea for a new system architecture, and jotted down notes and a diagram on a piece of scrap paper, without signing or dating the paper. A few months later, Ms. B approached her employers to see if they were interested in manufacturing a system using her architecture. Her employers immediately saw great potential for the architecture, and agreed to pay Ms. B a substantial sum for rights to it, if they were successful in obtaining a patent. A patent application was immediately filed in Ms. B's name, and the Patent and Trademark Office determined that the architecture was indeed patentable. However, a third party had also developed a similar architecture, and had also filed a patent application. An "interference proceeding" was instituted in the Patent and Trademark Office to determine who was entitled to claim the invention of the system architecture. It soon became evident to Ms. B that the third party did not come up with the idea until just before she disclosed the idea to her employers—thus she was the first to have the idea by a matter of months. Unfortunately, she had no way of proving it, and the third party was awarded the patent.

Horror Story 6

Mr. X is president of X-Corp, a service company that lays out and manufactures custom PC boards. X-Corp has developed a new computer-aided technique and software that permits it to substantially increase the density of components per unit area on a PC board as compared to the products of its closest competitor. In attempting to obtain a substantial order from a potential customer, Mr. X explains the new technique and software in detail to the potential customer without reservation. Later, after it appears that X-Corp cannot meet all of the customer's demands, the customer places a second order with one of X-Corp's fiercest competitors, and, in the course of doing so, explains the X-Corp technique and software to the competitor. The competitor thereafter begins using X-Corp techniques in all of its work. X-Corp loses its edge over the competition.

Horror Story 7

OK-Corp was in the private-branded widget business. It had been very successful in developing a number of extremely large accounts, supplying them widgets bearing the customers' trademarks. To take advantage of the low cost of foreign labor, OK-Corp outsourced the manufacture of its widgets off-shore. The widgets were drop-shipped from the foreign manufacturer's facility directly to OK-Corp's customers. Then one day, to OK-Corp's dismay, the orders from its large accounts abruptly ceased. When it called to investigate, it was told that the customers were now buying directly from OK-Corp's offshore supplier. OK-Corp had no patents on the widgets. OK-Corp was anything but okay.

Horror Story 8

Z-Corp spared no expense in rolling out its newest product in December 1989, and blanketed the market with advertising prominently featuring a catchy trademark. A great deal of thought and expense had gone into the choice of the trademark, and Z-Corp was certain that no one was using it. Unfortunately, Z-Corp had not thought to do a search of the Patent and Trademark Office files; just days before Z-Corp's rollout, Agresso Corp had filed an application for federal registration based upon an intent to use the identical mark. The notice of trademark infringement caught Z-Corp completely by surprise.

Horror Story 9

H-Co was in the construction business. It discovered that substance X, an ordinary, commonly available product, was phenomenally effective as an insect repellent when mixed with cement. The material was well-known, and had been sold in bulk for years for use as a fertilizer, but no one had discovered its insect-repelling properties. In an initial testing, H-Co brought bags of the material to a construction site and manually mixed it with the concrete used in the footings and floor of a building in progress at a location known to be infested by termites. Over the next eighteen months H-Co monitored the site and ultimately established to the inventor's satisfaction that the structure was effectively termite-proof. After determining that the additive was effective against termites, H-Co began to perform tests on its effectiveness against other types of insects, such as ants, wasps, Africanized bees, and roaches. The H-Co inventors were relatively sure that the additive would repel the other insects, but were not positive, and felt that the tests were necessary. They also suspected, although it was far from a sure thing, that the additive would work when mixed with other types of building materials, such as plaster, gypsum, stucco, or textured water-based paints.

H-Co had a sense that a patent could be valuable both as a barrier to competition and as a marketing tool. At the very least, they wanted to be able to mark their product "patent pending" to aid in marketing. If they were actually successful in obtaining a patent, that would be a bonus. However, they were just getting their business started, their funds were limited, and they did not want to spend any more money than they absolutely had to on obtaining a patent.

One of the inventors had a neighbor who was a patent attorney. The neighborhood patent attorney practiced on his own and specialized in preparing inexpensive patent applications for small businesses. He and his secretary worked out of a small office located in a nearby strip mall. The H-Co inventors visited the patent attorney's office, and spent an hour or two with him describing their discovery. H-Co emphasized that they were on a very tight budget and wanted to minimize attorneys' fees. Based on the description provided by H-Co at the meeting, and without requiring any further input from the company, the attorney prepared a patent application.

The application described the use of the material as a termite repellent, and the specific manner in which H-Co had mixed the material with the cement as it was poured in H-Co's initial tests. It did not explain why the material acted as a termite repellent. (There was no way that it could; at that time H-Co did not know why the substance worked.) There was no discussion of the use of any substance in the additive other than the specific substance used by H-Co in its initial test, nor any mention of substances that might be used as an alternative to substance X in the additive. There was no mention of insects other than termites.

