NeoMedia Technologies, Inc (NEOM)

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Numbers of patent, trademark infringement suits skyrocketing
By LAURA LAYDEN, [e-mail]
January 19, 2004

NeoMedia owns a bridge.

It's an expensive bridge the company has built to connect the real world with the virtual world.

If you want to cross that bridge, you'll have to pay. Otherwise, you're in for a bumpy ride.

That's the message Fort Myers-based NeoMedia Technologies Inc. sends in a lawsuit filed on Jan. 2 against Virgin Entertainment Group Inc. and its subsidiaries Virgin Megastore and Virgin Megastore Online in Los Angeles.

NeoMedia, a company whose shares trade publicly on the Over-the-Counter Bulletin Board, claims Virgin has infringed on four of its patents by using a technology that allows customers in its stores to scan CDs and DVDs to get information on the Internet, such as movie previews and video art.

While this marks the first patent infringement lawsuit NeoMedia has filed since it was founded in 1989, it's part of a larger trend in Southwest Florida and across the country.

Patent infringement suits have skyrocketed over the last decade. And so have the number of trademark infringement suits, which have sucked up the financial resources of several Southwest Florida companies in the last year including Sunshine Ace Hardware and Cheeburger Cheeburger.

According to the Administrative Office of U.S. Courts, the number of patent suits grew from 1,553 in 1993 to 2,700 in 2002, a 74 percent increase.

In 2002, trademark suits filed in the United States swelled to 3,470, a 61.5 percent increase over a decade ago. In 1993, they numbered 2,149.

"I think you are seeing an increase in intellectual property issues because intellectual property is becoming increasingly important in the marketplace today," said Jennifer Whitelaw, a Naples-based patent and trademark attorney. "Businesses are realizing that intellectual property in many instances is the most important thing they've got."

Whitelaw, the owner of Whitelaw Legal Group, has been recognized as one of the nation's top trademarkers by Intellectual Property Today, an Illinois-based trade magazine. She not only helps businesses and individuals get patents, but helps them defend their patents.

"Our clients are all around the country and all around the world," Whitelaw said. "We could have this practice anywhere, but Naples is a great place for business, a great place for emerging business, and that makes it a great place for us to serve the needs of intellectual property rights."

The firm has represented such well-known companies as Allstate Insurance, H&R Block and Sony. Earlier this year, Whitelaw added Sunshine Ace Hardware in Southwest Florida to the firm's client roster.

The hardware company, which has stores in Bonita Springs, Naples, Golden Gate and San Carlos Park, has accused Home Depot of infringing on its slogan "You Can Do It. We Can Help." The two chains are working to resolve the lawsuit.

Because of the increasing demand for patent and trademark services, Whitelaw says she's busier than ever. "Our business grows every year," she said.

Intellectual property attorneys across the country share in her good fortune.

As an example of the growing number of trademark suits in the United States, Microsoft Corp. alone faces more than two dozen.

The payoff can be big in intellectual property cases, especially for patent infringement cases. Some say that's why business is booming for patent attorneys across the country.

"I think what is happening is that more and more people are getting an understanding or becoming more sophisticated and understand that if someone is infringing on your patent, there could be a lot of money involved," said Jeff Pine, a partner in Baniak Pine & Gannon, an intellectual property firm in Chicago that is representing NeoMedia in its case against Virgin.

Pine points to a federal jury's decision in August to award Eolas Technologies, a Chicago-based software company, and the University of California more than $520 million in damages after finding Microsoft infringed on a patent owned by the university.

While at the University of California, Eolas chairman Michael Doyle and others developed a technology that allows computer users to access interactive programs embedded in Web pages. University and Eolas officials say Microsoft incorporated the technology in its Internet Explorer and Windows software without their permission.

The jury award was based on royalties for 354 million copies of Windows sold between November 1998 and September 2001.

"The size of the awards over the last 10 or 15 years has grown," Pine said. "That is what gets people's attention. Nobody cares about a small award."

Other experts attribute the increase in intellectual property disputes to a more friendly court system for patent holders and a flurry of patent filings seen since the early 1990s.


