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News and Trends

July 1, 1998
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What’s Intellectual Property Worth?

RECENTLY, SOFTWARE HAS GAINED NEW RESPECTas a patentable product. But with the rapid changes in technology, small developers need to weigh benefits against barriers when going down patent road.

Until the mid-1990s, most software had to be part of a larger system to be considered patentable, says Peter Michaelson of Michaelson & Wallace, a Red Bank, N.J. law firm that specializes in technology patent issues. The U.S. Patent and Trademark Office has been issuing patents for gizmos, designs and mechanical processes for centuries, but no one was quite sure what to do about software, especially as a stand-alone product.

For years software represented the almighty no-no, the attempt to patent an algorithm. "Within the past two years, the courts have taken a different view," Michaelson says.

The U.S. Court of Appeals for the Federal Circuit (CAFC) in Washington, D.C. has been home to patent disputes since 1982, but it took a landmark appeals case to change the precedent regarding software patents, says Ray Galasso, intellectual property attorney in the Austin, Texas office of law firm Thompson & Knight.

In 1995, IBM convinced CAFC that software itself was patentable subject matter. "IBM won [the dispute], and all of a sudden the floodgates opened," Galasso says. Since CAFC’s ruling, the patent office has been swamped with software applications, and many companies reported at least a two-year wait for an answer.

Despite the backlog, companies seem more eager than ever to patent the software applications they believe to be critical corners of the industry. "In the software area, processes are powerful things," says Alfredo Garcia, president of AudioCARE Systems, a division of MUMPS AudioFax Inc., Wayne, Pa. "If you’re the first person who thought of doing something this way, and you get the patent on it, it’s golden." AudioCARE’s RxInfo, a telephone-based patient education system for prescription drugs, was patented last fall.

The true market potential of a patent rests in pinpointing what the industry will require most in the near future. In 1995, the FDA asked Congress for a law requiring all pharmacies to provide patient drug information--a month after AudioCARE applied for the RxInfo patent. Call it astute foresight. Garcia calls it pure luck.

However, there’s a hitch to investing in the patent game: Most companies keep their developments secret until a patent application is filed. In the United States, a patent is issued to the company that can prove it conceived the idea first, not necessarily the one that filed first.

Being second can mean a lot of R&D funds just went out the window. "You have to consider the cost benefit of going through the exercise, since technology changes so quickly," says Peter Skinner, CFO of Oceania, Inc., Palo Alto, Calif., "and whether it makes sense to take this step to protect your intellectual property."

The R&D investment is risky, but so is being shut out of a market. Skinner says most companies spend more time thinking about how to create an essential product than in racing to out-patent the competition. "As a business person, you have bigger fish to fry," he says. "You’re trying to build commitments and products. You’re focusing on how to turn your ideas into reality."

Patents must be maintained through fees to the U.S. patent office, based on the size of the company--perhaps several thousand dollars every two or three years. But for larger corporations, Galasso says, the revenue generated by royalties and licensing fees far outweighs the maintenance costs.

A patent loses its leverage if it isn’t protected from infringers, but the process of patent litigation can create additional headaches. Depending on the federal district court, a patent lawsuit may take anywhere from one to seven years, Galasso says.

Michaelson says patent litigation is expensive and risky, and most companies would rather be doing business than suing each other. He sees arbitration and mediation as smarter alternatives to court battles. "Two companies may not be as far apart as they think, and can often end up with a business deal between them."

Pamela Tabar is a freelance writer in Cleveland, Ohio.


Cerner’s Blood Bank System Targeted

THE FDA HAS ORDERED KANSAS CITY, MO.-BASEDCerner Corporation to hire an outside consultant to conduct an audit of the company’s blood bank donor and transfusion software--an FDA-regulated medical device--after a patient was given an incompatible blood transfusion due to a software malfunction. According to the FDA, the software failed to generate a screen warning regarding the incompatible blood unit, and dispensed two units of the incorrect blood to the patient in an emergency transfusion. Cerner spokesperson Allison Stein-Best would not reveal details concerning the well-being of the patient, but said that the company, which recalled the software in February, had fixed the problem and delivered the modifications to its clients on May 1.