All buttoned up.

WEAPONS, SHAKEDOWNS, CRUSADES. These words have become part of the vernacular used to describe the ways in which patents are being used to harass, invade and even eliminate the competition, in this environment, top management needs to make sure that--from the start--they are soundly armed for the road ahead. Good counseling is the first step.

In their new book, Innovation and Its Discontents, patent experts Adam B. Jaffe, professor of economics and dean of Arts and Sciences at Brandeis University, and Josh Lerner, professor of investment banking at Harvard Business School, point to two Congressional actions that fostered and then institutionalized a continuing trend of patent aggression over innovation. Created in 1982 as a specialized appellate court for patent cases, the US Court of Appeals for the Federal Circuit systematically eased the enforcement of issued patents; in the early 1990s, the US Patent and Trademark Office (PTO) was recast as a quota-driven body, leading to a rise in the number of issued patents.

The subsequent changes in the patent arena were dramatic. Litigations escalated, along with prohibitive judgments and damage awards, such as the 1985 patent infringement case in which Polaroid won an injunction locking Eastman Kodak out of the US instant photography market as well as nearly $1 billion in damages. According to the PTO, almost as many patents were granted between 1990 and 2003 as between 1963 and 1989.

Today's patent vernacular describes an antagonistic world of "shakedowns," "crusades" and "weapons." A November 2004 New York Times article cited "patent terrorism" in connection with a patent auction by Commerce One, a bankrupt software company. The article centered on concerns that purchasers of the patents--which describe core e-commerce functions--could bring "... infringement lawsuits against companies [already] engaged in online commerce ... impede other companies ... or press competitors to pay licensing fees for practices already common in Internet commerce."

Patents today are increasingly used to harass, invade and often, as in the highly litigious medical devices industry, eliminate the competition. In this environment, management must ensure that, from the start, they are soundly armed for the road ahead. How a company advances under the power of its patent "engines," or resists those of its competitors, is a measure of the counseling it receives from its patent lawyers; indeed, the strength of this "counseling connection" can spell the difference not only between success and failure and profit and loss, but also between striking gold or entering a minefield.

A Collaborative Relationship

Good counseling is hard to come by and hard to identify in the arcane world of patents. While almost any counselor can prosecute and maintain patents, what companies need in this archly competitive environment is a close collaborator who embraces the patent as part of the company's business.

"As soon as the existence of gold becomes apparent," says James Lampert, partner and chair of Wilmer Cutler Pickering Hale and Dorr's Intellectual Property Department, "the counseling connection becomes indispensable in securing the site, figuring out how much gold there is and then unearthing the ore."

Counsel helps management make informed decisions about a patent's viability and whether to enter markets occupied by the competition. Determining the existence of potentially dominating patents is critical. "Not all companies think about potentially dominating patent rights," says Matthew Langer, who holds a doctorate from Yale in organic chemistry and is a partner in the Intellectual Property Department at Wilmer Cutler Pickering Hale and Dorr. "When potential third-party rights exist, counsel may be able to provide a 'freedom to operate' opinion, which can expose a patent's invalidity or show that it is not infringed and can both guide business judgments and serve to demonstrate good faith in the event of litigation."

"Good counseling also helps focus management on why a company wants its own patent rights," says Lampert. "Asking objective questions establishes a collaborative, strategically focused relationship. What do you think the patent will do for you? What do you want it to do for you?" What a patent can do, notes Lampert, depends not only on the patent's scope and strength, but also on the company's size, maturity and market. All of these should influence the company's patent strategy.

"The general themes are developing, protecting or expanding your business free from third-party claims and often--but not always within the exclusionary rights of your own patent," Lampert continues. "The gold is typically found at the nexus where legal and business considerations converge."

Patents can be used to protect markets or access external technologies, or they can be licensed to generate revenue or in exchange for a needed license under someone else's patent; a strong patent can provide market domination.

"Every situation has its own nuances," says Lampert, "but the point is, you have options, and good counseling helps you maximize those options. And remember, the plot only thickens in the international arena [see chart, page 6], which introduces differing prosecution and litigation factors."

Adding Value to the Business Plan

In the information and knowledge economy, patents increasingly are the business. Before acquiring patent rights, a company must ensure that the patent has real value. Finding the gold is one thing, but unearthing it or preventing others from doing so is another. A weak patent will not protect the company from infringement claims or provide strength in the event of litigation.

As a long-term investment, patents must be precisely engineered, durably built and vigilantly monitored. Patent prosecution is an essential element of patent strategy, and managing risk is a tenet of successful prosecution. For one thing, Langer recommends tight lips and prudent record-keeping. "Be guided by Miranda: 'anything you say may be used against you in a court of law.' Start marketing an idea to the outside world before you file and you risk compromising or even forfeiting your rights," he adds. Filing provisional patent applications before any disclosure can afford a company valuable time to establish market footing and better defend patents once they are issued.