Defending its turf


NeoMedia has patents for technology that uses machine readable codes, such as UPCs, to link people to the Internet, where they can obtain information electronically.

In the lawsuit filed against Virgin, NeoMedia says the mega entertainment company is using the same type of scanning technology in kiosks inside its mega entertainment stores in Illinois. The kiosks allow shoppers to get information on the Internet by scanning the covers of DVDs and CDs.

"We are not doing a good job for our shareholders if somebody just goes in on our turf," said Chas Fritz, chairman and founder of NeoMedia. "We need to defend that for our shareholders."

NeoMedia, whose stock currently trades for pennies a share, has 13 patents for its technology and others pending. The patents cover linking the real world to the electronic world from a number of devices including camera phones, and wands and pens that can be used to scan codes in printed documents, such as a newspaper or magazine, to link directly to a Web site.

NeoMedia's services are marketed under the PaperClick trademark.

"We are in the bridge-building business," Fritz said. "We are building a bridge from the physical world to the nonphysical world and we are welcoming anyone to come onto the bridge that we built. But there is a charge for it."

Fritz said his company prefers not to file lawsuits and to use its patents as a way to partner with other companies. Companies that want to use its technology can pay a licensing fee, which is a negotiated amount, he explained.

Otherwise, NeoMedia's technology is protected and companies must find a way to build their own bridge without infringing on its patents, he said.

NeoMedia hired Chicago-based intellectual property specialists Baniak Pine & Gannon to look out for its interests and enforce its patents about a year and a half ago. More companies are doing the same, as they realize the importance of defending their trademarks and patents, experts say.

In the United States, patented technology is protected for 20 years, starting from the date a company or individual applies for the patent. If a patent is revised, the time clock is moved forward to the date the new patent was applied for, which gives inventors a longer period of exclusivity. NeoMedia's earliest patents date back to the early 1990s.

U.S. patents only offer protections in this country. It's for that reason that NeoMedia is now looking to get patents for its technology in other parts of the world.

NeoMedia seeks damages in its case against Virgin Entertainment. But the amount of money it will ask for has yet to be determined, said Pine. More research is needed to determine how Virgin may have benefited from using the technology in its kiosks, he said.

Virgin Entertainment has yet to respond to the lawsuit, which was served last week, Pine said. Representatives for the company could not be reached for this story.

NeoMedia's complaint alleges that Virgin has known about its patents for at least a year. Companies that knowingly infringe on patents can face monetary penalties up to three times the amount they'd pay if they are found to be doing it unintentionally.

NeoMedia says it first notified Virgin that it was infringing on its patents on Dec. 20, 2002.

"We sent them a letter a while back and they haven't commented," Pine said. "They haven't told us what they think. They were obviously not going to respond, so we had to take the next step."

NeoMedia, with annual revenues of about $9.4 million last year, is a small fish taking on a big fish.

Virgin Entertainment sells music, movies, books, games and other related merchandise in stores across the country. Store locations include Miami, Chicago, Long Island, Boston and Las Vegas.

Virgin Entertainment is part of a group of companies marketed under the Virgin brand, which originated in Britain. Virgin is involved in everything from planes to bridal wear. There are more than 200 companies operating under the brand worldwide, and as a group Virgin had revenues of more than $5 billion in 1999, according to a company Web site.


Not alone


NeoMedia is far from the only local company that has found itself putting up a fight for its intellectual property.

Other companies that have been wrapped up in patent suits are Arthrex Inc., a Naples-based company that develops medical devices used in arthroscopic surgery, and SmartDisk, a Fort-Myers based technology company.

The local companies haven't always been the ones to initiate legal action.

In June 2000, PC Connector Solutions LLC filed a patent infringement suit against SmartDisk claiming the local company's Smarty and FlashPath products infringed on a patent it owns.

In December, SmartDisk announced it had received a favorable judgment in the suit filed against the company and Fuji Photo Film USA.

SmartDisk develops, manufactures, markets and distributes products that enhance the use of miniature storage media and smart cards. Company officials declined to comment for this story.

