Know how, when to protect intellectual property
by Carla Solberg
BOB HANSEN remembers December 2000 as particularly harsh. A record-breaking cold snap had settled in the Twin Cities, but for Hansen it wasn't the weather that made things so bleak.
The co-founder, chair and CEO of Electromed Inc., a medical technology company in New Prague, was grieving. Hansen's wife and brother had recently died, and as Electromed prepared to bring its first product to market, it was slapped with a patent infringement lawsuit by a much larger competitor.
"It was one of the lowest moments of my whole life," Hansen says. "I lost my wife, my brother and was about to lose my business."
Hansen's attorney, who didn't like the odds of Deep Pockets Goliath v. Cash-Strapped David, spent an afternoon trying to convince him to settle, but he wouldn't.
"I needed $300,000 to go to trial and didn't have it," Hansen says. "It was a long, slow walk back to the car."
To Hansen's relief, two board members came up with the money needed to go to trial. After a legal battle that spanned more than two years and racked up $750,000 in legal fees, Electromed prevailed.
For Electromed and so many other companies, good intellectual property (IP) strategy is the key to staying alive and thriving in the marketplace. And while there's no such thing as a standard plan, there are some elements that almost every company should keep in mind when outlining an IP strategy.
A few things that all the experts agree on: When shopping for a patent attorney, don't go bargain hunting. Just because a product is worthy of a patent, doesn't mean it's worth it. Get patent counsel involved sooner, rather than later.
"The ability to operate freely in the market has a huge dollar value," says Andrew Ehard, a partner in the technology group at the Minneapolis law firm Merchant & Gould.
By contacting counsel before product development begins, you can research the landscape and make sure that your idea hasn't already been captured and monopolized by another company, he says.
Smaller companies will sometimes shy away from making that call to save money, but that can be an expensive mistake, Ehard says. "Typically, the cost of doing your due diligence is minimal compared with the cost of product development and the cost of opportunities that are lost."
If due diligence reveals that an existing product or technology could pose a problem, patent counsel can offer advice on alterations that can make a product sufficiently different, Ehard says. "It is always less expensive than having to alter your technology after you get a cease-and-desist letter."
By waiting too long to contact patent counsel, a company also risks losing its ability to obtain a patent, says Brad Pedersen, shareholder at the Minneapolis law firm Patterson, Thuente, Skaar & Christensen. "The most typical mistake is not seeking advice from patent counsel before there's been some kind of barring incident."
A barring incident is the legal equivalent of letting the cat out of the bag. If a patent application isn't filed within a year of such an event, a company can lose the ability to patent that cat.
Barring incidents often involve marketing mistakes but can also include trade show appearances, white papers and press releases, Pedersen says.
Is a patent worth it?
Another common mistake is thinking every new idea is worth a patent, Pedersen says. No matter how novel the idea, if sales, by both the inventor and potential infringer, won't break a million over the life of a patent, then it probably isn't worth going through the process, he says. If they'll top $10 million, it is.
Before selecting patent counsel, it's wise to do as much research as possible, experts say. Not all patent attorneys are created equal.
A reputable name will carry weight with potential investors, says Douglas Eayrs, president of MedVest Capital, a Maple Grove investment banking firm that assists emerging companies to secure early-stage private financing.
And, he adds, the due diligence has to be strong enough to withstand scrutiny from multiple fronts.
Venture capital firms will hire patent attorneys to do their own due diligence before making an investment, says Eayrs. And if there's a problem, it's a problem.
"If they come back with mixed reviews, even if the company's own attorney says otherwise, they can nix the deal," he says.
IP is the first thing that investors look at and the second thing, after market size, that Fridley-based Medtronic Inc. says it considers when sizing up potential acquisitions, says Eayrs.
To MedVest, companies with unique technology in uncrowded markets are particularly attractive, says Eayrs. One such example is BioE Inc., a St. Paul biomedical company that provides stem cells derived from human umbilical cord blood and cellular tools for drug discovery and therapeutic research. MedVest assisted BioE with an $8.3 million round of private financing in February 2005.
"We're still considered a development stage company," says CEO Michael Haider. "The value of our company is really based on our intellectual property."
That proprietary property includes the Multi-Lineage Progenitor Cell, a stem cell that can evolve into a variety of cell or tissue types, and the PrepaCyte Platform, a cell separation technology that acts like a cell skimmer.