"Counsel's insight into the complexities of patent strategy adds significant value to the business plan," says Langer. This includes pacing the patent budget and anticipating how evolving legal and market conditions will affect patent rights. More than a guiding hand, though, the good counselor is a guardian of management's interests. "The focus," Langer adds, "is less about valuating a patent than it is about designing patent applications and obtaining patents that will stand up commercially and legally,"

A patent must be novel and non-obvious, and this is where counsel's skill in examining prior art past patents and relevant technical literature--is essential. In the vast body of prior art, no search can be conclusive; one instance of previously published art can render a new invention old, obvious and thus unpatentable.

An issued patent is therefore only presumptively valid--but counsel's skill in formulating search criteria can increase the strength of that presumption or provide the facts needed to overcome it. "Facts make or break an application," says Langer. The skilled counselor conceives of all possible search criteria, analyzes the prior art and determines whether particular claims are valid or infringed. Prior art searches also provide insight into the competition that might influence a redirection of strategy.

The words used in the patent's claims count most. Precise claim drafting and definitions are imperative--one wrong word, even a preposition, can be a patent's future undoing.

"You want to invest your patents with integrity and expose any Achilles Heels in your competitors' patents," says Langer. "The goal is to minimize the strength of your competitors' infringement claims, establish a superior bargaining position for settlement discussions if you're sued and fortify advocacy standing in the courtroom."

Protecting the Business

In addition to spending substantial sums preparing and filing patent applications, companies spend millions of dollars litigating and settling patent infringement cases. The ghost of Polaroid v. Kodak continues to roam the patent universe. In 2003, Microsoft was ordered to pay $521 million to Eolas Technologies for patent infringement relating to Internet Explorer. The jury was influenced by internal Microsoft documents acknowledging the Eolas patent. In 2002, Amazon.com secured an injunction against barnesandnoble.com for infringing its "one-click ordering" patent covering online shopping. This controversial case was settled for undisclosed terms. In a 2001 medical devices case, Guidant won $140 million in damages from St. Jude Medical over its competing defibrillator. The case was upheld on appeal in 2004 and returned to the trial court for a new finding of infringement and damages.

But patent litigation is expensive. Even a modest litigation can cost upwards of $1 million in fees and expenses, and during a protracted trial, market value typically suffers, the competition can gain momentum, and damages can sink the ship. More critical strategically, litigation can derail a company by diverting attention away from development and marketing. "Cost is typically the most persuasive incentive to settle," says Lampert. "Costs quickly escalate during discovery early in the suit, and again shortly before trial, which is when most settlements typically cross-licensing or patent sharing agreements--occur." Settlement is often dictated by the uncertainty of litigation outcomes and is appropriate for both sides.

"Good counseling strives to anticipate the court's ruling, but facts and perceptions change throughout a trial, and you may not wish to risk an unpredictable result," he continues. "By settling, you hope to realize as much of the patent's value as possible." For the patent owner, this may mean obtaining substantial payments while avoiding the possibility of defeat; for the defendant, settlement avoids the risk of losing its ongoing business.

The more lucrative the market, however, the higher the stakes, and when companies believe that a patent can give them exclusivity in a lucrative market, settlement may be unlikely. "When the fight is on," says Lampert, "the biggest mistake a company can make is separating the patent from the business. The goal for both sides is not simply to win the case--it is to protect the business and the counseling connection is invaluable in maintaining legal, strategic and financial perspective. Again, it is about asking the right questions. How will litigation impact business? Am I prepared to risk losing or, perhaps, losing the company itself?. How far you choose to proceed into litigation-with costs escalating after the early motions phase--is a business decision based on knowing your legal risks and options."

Asking the PTO to reexamine the patent may be an alternative. Reexaminations--either ex parte in which only one side is heard, or inter parte in which a third party is involved in addition to the PTO--concentrate exclusively on the validity of the patent's claims over published and patented prior art and can quicken the process and save money. "For the patent owner," says Langer, "reexamination is a worthwhile strategy for disabling your opponents' prior art without significantly amending the patent claims. Most defendants, however, feel that presenting their prior art to the PTO rather than a court is risky."

Patent mediation allows companies, through their lawyers, to discuss the issues outside of court and work toward a voluntary resolution. "Mediation can work," says Lampert, "although less frequently at the outset of a lawsuit, since one of the litigants has usually entered the fray with guns blazing."