PC Connector is appealing the judgment, according to a SmartDisk news release.

Arthrex has found itself on both sides of patent infringement disputes. The company is a leading provider of medical instruments for arthroscopic surgery, which involves making small incisions in joints, such as knees, shoulders and wrists, to treat disease and injury, from arthritis to bone fractures and cartilage tears. The company's earliest patent dates back to 1987. The company now has about 200.

Because of the high-tech industry it's in, patent protection has always been a concern for Arthrex, said John Schmieding, the company's general counsel.

"It's imperative in such a competitive market to file and obtain a patent on your invention and also to monitor what your competitors are doing to protect your rights," he said. "That is a constant effort."


Clueing in


In the dot-com boom, companies and inventors began to focus more on patent and other laws protecting intellectual property in the United States.

In the early 1990s, there were aggressive patent filings by IBM and a few other high-tech companies, such as Intel and Hewlett-Packard. Other companies followed to ensure they were protected against a patent attack and didn't end up on the losing end of a lawsuit.

"People really clued into the patent law when they found out that priceline.com was the only one that could do the name your own price sales technique," said John Cyril Malloy III, a partner in the intellectual property firm Malloy & Malloy in Miami and an adjunct professor of intellectual property at St. Thomas University Law School, also in Miami.

Partly as a result of the flurry of patent filings, the "economic engine of intellectual property law litigation has been running hot for the last decade," he said.

Patent activity remains strong in this country and that's likely to mean more intellectual property suits in the future.

It's not just high-tech companies looking to protect their inventions. Applications are coming in for inventions in hundreds of categories, from apparel to dispensing products.

"People are figuring out that they should patent everything and anything," said Martin Reynolds, a technology analyst at Gartnergroup's Dataquest, a market research firm based in San Jose, Calif. "It turns out sometimes that the strangest things have value. You would never imagine something you might patent might become the linchpin for a new technology."

He said a recent trend has been patent suits filed by "dead companies" that own nothing but their patents. A lot of them are Internet type companies that fell victim to the dot-com crash, he said.

Also, he said, many companies get patents so they can share technologies with other companies. They see their patents as a way to quickly negotiate away infringement suits, he said.


Patents rise


In 2002, the U.S. Patent and Trademark Office in Washington, D.C., approved a record number of patents — nearly 184,000. Of that total, 91 percent — or 167,334 — were utility patents. The most common patents are utility patents, which cover industrial or technical processes, machines and other manufactured products.

California inventors led the way in claiming more than a 20 percent share in all patents issued to U.S. residents in 2002. They were followed by New York residents.

In 2002, the U.S. Patent and Trademark Office received 355,418 new applications for patents. So it doesn't it appear that patent activity is going to slow any time soon.

It usually takes at least two years from the time an application is filed to get patent approval, said Ruth Nyblod, a spokeswoman for the U.S. Patent and Trademark Office.

To qualify for a patent, an invention must be novel, useful and non-obvious, she said.

"It's good to do your homework ahead of time," Nyblod said. "Your invention has to be new. So if there is anything similar, it may preclude you from getting a patent."


A monopoly


Patent law is driven by the U.S. Patent Act and by the court cases that interpret it, which have caused some confusion over the years. The right of the patent is "the right to exclude others from making, using, offering for sale, or selling" an invention in the United States or "importing the invention into the United States," according to U.S. law.

The U.S. patent law is part of the U.S. Constitution. Congress created the patent system to encourage innovation by giving people a limited monopoly on their creations. In exchange for those rights, inventors make their inventions public and must disclose the best way to make or use the invention.

There are three types of patents. Besides utility patents, there are patents for new designs for manufactured products and new plant varieties.

Approved patents can be found on the U.S. Patent and Trademark Office's Web site at www.uspto.gov. They can also be looked up in libraries across the country.

Patent documents must include a detailed description of an invention and at least one claim, which is the enforceable part of the patent.

The claims say what an invention does, and anyone making or selling a product that is described in those claims can find themselves in a patent infringement suit. However, that doesn't mean they'll find themselves in front of a jury.

