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Business Impact

Going After Mom and Pop

Overly broad e-commerce patents threaten small businesses.

If you want a good example of what’s wrong with the U.S. patent system, just talk to Tim Beere and Cathy Brand-Beere of Fort Wayne, IN. This couple owns the quintessential mom-and-pop operation-DeBrand Fine Chocolates. The 15-year-old confectionery has three Indiana stores, and it also does a good deal of mail-order business over its Web site. Now, through no fault of their own, the Beeres are entangled in a disgraceful and costly patent fight that threatens to sour their otherwise sweet business success.

As Tim Beere recounts the bitter tale, one day last fall a local officer knocked on the door and served the couple with an unexpected lawsuit. The lawsuit, filed by a company the Beeres had never heard of, claimed that the Beeres’ online chocolate business infringed two of its patents and demanded a $5,000 licensing fee if DeBrand Fine Chocolates wanted to continue selling products online. Beere says, “At first we thought it must be a practical joke.”

But it’s no joke. DeBrand Fine Chocolates is one of 50 unsuspecting small businesses, which in just the last few months have been sued by a San Diego outfit known as PanIP-short for Pangea Intellectual Properties. PanIP is a no-employees paper tiger of a company-technically, a limited-liability corporation-formed by self-proclaimed inventor Lawrence Lockwood to capitalize on several e-commerce patents he holds. With five rounds of lawsuits under way, PanIP finds and sues 10 to 12 additional businesses every month.

This story is part of our March 2003 Issue
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Lockwood’s scheme has been diabolically simple. First, he garnered a couple of absurdly broad patents. Judging by the thousands of tangled and overlapping e-commerce patents that have been handed out in recent years, such patents are easy to come by. Next, he hired a tenacious lawyer, formed a company, and began filing lawsuits. Now, he picks his quarry carefully. Lockwood’s attorney, Kathleen Walker, says her client merely wants recompense for the 20 years he has spent inventing. Ultimately, Walker says, Lockwood plans to sue “any and all infringers,” a group that she admits could include just about anyone doing business on the Internet.

But there is little question about the kinds of companies PanIP has gone after. The lawsuits target small, successful, independent enterprises that do business on the Internet and are located far from urban corridors of power. DeBrand Fine Chocolates is a perfect victim. So is Delasco Dermatologic Lab and Supply, a skin care products company with fewer than 100 employees, in Council Bluffs, IA. Ditto for Can-Do National Tape in Nashville, TN; River City Meat Company in Kansas City, MO; and, in the latest round of PanIP lawsuits, Double “H” Western Wear in Salem, OR.

Did Lawrence Lockwood invent e-commerce? Hardly. Nonetheless, he is the rightful owner of exclusive rights to two e-commerce concepts: U.S. Patent 5,576,951, issued in 1996, covers an “automated sales and services system,” and U.S. Patent 6,289,319 was granted in 2001 for an “automatic business and financial transaction-processing system.” A close look at these patents suggests any number of strategies a competent patent lawyer could use to challenge Lockwood’s payment demands. The latter patent, for example, despite its very broad language, explicitly claims rights to a system meant for filing loan applications online-a far cry from the purported infringements of the PanIP defendants.

But here’s the rub: according to the American Intellectual Property Law Association, the average patent case that goes to trial costs defendants more than $1.5 million. Meanwhile, getting the U.S. Patent Office to reexamine even one of its more obvious mistakes is time-consuming and costly. Unfortunately-and this is really disgraceful-because they have little recourse, small companies such as DeBrand Fine Chocolates have considerable incentive to pony up the royalties. Two-thirds of the companies PanIP has sued to date have agreed to its royalty terms, says attorney Walker. Despite this grim reality, there is heartening news. Some 15 of the companies PanIP has targeted-including DeBrand Fine Chocolates-have decided to fight. They have banded together and started a legal-defense fund. “It has taken a lot of late nights,” Tim Beere says.

PanIP’s request of $5,000 from DeBrand Fine Chocolates is less than the $30,000 PanIP sought from earlier defendants. Nonetheless, PanIP continues to file lawsuits, and Walker says her client is ready to fight “all the way through the courts to uphold our patents if we have to.” It seems all but certain that many similar lawsuits are in the offing. And don’t look to Congress for a remedy; there is no thoughtful legislation on the docket to redress the kind of problem the Beeres and other small-business owners face. It helps that in areas such as gene patenting, the U.S. Patent and Trademark Office has made the requirements slightly more stringent, but even that will do nothing to defuse the thousands of overly broad e-commerce patents already strewn about like ticking time bombs.

It’s up to the courts to put the brakes on baseless lawsuits and prevent misuse of overly broad patents. And that is why I urge every reader to visit the PanIP defendants’ Web site and learn more about their legal counterattack. The defendants’ Web address might make you chuckle, but it should give you pause: www.youmaybenext.com.

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