The Verdict on IP Protection

As the battle over intellectual property intensifies among manufacturing technology suppliers, manufacturers must pay renewed attention to that age-old maxim -- let the buyer beware.

Companies Mentioned
Posted on Nov 03, 2006

Earlier this year the Gillette Company sued Energizer Holdings Inc. in the U.S. District Court of Massachusetts alleging Energizer's QUATTRO, a four-blade, wet-shave safety razor, infringes on Gillette's 777 patent (U.S. Patent Number 6,212,777 issued in April of 2001). The 777 patent outlines a disposable safety razor with a group of blades placed in a particular geometric position. Bottom line: it's a close shave. Gillette has every right to sue a company it feels is unlawfully reproducing a design it owns. Its patent, after all, is protected under the laws of the United States Patent and Trademark Office (USPTO). So, if Gillette feels another company is copying its design, it can seek licensing fees or some kind of financial settlement. But what if Gillette decided it wanted to go after every person who uses the QUATTRO? Could it be that consumers -- just by the fact they are using a product that potentially oversteps legal intellectual property (IP) boundaries -- are also at fault? So sue them for shaving. Why not? BELIEVE IT OR NOT
This hypothetical scenario may seem extreme, but the manufacturing community has been struggling with this very issue for the last decade. Since the early 1990s, manufacturers have been fighting a battle over machine vision patents held by the late Jerome Lemelson, the named inventor of 12 patents pertaining to this specific area. In this decade, another patent owner is on the loose: Solaia Technology LLC. Solaia is the holder of the 318 patent (US Patent No. 5,038,318), which it acquired from Schneider Automation Inc. in 2001. Its business is set up for the sole purpose of suing companies it says infringe on its patent covering a "Device for Communicating Real-Time Data Between a Programmable Logic Controller and a Program Operating in a Central Controller." In both of these instances the patent holders didn't go after the manufacturers that were selling a product each claimed infringed on their IP. Instead, they went after the end users. "From the standpoint of the lawyers ... there's more money to be made there," says Bruce Sunstein, an expert in patent infringement and enforcement and a patent attorney at Bromberg & Sunstein (Boston). Sunstein specializes in patent prosecution on behalf of a client base that ranges from biomedical to computer hardware and software companies. "Since these things are used in processes in production, [the company] feels it should be able to get something that relates to the rate of production." It was Lemelson, Sunstein says, who set the precedent for going after end users. Solaia followed suit. And now, as the volume of patent disputes among vendors escalates -- the latest public battle is between Intermec Technologies Corp. (Everett, WA) and Symbol Technologies (Holtsville, NY) over wireless data capture and laser scan engines -- customers are fearful of getting caught in the crossfire. Moreover, some of the patents at the center of these legal wranglings are part of emerging industry standards, which muddies the waters even more. Groups such as EPCglobal Inc. and the OPC Foundation have been working to create standards around RFID and factory floor communications, respectively. In the spirit of collaboration, each organization has asked vendor members for technology donations to jump-start application innovation. But that has tended to backfire. Take, for instance, EPCglobal's efforts to create a royalty-free RFID standard to help vendors incorporate wireless tags into crates and pallets as part of supply chain mandates from major retailers such as Wal-Mart Stores Inc. The vendors helping to define EPC's Gen 2 specification contributed key technology. Intermec was one of those vendors. It donated five patents for Gen 2, which allows for the basic functionality. If a company wants anything more than that, it has to pay. "We have 131 other patents that we think enable [us] and our competitors to make Gen 2 even better," says Doug Hall, Intermec's director of printer and data capture marketing. Intermec, however, is making an effort to make it easier to access these patents through its Rapid Start Licensing Program. And then there's the 318 patent, which was technology Schneider Automation shared with other vendors as part of the OPC Foundation's attempt to define seamless communication between disparate devices in the factory. Vendors including Rockwell Automation (Milwaukee) and GE Fanuc Automation America Inc. (Charlottesville, NC) designed products using the contributed 318 technology and then sold them to customers. The EPC spec -- unlike 318, which is deeply embedded in some control applications -- is just now finding its way into products, and at this point the legal disputes around RFID are corralled within the vendor community. But who's to say they won't trickle out to end users eventually? It's a valid concern, given the recent experiences of Rockwell customers including Jefferson Smurfit Corp., The Clorox Company Inc., Konica Corp., BMW Manufacturing -- and even the Gillette Co. -- which have all been on the receiving end of Solaia's demands. PROTECT YOURSELF
At the heart of all this activity lies the question: How can you, the technology buyer, shield your company from IP lawsuits that have nothing to do with your business? There's no easy answer, but, ultimately, the legal responsibility lies with the vendor from which you purchased the product. Before entering into any contract with a technology vendor, make sure there is a well-defined indemnity clause included. Oftentimes products have an implied warranty, Sunstein says, that is part of the uniform commercial code, a law that states that contracts in a commercial setting include a uniform expectation of how a product or process should work. Unless the buyer has done something to disclaim the code, the implied warranty is that the purchased product does not infringe on anything. The indemnity clause, however, covers all bases. Another option is a patent infringement insurance policy, which can include a range of coverage from just legal costs to full indemnification for damages. Insurance can be pricey. A policy's cost can range from $7 to $12 per $1,000 of coverage, but it can be worth the extra expense, especially given the "chain of commerce" in which liability can shift from one company to the next. For instance, many large companies require that their suppliers have a defense policy in place prior to doing business, says Robert W. Fletcher, president of Intellectual Property Insurance Services (Louisville, KY), a patent insurer. The side benefit of having such insurance is that it can sometimes divert litigation. "Insurance tends to be a great equalizer," Fletcher says. "When the parties see no financial strategy, no logistics they can employ, they have to address the issues, and many times the case is settled." According to Rockwell officials, about 30 of its customers have settled with Solaia for between $300,000 and $500,000 apiece. Meanwhile, Rockwell has been trying to protect its customers by filing a countersuit against Solaia's law firm, Niro, Scavone, Haller & Niro, alleging it conspired to extract millions of dollars in licensing fees with baseless patent infringement suits. Those battles continue to play out in U.S. courts, some in the Northern District of Illinois Eastern Division, where Solaia filed suit, and some in Wisconsin, Rockwell's home state. A UNIFIED FRONT
