Many new product ideas are often obtained from competitors, because a competitor’s product which achieves market success indicates the probable success of similar new products. Further, a successful product by your competitor may result in your customers not being able to buy what they consider a full range of products and services from you. This sometimes causes a customer to request this new product from you and perhaps to switch to your competitor for all their business if you cannot supply a comparable product.
Normally one is free to copy a competitor’s product so long as no attempt is made to pass off the copied product as coming from the competitor and one does not copy material subject to copyright which in addition to printed materials can cover certain sculptural works of art. However if a patent is pending or issued covering the product, considerable business and economic risk is involved in bringing out a competitive product without careful consideration of the advice of patent counsel.
If a competitor’s product is marked with a patent number or you are notified of the existence of its patent, designing and marketing a competitive product may result in being found liable for intentional infringement of the patent. Damages in a patent suit can be large. The law provides that a patent owner is entitled to a minimum of a reasonable royalty which typically is three to five percent of the wholesale price but can be ten to twenty percent. If the patent owner is in business and the infringement reduces sales of the patent owner’s products, lost profits are available. In fact, lost incremental profits may be recovered. Incremental profits are the profits the patent owner would have made if they had made the infringing sales. Basically gross sales minus variable costs, which can easily be 20 to 40 percent of actual gross sales. If the infringement is found to be intentional the Court has the discretion to treble damages and award attorneys fees. Thus damages are potentially equal or greater than total gross sales of a infringing product.
Thus a situation where a company is accused of patent infringement or is contemplating introducing a product which will compete with a patented product can and usually does have considerable risks sometimes at the “bet the company” level. At the same time, failing to bring out new competitive products which meet the competitors’ products and which respond to customer demands can seriously damage the company.
While not all risks can be removed, with the help of a patent attorney the risks of being sued and the risks of losing a suit can be substantially reduced and in some cases nearly eliminated. The first step is to consult with patent counsel as early in the design process as possible–preferably before design has begun. The second step, which the patent attorney performs, is to conduct a patent search directed to the product or product type which it is proposed to develop. It is our practice to have the search performed in Arlington, Virginia, at the United States Patent and Trademark Office search facilities by a professional searcher. The result is a number of patents indicating the state of the art and closest patents. The search performs two functions: first it provides a general survey of designs which are in the public domain. Second it provides a survey of patents which are in force and which a new product might possibly infringe.
The patent attorney will review the patents developed by the search and, if a concept has been developed, will review that specific concept for infringement of each of the developed patents. If the particular patent is identified as being of particular concern–either because of the breadth of claims or because of the ownership of the patent (i.e. the patent relates to the product being designed around), a file history should be ordered from the patent office. The patent file history allows a more definitive determination of the scope of a patent. At this point a short memo or letter detailing the important limitations or coverage of each significant patent may be prepared for use by the design engineers. The next step is a meeting of the patent attorney and the design engineers who will have reviewed the patents developed by the search and therefore will be prepared to present the approach they wish to take in developing the new product.
The design engineers then lay out proposed design solutions, and the patent attorney identifies specific structures or functions which may result in infringement of one or more patent claims. Typically, the result of the first meeting will be a proposed design which appears to avoid infringement. The engineers will then consider whether the proposed design meets the various in-house criteria for functionality, cost, manufacturability, consumer appeal, etc. The patent attorney will similarly review the proposed design carefully, assessing the strength of the noninfringement case.
If the proposed design appears to avoid infringement of all the patents considered and meets the required criteria for functionality and cost as determined by the engineering team, the patent attorney will prepare a noninfringement opinion letter.
A properly written noninfringement opinion letter performs an important legal function. Although it is impossible to predict whether a particular patent holder will or will not bring a lawsuit against a particular product, a properly prepared opinion letter can protect the accused infringer from being found to be a willful infringer, and suffering increased liability for punitive damages. A satisfactory opinion letter will consider the proposed design or designs, as well as the potentially infringed patents and their file histories, and will reach a well-reasoned and reasonable conclusion that no infringement is present. If the opinion is reasonably relied upon by a company, it will normally prevent the company from being held to be a willful infringer should the court eventually conclude that one or more patents considered in the opinion was in fact infringed.
