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DLO sues companies over patent infringements
Lawsuits underscore growing use of litigation to protect intellectual property
By Dan McCue
Staff Writer
A Charleston company comes up with an innovative product and corners its market. For most business owners, that scenario sounds perfect.
But according to Michael E. Ray, an attorney with Womble, Carlyle, Sandridge & Rice in Winston-Salem, N.C., a growing number of Lowcountry companies are discovering that along with the rewards associated with getting a new, hot product on the market comes the costly challenge of protecting their products’ patents from infringement and their market share from disreputable knock-offs.
“Litigation over patent infringement has gotten much more common over the past 10 to 15 years, and I think its because more companies realize that their intellectual property—their patents—have a value beyond what’s directly reflected in sales,” said Ray.
A case in point involves Digital Lifestyle Outfitters, the Charleston-based designer and seller of iPod and MP3 player accessories, which since 2004 has filed lawsuits against three different competitors in the U.S. District Court for the Middle District of North Carolina.
Ray, who represents DLO, said the lawsuits all revolve around patents the company holds under its corporate name, Netalog Inc., for an FM transmitter and power supply/charging assembly for MP3 players.
The lawsuits against Griffin Technologies Inc. of Nashville, Tenn., Belkin Corp. of Los Angeles and Tekkeon Inc. of Tustin, Calif., seek injunctive relief, monetary damages and enhanced damages for willfulness.
In each case, Ray said, DLO discovered the alleged patent infringement by doing its own policing of the marketplace, something he said all patent holders should do.
“Understand that companies often spend a lot of money getting their patent and producing the product, and the patent process alone can take years,” Ray said. “That investment is where the value of patents starts.
“That being the case, companies have a real stake in doing the detective work and excluding others from making use of or offering for sale what is described in that patent,” he said.
But it is not just a matter of going down to the local Wal-Mart or Target and seeing what’s on the shelves. An important distinction for patent holders to remember is not to make a comparison of product to product but a comparison of product to patent, Ray said.
First line of defense
A company’s sales and marketing people are often the first line of patent defense because they routinely see and hear what the competition is doing.
Next, Ray said, come employees who attend trade shows and get a taste of what the competition is cooking up for next year.
“In the case of our client, whose business is limited to MP3 and iPod accessories, it’s a narrow market, and therefore the competitors are known entities; they all attend the same trade shows and constantly go head to head for sales,” Ray said.
Companies seeking to protect their patents typically arrive at Ray’s office armed with reams of paper—the proof of a patent and sales and marketing material, plus the brochures, newspaper and periodical advertisements that have made them suspect that intellectual property is being stolen, he said.
“Oftentimes, a company has actually purchased a competitor’s product and taken it apart to make sure it works the same way,” Ray said. “Different clients take different approaches, but that’s fairly typical.”
But feeling you’ve caught the competition red-handed is only the tip of the litigation iceberg. Companies striving to protect their patents should be forwarned that patent cases are “long, drawn-out and expensive,” Ray said.
“A lot of factors drive this,” Ray said. “First of all, the federal court docket is notoriously backed up, so it can take months to have your case heard and longer still for a determination to be made regarding damages.
“Then there’s the additional expense of hiring expert witnesses,” he said. “During the first go-round, you’ll need experts to explain precisely how the product that’s being challenged infringes on your patent. Later in the case, when the court is considering damages, you’ll need to present additional experts to evaluate the market and to explain the loses you’ve suffered in relation to market forces.”
Court discretion
Unlike other civil court proceedings, a company prevailing in a patent lawsuit can’t receive punitive damages. Instead, a patent court has the discretion to award “enhanced damages,” an amount up to three times that of the compensatory damages awarded, plus legal fees and court costs.
Because of these enhanced damages, awards in high profile patent cases can go into the hundreds of millions of dollars.
However, even in the more modest patent cases, “the judgment against a losing defendant can be very significant, very quickly,” Ray said.
Beyond the potential monetary gains a prevailing plaintiff can realize through litigation, a company’s vigilance in protecting its patent also has another significant benefit—excluding competition in the market, a market that thanks to the Internet, has no bounds.
But Ray said the Internet has been both a blessing and a curse when it comes to patent protection.
On one hand, a company’s presence on the World Wide Web might boost its sales, but it also widely disseminates information about its product, making the product more likely to be copied.
On the other hand, Ray said, the Internet makes it easier to find the source manufacturer of a product that may infringe on your copyright.
“This is particularly important when the manufacturer of the knock-off is based overseas,” he said. “In the past, prior to the advent of Internet marketing, a foreign company’s role in infringing on your patent might not have been as readily apparent as those played by your domestic competitors.
“On top of that, Internet marketing also opens predatory companies up to being sued in jurisdictions they might not have expected,” he said. “A manufacturer in California may believe it’s immune from being sued in the Carolinas, but the fact that a product is being marketed here via the Internet changes the equation.”
DLO’s lawsuits
Of the three lawsuits Digital Lifestyle Outfitters has filed to date, pretrial discovery has been completed in Netalog Inc. v. Griffin Technology Inc., and the trial is scheduled to begin in April 2006, Ray said.
DLO’s lawsuit against Belkin Corp., Netalog Inc. v. Belkin Corp., is currently in the discovery phase with witnesses being actively deposed, and no trial date has been set.
The last of the three lawsuits, Netalog Inc. V. Tekkeon Inc., has recently been served.
“Sometimes a company will pick one party to sue, making it an example for others, but in this case, our client looked at the market, looked at who appeared to be infringing on its patent and decided the best approach was to sue them all, one at a time,” Ray said.
Although he is representing the plaintiff in the DLO litigation, Ray did have some advice to companies on how to avoid becoming a defendant in such cases.
“It really starts at the product development level,” he said. “My advice to a company considering entering a market is to understand what the marketplace is and to look very closely at your product, how it works and what existing patents might be attached to them.
“In short, understand what the intellectual property implications are before you enter the market. That’s really the only way to ensure that your product brings you profits rather than costly headaches down the line,” he said.
Dan McCue is a staff writer for the Business Journal. E-mail him at dmccue@charlestonbusiness.com.
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