While the number of patent lawsuits has been on the rise over the last decade, few ever go to trial.

"Most of these cases settle," said Pine, of Baniak Pine & Gannon. "Maybe 90 to 99 percent of these cases historically have settled and usually the settlement agreement is confidential. Because of that nobody knows what happened. They just know there was a lawsuit."

Because almost any lawyer can handle trademark cases they are more common than patent suits, said Malloy, a partner in Malloy & Malloy in Miami.

Patent infringement suits must be handled by registered patent attorneys, and also patents are more rare than trademarks so that also tends to limit the number of patent cases filed, he said.

Generally, the first one to either use a slogan or name or to file an intent to use them with the U.S. Patent and Trademark Office has the ultimate right to use them. Unlike patents, trademarks do not have to be registered for their users to have protection rights. However, the registration comes with many advantages, including the notice to others of its ownership and a presumption of legal ownership nationwide.

Registered trademarks can be found on the U.S. Patent and Trademark Office's Web site. The rights to those trademarks exist as long as they continue to be used.


Say Cheeburger


In the last year, several Southwest Florida companies have been involved in trademark suits including Fort-Myers based Cheeburger Cheeburger Restaurants Inc.

In December 2003, a Chicago tavern made famous in a 1970s "Saturday Night Live" skit sued the local company over the slogan it uses for its 16 Florida eateries.

The Billy Goat Tavern filed the trademark infringement suit in the federal district of Chicago, alleging that the Southwest Florida chain fraudulently obtained a trademark on the name "Cheeburger Cheeburger."

The tavern has used the "Cheezborger Cheezborger" trademark since the late 1970s, and it's printed on a sign at the tavern and emblazoned on hats and T-shirts. The cast of "Saturday Night Live" created a skit around the phrase "Cheezborger Cheezborger, no fries," which brought the tavern national fame when John Belushi played the part of a frenzied Greek cook. The case brought against Cheeburger Cheeburger was settled quickly and Malloy, who represented the local restaurant chain, said the chain's decision to file for a federal trademark on its name in 1988 ensured it a favorable outcome.

"The trademark registration owned by our client in the Cheeburger, Cheeburger case was absolutely pivotal for the tremendous outcome for our client," he said. "You do obtain trademark rights by virtue of having used a name or slogan, but the federal trademark registration solidifies those rights and expands them across the country, even though you may not have locations across the country."

Billy Goat tavern filed the suit to try to stop Cheeburger, Cheeburger from opening a restaurant in Glenview, Ill., Malloy said.

Under the settlement, Cheeburger, Cheeburger was allowed to open its restaurant in the Chicago area under the name "Cheeburger Big is Better," Malloy said.

In the settlement, Cheeburger Cheeburger agreed not to open up any more restaurants in Chicago. On the flip side, Billy Goat's owners agreed not to use its "Cheezborger Cheezborger" slogan outside the Chicago area, Malloy said.

In June 2003, Sunshine Ace Hardware filed a federal suit against Home Depot. The suit alleges the advertising slogan adopted by Home Depot's parent company, Homer TLC Inc., infringes on Sunshine Ace Hardware's trademarked slogan and creates unfair competition, injuring its business.

The trademarked slogan is "You can do it. We can Help." In its suit, Sunshine Ace Hardware, which began selling hardware in 1964, asks for more than $500,000 in damages. It seeks an injunction to stop Home Depot from using any materials with the slogan and to stop employees and other representatives for the home improvement giant from using the saying.

Home Depot unveiled its new ad slogan, "The Home Depot is more than a store. You can do it. We can Help," in February of last year.

In October, Home Depot and Sunshine Ace Hardware officials said they were trying to resolve their differences and hoped to reach a settlement within 90 days.

Whitelaw, the Naples patent and trademark attorney representing Sunshine Ace Hardware in the case, said businesses big and small should take every step they can to protect their names, slogans and inventions before it's too late.

"It's just a marketplace reality," she said. "Doing business today means you've got to be aware of your intellectual property rights."

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