Thus an opinion can considerably reduce the risks associated with launching a new product by effectively eliminating the possibility of attorney’s fees and treble damages being awarded. Although the patent owner may wait many years before beginning suit (and may recover damages going back seven years) if the new product presents a significant competitive challenge, a patent owner will often begin a legal action as soon as the patent issues. With very little actual products sold and without the possibility of attorneys fees and treble damages, the danger of launching a new product has been significantly reduced.
The design around process can arise in several contexts. The context discussed above is one of simply introducing a new competitive product where patent infringement is a concern. Sometimes a design around is necessary as part of the settlement process after a company has been sued for patent infringement. Even more economically damaging than the loss of a patent suit may be the inability to supply the product accused of patent infringement. Although the stakes are raised considerably by the existence of pending litigation, the possibility exists of getting the patent owner to agree, or the court to find that a particular design around does not fall within the scope of a particular patent. In fact, one litigation tactic is to produce a range of product designs, progressively differing from the claimed invention, thereby forcing the patent owner to define the limits of his patent.
Not infrequently a product development manager may believe that no acceptable product is possible which does not include features which the patent attorney believes will cause infringement. The temptation is to proceed with marketing plans and to ignore the warnings of patent counsel as something which can be dealt with at a later time should the problem arise. An attitude of “let’s get our job done and get competitive new products out on the market and let the lawyers worry about a lawsuit when it if it happens” must be avoided. Such an approach should be firmly rejected from management at the highest level within the company. Willful disregard of the potential dangers of infringement can be considered as evidence of willful infringement, presenting the highest levels of risk to the company.
Knowing infringement of a patent must be avoided from the CEO to the design engineer. The risks of proceeding to knowingly infringe a patent are, first of all, a near certainty of being sued; of having very little likelihood of succeeding on the merits at trial, and on top of being required to pay damages, the very real possibility of paying for the other side’s attorney’s fees, and –in smaller corporations–the possibility that corporate officers will be found personally liable. Moreover, upon losing a patent infringement suit, the total abandonment of the proposed product is typically demanded by the patent owner, resulting in total loss of the investment in product research and development and market development. At that point, the product design will have to be accomplished in a noninfringing way on a tight time schedule with the patent owner’s attorneys looking on. Because of the extremely strong position of a patent owner when an infringer proceeds knowingly to infringe, the risks associated with bringing litigation are comparatively low for the patent owner– prompting immediate suit.
The solution, while not always simple, is to spend time and money working with a patent attorney to find the best possible design in terms of market functionality and avoidance of patent claims. It just takes a little more time to get it right the first time. Product designers are accustomed to accepting engineering, style, and cost constraints. When a competitor has a patent, the legal constraints must be accepted as well. Under pressure, the designers should be able to develop an approach which does the job while avoiding the patent. Moreover, the new design is often better than the patented product and often can itself be patented. The second person to approach a problem is generally better informed and so can often effect a better solution. The alternative to spending time and money necessary to complete a successful design around is that the entire product category or designed approach must be abandoned to the competition as soon the suit is filed.
By attempting to design around an existing patent before the patent owner is alerted to your activity, complete control and freedom of action remains with you. The goal of the design around process can then be harmonized with a level of risk which is realistic in view of your willingness and ability to engage in litigation. At one extreme there is a design approach where the goal is a design for which a reasonable argument can be made that it does not infringe the patent in question, at the same time a real possibility exists of being found liable should the patent owner sue. At the other extreme is a competitive design which is so different from the patented product, that the patent owner will not even stop to consider whether the new product might infringe its patent.
The bottom line is that it is an extremely rare patent which completely blocks a competitive response. Nevertheless, your competitor’s patent does raise the cost of introducing a competing product and does require that the competing product differentiate itself from the patented product. If properly carried out, a design around will result in a better product at only marginally greater design cost and little or no probability of being sued. With the help of patent counsel, costly patent litigation can be avoided while the ability to compete on the basis of better marketing, better services, and better designs remains unimpeded. The ability to bring out competitive products into a marketplace with many existing patented products can confer a considerable competitive advantage. This advantage is achieved by developing a working relationship between patent counsel, designers, and corporate management. The objective is to achieve new innovative products which do not infringe existing patents, and to maintain litigation risks within acceptable levels.