Commercializing these products has been the company's focus since it was founded in 1993 and its patent strategy has supported that goal, says Mark Ellinger. He is managing principal at the law firm Fish & Richardson, Minneapolis, who has worked with BioE.
"It's critically important for small companies to align their patent claims with their business strategy," Ellinger says. "It's quite easy to get off track."
To stay on track, BioE does an internal market analysis for potential products and will only patent inventions that have a clear commercial value, Haider says.
And not just some value. "Obviously, you're looking for a value of substance," says Haider. "For BioE, the technology we develop needs to have market value in the $100 million range over the life of the patent, which is typically about 20 years."
Demonstrating a product's income-generating potential strengthens a patent portfolio and that's key when trying to attract investors, says Sima Griffith, founder and managing principal of Aethlon Capital, an investment bank in Minneapolis. "That future revenue has value today."
She adds that in valuing IP, there are two important considerations: What would it cost another company to do the same thing? And how long will that take?
Aethlon works exclusively with companies that have proprietary information. "Proprietary technology creates a barrier to entry," says Griffith. "We are looking for companies that have a strong patent position, proprietary technology or a trade secret that gives them a competitive advantage."
That was the case with Granite City Food & Brewery, a restaurant chain with headquarters in St. Louis Park.
Co-founders Steve Wagenheim and Bill Burdick wanted to create a casual restaurant chain with an upscale feel that served made-from-scratch food and made-from-scratch beer.
But when they began research by touring brew pubs, they discovered that many were unsuccessful because of the high cost of having an onsite brewery.
Making the beer at one site and distributing it to the others also had cost barriers, says Wagenheim, as federal alcohol regulations require distributors to act as middlemen in transactions between beer makers and beer drinkers.
And so, on the back of a napkin, Wagenheim and Burdick worked out a process they called "Fermentus Interruptus," which allows them to brew unfermented beer, called wort, at a central location and transport it to fermentation tanks at each restaurant where the metamorphosis of wort to beer is completed.
"We're bypassing the part of the process that is the most costly, time-consuming and difficult," says Wagenheim. And they bypass the distribution laws "because we don't make alcohol; we make wort."
Founded in 1999, Granite City has 18 restaurants throughout the Midwest and plans to open eight more this year. Sales hit $58.3 million for fiscal 2006, up 61 percent from 2005. The patented process has given Granite City "beverage leverage," he says.
'Patents aren't magic'
Still, cautions Hansen of Electromed, "patents aren't magic."
Founded in 1992, Electromed is the maker of SmartVest, a portable, programmable pneumatic vest used to clear mucus buildup from the airways of cystic fibrosis patients. The company was sued for patent infringement by Advanced Respiratory Systems Inc. of Shoreview in December 2000.
At the time, Electromed had ten of its own patents, but that information was not admissible in court.
Being the target of a patent infringement suit is a "wretched experience" that is "financially, mentally and emotionally exhausting," Hansen says. "It reduces your ability to attract employees, investors and customers, because who wants to be associated with a leper?"
In the end, what may have saved the day for Electromed was a decidedly low-tech approach to documenting proprietary information: photographs.
When SmartVest technology was in the early stages of development, a decade before the suit was filed, Hansen and his friends took some snapshots of it in a buddy's basement. "I was able to show some pictures where I was 10 years younger holding up some pretty primitive prototypes," Hansen says.
In the three years since the trial's end, Electromed's annual sales have risen from just under $1 million to about $6.5 million and the company became profitable in June 2006, Hansen says. "Considering all we've been through we've been very fortunate."
[contact] Douglas Eayrs, MedVest Capital: 763.773.9797;
Andrew Ehard, Merchant & Gould: 612.336.4602;
; www.merchantgould.com. Mark Ellinger, Fish & Richardson: 612.335.5070;
; www.fr.com. Sima Griffith, Aethlon Capital; 612.338.6065;
; www.aethlon.com. Michael Haider, BioE Inc.: 651.426.6466;
; www.bioe.com. Bob Hansen, Electromed Inc.: 952.758.9299;
; www.electromed-usa.com. Brad Pedersen, Patterson, Thuente, Skaar & Christensen: 612.349.5774;
; www.ptslaw.com. Steve Wagenheim, Granite City Food and Brewery: 952.215.0678;