In one instance, Rockwell partnered with customer ArvinMeritor Inc. (Troy, MI) to help it with its defense. According to ArvinMeritor officials, Rockwell had agreed to indemnify the company as part of a contract. But Rockwell was also interested in trying to stop Solaia from suing other customers. "When you agree to buy equipment, you need to have the seller give you a contractual provision that says: in the event you are sued for patent infringement they'll defend you and pay any damages," says M. Lee Murrah, chief intellectual property counsel at ArvinMeritor. "The contract is really the most important thing to do. Too often too many people forget to do the paperwork because it's trouble, dull and boring. But it has to be done. If you do the paperwork, in a case like this you can protect yourself." Ultimately, that protection paid off for ArvinMeritor and Rockwell. In March, a judge denied Solaia's motion for a summary judgment against ArvinMeritor for patent infringement, ruling that the company did not infringe on the 318 patent. Solaia will likely appeal the decision. (Solaia's law firm, Niro, Scavone, Haller & Niro, did not return phone calls inquiring about an appeal.) But it is a small victory for Rockwell, which has been steadfast in its commitment to customers, many of which have sought indemnification from the automation vendor. Rockwell has compensated those customers whose contracts include indemnity clauses. "One factor is, 'what was it you bought from us exactly?', and the second is, 'what do the contract terms say in view of what you bought from us?'" explains John Miller, Rockwell's vice president and chief counsel for intellectual property. "These two factors largely determine whether indemnity is an issue that Rockwell needs to address." Indemnification clauses should be a priority for every buyer. According to a report from IDC, 4% of U.S. organizations have been faced with the threat of vendor legal action over IP infringement. More than half of U.S. organizations say they have a formal or informal indemnification policy in place or are developing one. IDC says that among companies' major concerns are the negative impact of legal issues on software innovation, the financial impact of replacing software and the legal costs of defending the case. For these reasons, Rockwell has also spent big chunks of its own business time sorting out the issues for clients and doing its own damage control. "The issue does come up with customers," says Matthew Gonring, Rockwell's vice president of global marketing and communications. "We've spent an inordinate amount of time talking about this ... and it's fair to say we've lost some business because of it. ... But the goal remains to adjudicate the issue of infringement and enable this to go away." IP PROTECTION
The OPC Foundation, the standards organization that was the catalyst for the 318, is now enforcing new IP rules to protect its members and end users. The organization has determined that the OPC specs do not infringe on the 318 patent, which pertains to moving data from a PLC into a spreadsheet via direct memory. Nevertheless, OPC representatives understand why manufacturers have been quick to settle with Solaia. "Customers settle because by the time they figure out if it makes sense legally they can't defend themselves. It's just cheaper to settle," says Tom Burke, OPC Foundation president and executive director. When a member joins OPC -- or any standards body for that matter -- they sign an agreement that says the things being developed and contributed are part of a working technical group and become the property of the organization. There are loopholes, however. "We've always had an IP policy," Burke says, "but it wasn't sufficient in terms of holding things up in court. It was more of an honor system. Now, we are putting a whole process into place to start being the collector of IP and the reference for our members." Burke says the guidelines surrounding control of IP by the foundation will be tough. PATENT FRENZY
OPC's formalization of its approach to IP comes at a time of significant growth in patent activity. The number of patents issued in the United States annually has more than tripled over the past two decades, according to a Wall Street Journal report. The patent office will grant a patent on anything that is new (cannot be found anywhere else), useful (meaning operable) and non-obvious (subject to interpretation by patent office examiners who review prior art). These definitions provide enough leeway so that even ideas without an existing prototype can be patentable if they meet these criteria, says John Cronin, chairman and managing director of ipCapital Group Inc. (Williston, VT), an IP strategy consulting firm. The criteria stem from the mid-'80s when there was a growing concern that America was losing its edge in innovation as competition from Japanese companies intensified. As a result, Congress relaxed the patent laws. A BAD RAP
"Because IP is an exclusionary right, it is often viewed negatively," says Cronin. "But it is really just another business tool." Cronin holds 100 patents of his own, granted during his years working at IBM. IBM, renowned in the industry as the master of the patent formula, in January released 500 patents royalty-free to the software developer community. According to reports, the move was made by the U.S. patent leader to encourage other companies to unlock patent portfolios in order to support technology innovation. Cronin says it was a great thing for IBM to do to help the industry grow. On the other hand, he doesn't see patent protection as something that will strangle innovation. "I think we'll see the reverse. If someone gets a patent in your market space, and you don't want to be [stepping] on that, you have to be innovative to get around it." Similarly, it seems, manufacturers will need innovative defense mechanisms to protect their companies from IP litigation. Of course, it's always best to get legal counsel before doing anything, but the bottom line for manufacturers purchasing technology is that someone else's IP is not necessarily your responsibility. "Don't forget, if you are an end user that bought a product and you are sued for infringement, [the vendor] has an obligation to defend you," says Sunstein. Even individuals -- seeking that close shave -- should be protected. So don't worry men, because in the case of Gillette and Energizer the court ruled that Gillette's 777 covered only a three-bladed razor -- not the four blade the companies were squabbling over. So your beards and your wallets are safe.

Top Enterprise Software Planning (ERP) Comparison