The patent application included three claims. The first claim was extremely broad: "1. A product for repelling insects comprising substance X." The second claim depended from claim 1 (that is, incorporated claim 1 by reference) but specified that the insects were termites. The third claim was an independent method claim describing in exacting detail the particular method by which H-Co had mixed substance X with the cement as it was poured in H-Co's initial tests. The application was filed without a declaration in order to obtain the earliest possible filing date. After the application was filed, a copy was sent to the inventors at H-Co for their review, together with the required declaration for execution. The inventors were very busy. They gave the application only a cursory review before they signed the declaration and returned it to the attorney for filing with the patent office.

It was well over a year before H-Co had any further word from their patent attorney. During that time, H-Co had determined that selling cement premixed with substance X not only resulted in far better quality control, but was far more profitable than selling substance X alone as an additive for mixing with cement on-site. By the time H-Co heard from their patent attorney, they had also determined why substance X was so effective as an insect repellent, and had identified other substances with the same property that might be used as an alternative to substance X. In fact, H-Co found an equivalent substance Y that was nearly as effective as substance X but was considerably less expensive. They also discovered that adding a small percentage of an additional substance Z made the additive even more effective, particularly if substance Y was employed rather than substance X, resulting in a far less expensive but more effective product. H-Co's tests proved the effectiveness of the additive against other types of insects, such as ants, wasps, Africanized bees, and roaches, and that it would work when mixed with other types of building materials, such as plaster, gypsum, stucco, or textured water-based paints. The Y-Z additive was surprisingly effective against wasps and bees when mixed with textured paint, and particularly effective against roaches when mixed with gypsum.

When a letter from the patent attorney finally came, H-Co was estatic. The letter read, "I am happy to report that the patent office has allowed claims in the application. A copy of the office action by the patent office is en-closed, along with a proposed response that will place the application in condition for allowance. Unless I hear from you to the contrary, I plan to file the response this Friday."

The H-Co inventors glanced through the PTO office action and the pro-posed response. In the office action, the examiner had allowed claim 3 (in-cluding the details of mixing the additive with cement), but had rejected the broad claim 1 as indefinite, and had objected to claim 2 as "depending from a rejected claim." However, he did state that claim 2 "would be allowable if placed in independent form including all of the limitations of claim 1." The proposed response took a straightforward and simple approach.

The attorney did not contest the rejection; instead, he simply amended claim 1 to substitute the term "termites" for "insects," and canceled claim 2. The inventors didn't understand why the patent examiner thought original claim 1 was indefinite; it seemed perfectly understandable to them, and they could not see how using the term "termites" instead of "insects" made it any more understandable. However, they figured the attorney knew what he was doing and deferred to him. The proposed response was filed as the attorney proposed, and, sure enough, H-Co's patent was granted with the amended claims.

For the next few years, things couldn't have been better for H-Co. They became a leader in the cement market. Then one of their employees left, and took a position with one of the cement industry giants. And when they went to enforce the patent against the competitor, they discovered its weaknesses. They discovered the hard way that, where patents are concerned, you really do get what you pay for.

Horror Story 10

B. Hindthetimes brought his newest product to market in record time to meet the competition-but he did it without considering his competitor's patent position. He almost immediately received notice from his primary competitor that the new product infringed the competitor's patent. In B. Hindthetimes's opinion, this was not true. In any event, someone had once told him that patents were rarely successfully enforced in the courts. He opted not to consult an attorney and continued to market the product. B. Hindthetimes was soon in court and found himself faced with an injunction and a judgment for treble damages plus attorneys' fees. B. Hindthetimes learned the hard way that patents, if properly prepared, are now very enforceable in the courts, and that he would have been well served to consult a patent attorney before he went to market.

Horror Story 11

Salco was very proud of its new customer tracking software; the software was custom developed for the company by a consultant, and had cost it in excess of $500,000 in fees to the consultant, not to mention all the time and effort that had been devoted to providing the consultant all the data and feedback necessary to develop the software. That is, Salco was very proud of its software until it learned that after the software had been developed, the consultant had licensed substantially the same software to Salco's fiercest competitor. To add insult to injury, since Salco had already paid for the development costs, the competitor paid only a fraction of the fees Salco had paid to the consultant.

Horror Story 12

A number of years ago, Mr. D had an idea for a new interface circuit, but he came to the conclusion that it was too expensive to manufacture. He decided it was not worth pursuing and put it aside. A number of years after the fact, lo and behold, Mr. D finds out that P Company is about to come out with a line of hardware using precisely the interface circuit that he conceived years before. Mr. D goes directly to his patent attorney and requests that an application be filed. It is determined that Mr. D, in fact, developed the interface before P Company, and that the application could be filed within one year of any "printed publication," "public use," or "on-sale" bars. Just the same, Mr. D is barred from obtaining a patent because he "abandoned" the invention.

These hypotheticals are typical examples of how valuable rights in intellectual property are unwittingly lost by seemingly innocent courses of action, and how failing to consider third-party rights can lead to disaster.

Excerpted from Protecting Your #1 Asset , by Michael A. Lechter . Copyright (c) 1994, 2001 by Michael A. Lechter, Esq. Reprinted by permission of Little, Brown and Company, New York, NY. All rights reserved.

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