Shields and Arms

Consider the recent legal battles of Canada-based Research In Motion Ltd. (RIM) relating to its BlackBerry mobile messaging device. While busy suing competitors over issues of infringement, royalties and trade secrets, RIM also has been fending off NTP Inc., a Virginia-based intellectual property holding company that owns patents on wireless technology. In August of 2003 claiming that RIM had infringed NTP patents--NTP won nearly $54 million in damages and fees from RIM, as well as an injunction barring the BlackBerry from the US market. The court stayed the injunction pending an appeal, which was partially affirmed and partially vacated by a three-judge Federal Circuit panel in December 2004 before being sent back to a lower court.

The implications of the case resonate with the concerns expressed in Innovation and Its Discontents. Litigation costs are passed on to the consumer, whose confidence in the product ebbs; competitors are afforded time to catch up; and innovation, such as third-party development of complementary products, is stifled. With BlackBerry as its core product, RIM itself is threatened. While admittedly broad--generally describing wireless email messaging--the NTP patents have not been found invalid, and NTP has sued other wireless email companies as well. NTP's strategy appears to be to compel royalty payments from the industry. NTP itself is not in the business; injunctions against RIM and its competitors would eliminate the market.

Unwilling to settle, RIM is determined to fight NTP all the way to the US Supreme Court, if necessary, and will do so with the support of the Canadian government. Concerned with the "chilling effect" the case could have on innovation by Canadian companies, Canada's Department of Justice submitted a brief in support of RIM's request that the Federal Circuit rehear the case. The court was expected to hear arguments from both sides in February; the PTO is reexamining the patents in question.

Echoing the concerns of the Supreme Court in its 1882 opinion in Atlantic v. Brady (which frowned upon patents awarded for "trifling devices" and the embarrassment of the "honest pursuit of business with fears and apprehensions of concealed liens and unknown liabilities lawsuits and vexatious accountings for profits made in good faith"), authoritative observers, such as Jaffe and Lerner, are decrying a patent system that has become "sand rather than lubricant in the wheels of American progress."

In this light, the BlackBerry case asks an important question: Will the business of patenting be anticompetitive or will it enhance innovation and the advancement of knowledge? Mining for gold can be treacherous; management cannot afford to proceed without the shields and arms of the counseling connection.

CONNECTING WITH COUNSEL

Management should interview counsel in order to learn how they will handle patent strategy in the company's area of invention. Some key questions include:

[check] How familiar are you with my business and my competition? Reliable advice and guidance depend on counsel's solid understanding of the pertinent business landscape.

[check] Do you have a degree and have you ever drafted a patent application in my subject area of invention? A skilled counselor contributes industry as well as legal experience.

[check] What kinds of companies have you represented in the past? Good counsel has experience working with a range of businesses, from start-ups to large corporations.

[check] Can you provide examples of patents that you have guided to issuance? How do you handle opinions? How do you staff and handle patent litigation? Patent prosecution, and litigation especially, require specialized attention, and a strong track record is important.

[check] How do you handle international patent work? While US counsel does not prosecute or litigate foreign patents, they typically work with a trusted network of foreign attorneys.

[check] How will future legal developments affect my patents? Good counsel constantly monitors the patent landscape, including staying abreast of the law.

LOST IN TRANSLATION?

LOST IN TRANSLATION?

In the US, once an invention is publicly used or disclosed, its
inventor has one year to file a patent application. But in most
of the world, rights to an invention are forfeited with any disclosure
prior to the filing of an application. This is just the
start of critical differences in the way patents are prosecuted,
maintained, litigated--and translated--around the world.
Some others, which counsel generally navigate with the help
of a network of foreign counterparts, are detailed below.

CATEGORY           US                     INTERNATIONAL

Patent Rights      Patent granted to      Patent granted to "first
                   first to invent        to file"

                   Effective only         Although applicants in
                   throughout the         Europe can file in
                   territory of the       a centralized patent
                   United States          office, patents are
                                          granted on a per country
                                          basis and are effective
                                          only in the country of
                                          issuance

Maintenance Fees   Relatively             Generally more expensive
                   inexpensive fees,      and typically due
                   due at 3.5, 7.5        annually on an upwardly
                   and 11.5 years on      sliding scale--in each
                   an upwardly sliding    country where a patent is
                   scale                  held

Litigation         Often used as an       Primarily defensive
                   offensive weapon       strategy, due, in part,
                                          to availability of
                                          opposition proceedings

                   Lengthy, burdensome    Generally less costly
                   and expensive          and expedient, with
                                          minimal use of
                                          depositions and witnesses

                   Adjudicated by judge   Adjudicated by specialist
                   and jury in            courts, without juries
                   Federal Court

Use                No obligation to use   Compulsory use; under the
                                          "working requirement"
                                          rule, if a patent is not
                                          commercialized within
                                          three years, it can be
                                          subjected to compulsory
                                          licensing

Business Methods   Patentable             Nonpatentable, unless
and                                       bundled with another
Software                                  invention

Brooklyn-based journalist Jeffrey Heilman has written about client management issues as well as military history.