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How To Knock Out Knock Offs


Emily the Strange, a taciturn teen who dresses in black and whose favorite phrase seems to be "Get lost!" is an original character created by Cosmic Debris Etc., a 25-employee company in Oakland, Calif. Featured on popular merchandise such as T-shirts and backpacks, Emily is also a tempting target for the rip-off artists who've put her image on a host of unlicensed goods the world over.

In 2003, when the 10-year-old company discovered Emily knockoffs in German and Australian stores, it decided enough was enough. The company then hired a private investigator, who traced the items back to stores in Taiwan. Cosmic Debris called a law firm and police in Taiwan. The result: a raid and about 40 cartons of confiscated merchandise.

The Taiwanese raid may have been Cosmic Debris' most dramatic effort to halt copycats, but it was hardly its first. In the past five years, Cosmic Debris' lawyers have written, sued, or taken to court about 15 companies making knockoffs of its trademarked or copyrighted products. While this costs the $5 million company about $100,000 a year in legal fees, it sees no other option. If the imitation goods aren't taken off the market, "we could be put out of business," says Rob Reger, the company's co-founder and president.

Protecting your intellectual property -- including your inventions, ideas, processes, logos, or images -- can be crucial to your company's success. Without such protection, cheap imitations of your products can quickly eat up profits. Copycats using your catchphrase or logo can muddy your brand in consumers' minds. Plus, legal protection of your property is key to securing licensing deals and venture capital. "We invest in companies selling products that can be protected," says Howard Anderson, senior managing director of Cambridge (Mass.)-based YankeeTek Ventures, which funds early-stage technology companies.

Quite simply, any company that wants to set itself apart from the rest of the market needs to consider intellectual-property protection, says Stephen R. Buckingham, an attorney with Lowenstein Sandler in Roseland, N.J. The only ones that can get by without it are community-based service companies, such as dry cleaners and delis, or those selling commodity products that compete exclusively on price.

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.

Before you even open your company's doors, you should develop a strategy to protect your ideas. Start by enlisting a good attorney to determine whether you need copyright, trademark, patent, or other legal protection, and to guide you through the process of getting it. If you do discover violations, you'll need to decide which are worth fighting. Companies selling abroad also have to safeguard products there. And because the process of obtaining legal protection can drag on for years, you'll want to take some precautions while you wait.

IT MAY HAVE TAKEN a lifetime for you to hit on your idea or design, but someone can steal it in just a moment. That's why it's good to be circumspect in early conversations with potential partners and investors. Discussions and written documents should explain what a product does, not how it does it. Nondisclosure and confidentiality agreements can sometimes ensure discretion among partners and funding sources, but many big corporations and venture-capital firms won't sign them. "I may have 20 plans on my desk with the same technology; I don't want to be accused of breaching confidentiality," says YankeeTek Ventures' Anderson.

A safer course may be to announce your product only when you've reached critical mass. Until then, try to quietly sign up some customers and stay below the radar.

If you must work with partners before you're legally covered, a carefully worded contract is essential. Just ask the father-and-son team of Peter and P. Christian Woll. About three years ago, Christian, inspired by his own shoulder troubles, designed a device to help broken shoulder bones heal. Two years later, the Wolls founded the Littleton (Mass.) Woll BioOrthopedics to commercialize the idea. They hired an engineering firm to produce a model of their device, but the engineers went on to claim that they, not the Wolls, owned the design. After four months of letter-writing by lawyers and what Peter Woll says were "tens of thousands of dollars" in legal fees, the Wolls moved on. They recently signed an agreement with another engineering firm stipulating that any ideas developed while under contract belong to the Wolls.

CHOOSING WHICH LEGAL protection to seek -- copyrights, trademarks, patents, or trade-secret protection -- depends largely on the nature of your intellectual property. Copyrights are the easiest to get. Registration generally costs about $30, and takes only a couple of weeks to complete. The creator of a work automatically gets a copyright when it's produced, but if you don't register with the U.S. Copyright Office, you won't be able to sue to protect it.

Trademarks, which safeguard logos, names, and phrases, enable you to build a brand quickly because you can publicize your product without fear, says Brian L. Michaelis, an attorney with Boston-based Brown Rudnick Berlack Israels. Once a trademark is established, only licensees can use the design or name. It's possible to establish one without filing with the U.S. Patent & Trademark Office, but you're in a stronger legal position if you do.

A combination of trademark and copyright protection made it possible for Lynette Jensen, chief executive of Thimbleberries in Hutchinson, Minn., to stop online fraud. The $2 million, seven-employee company sells designs and fabrics to quilters. Its designs are copyrighted and its name is trademarked. In 2003, 20 eBay sellers listed what they claimed were the 16-year-old company's quilting kits -- something the company doesn't make. It took just a few sharply worked letters from Jensen and her lawyers to get the Thimbleberries name off the products.

For companies guarding a unique method, recipe, or process (think Coca-Cola or Gore-Tex) there's trade-secret protection. Part of the appeal of trade-secret protection is that you won't have to register with the government, so there's no chance that your secret will be made public. But you generally will have to make your case in court. You don't file for trade-secret protection. Instead, a company that wants to stop an imitator must demonstrate that its product and method of manufacturing have indeed been kept secret, and that there's a process in place to keep them hidden. That can mean storing formulas under lock and key or having employees sign confidentiality agreements.

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. (www.aipla.com) 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.

By Anne Field


American Apparel's Future
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