Creativity: Whose Bright Idea?

By THOMAS McCARROLL

When Johnson & Johnson introduced a new fiber-glass casting tape for broken bones several years ago, executives at Minnesota Mining & Manufacturing flew into a rage. The tape, which sets fractures faster than plaster, was remarkably similar in design and function to a casting tape developed by 3M scientists. The St. Paul-based company quickly sued, charging J&J with violating four of its patents. Last month a federal court backed 3M and ordered J&J to pay $116 million in damages and interest -- the fourth largest patent-infringement judgment in history.

Although the verdict is subject to appeal, the award underscores the growing importance of protecting intellectual property. That phrase may seem entirely too grand to apply to a song like If You Don't Want My Peaches, You'd Better Stop Shaking My Tree, but it actually encompasses the whole vast range of creative ideas that turn out to have value -- and many of them have more value than ever. From Walt Disney's Mickey Mouse to Upjohn's formula for its antibaldness potion, patents, trademarks and copyrights have become corporate treasures that their owners will do almost anything to protect.

In an economy increasingly based on information and technology, ideas and creativity often embody most of a company's wealth. That is why innovations are being patented, trademarked and copyrighted in record numbers. It is also why today's clever thief doesn't rob banks, many of which are broke anyway; he makes unauthorized copies of Kevin Costner's latest film, sells bogus Cartier watches and steals the formula for Merck's newest pharmaceutical. That's where the money is.

The battle is widening -- U.S. companies filed more than 5,700 intellectual- property lawsuits last year in contrast to 3,800 in 1980 -- and the stakes can be enormous. In the biggest patent-infringement case to date, Eastman Kodak was ordered last October to pay $900 million for infringing on seven Polaroid instant-photography patents. In a $100 million trademark suit, Mirage Studios, creator of the hugely popular Teenage Mutant Ninja Turtles characters, is demanding that AT&T refrain from using such terms as turtle power and cowabunga in a 900-number telephone service for kids. In a far- reaching copyright case, book publishers scored an important victory in March when a federal court in New York City fined the Kinko's Graphics national chain of copying stores $510,000 for illegally photocopying and selling excerpts of books to college students.

Yet thieves still reap a rich harvest. Inadequate protection of U.S. patents, trademarks and copyrights costs the U.S. economy $80 billion in sales lost to pirates and 250,000 jobs every year, according to Gary Hoffman, an intellectual-property attorney at Dickstein, Shapiro & Morin in Washington. The computer industry loses upwards of $4 billion of revenues a year to illegal copying of software programs. Piracy of movies, books and recordings costs the entertainment business at least $4 billion annually.

With intellectual property now accounting for more than 25% of U.S. exports (compared with just 12% eight years ago), protection against international piracy ranks high on the Bush Administration's trade agenda. The U.S. International Trade Commission, the federal agency that deals with unfair- trade complaints by American companies, is handling a record number of cases (38 last year). Says ITC Chairman Anne Brunsdale: "Conceptual property has replaced produce and heavy machinery as the hotbed of global trade disputes."

One reason is that many countries offer only feeble protection to intellectual property. Realizing that such laxness will exclude them from much world trade as well as hobble native industries, nations everywhere are revising laws covering patents, copyrights and trade names. Malaysia, Egypt, China, Turkey, Brazil and even the Soviet Union have all recently announced plans either to enact new laws or beef up existing safeguards. In an effort to win U.S. congressional support for a proposed free-trade pact, Mexico last month revealed plans to double the life of trademark licenses to 10 years and extend patent protection for the first time to such products as pharmaceuticals and food.

Countries that don't get with the program are asking for trouble. The Bush Administration in April placed India and Thailand on the Commerce Department watch list for possible retaliation because of those countries' casual treatment of property rights. In Thailand, cited as the most flagrant violator, copycat versions of Lotus 1-2-3 spreadsheet software sell for the equivalent of $50 instead of the $500 U.S. price. New movies like David Lynch's Wild at Heart, not yet available on video in the U.S., go for $4 a tape.

The U.S. may offer the world's strongest protection of intellectual property, reinforced by more than a dozen laws passed since 1980. The most significant by far was the 1982 overhaul of the patent and trademark courts. Previously divided into 12 separate districts, each with its own interpretation of the law, they made defending inventions and creative works almost impossible. Infringers could go "forum shopping" for the most favorable court district and operate with near impunity. The reorganization ended the legal hodgepodge by creating a single Court of Appeals that has tended to favor patent holders, who now win 80% of all infringement cases, vs. 25% before the reforms. Says Roger Smith, chief intellectual-property attorney at IBM: "There is more confidence in the courts and greater confidence in patents than ever before."

The courts have increased the use of juries, which tend to side with plaintiffs and award big monetary damages. Last year a Detroit jury awarded inventor Robert Kearns a $10 million judgment against Ford for violating Kearns' patents on intermittent windshield wipers. A San Francisco jury two months ago ordered Intex Plastics to pay inventor Charles Hall $5 million in damages for violating his patent on the water bed.

Copyright laws also carry more weight. The U.S. in 1988 became party to the Berne Convention for the Protection of Literary and Artistic Works, which allows a U.S. copyright holder to enter the court system of other nations subject to the convention to seek restitution for infringement. The treaty strengthened copyright protections, although the U.S. did not sign on to controversial provisions concerning "moral rights," which allow artists and authors to maintain control over revision of their works.

As intellectual property becomes more valuable and secure, people naturally create more of it. Evidence: filings for patents, trademarks and copyrights are hitting record highs. Last year some 174,700 patents were filed in the U.S., a 39% jump over 1985. The number of copyrights registered soared to 643,000 last year, in contrast to 401,000 in a five-year period ending in 1975. Overseas filings are also up. In Japan the number of patent applications nearly doubled between 1980 and 1988 as that government signaled its intention to enforce property laws more strictly. After a 29-year delay, Texas Instruments recently received a basic patent on integrated circuits in Japan that could bring the U.S. company an extra $500 million in annual revenues from Japanese chipmakers.

Protecting intellectual property has become a growth industry in itself. New York City's Weil, Gotshal & Manges two years ago became the first major law firm to establish a separate group specializing in patents, trademarks and copyrights. It has some 35 intellectual-property attorneys on staff. Fish & Neave, also in New York City, runs the biggest intellectual-property practice, with some 110 attorneys specializing in the field. General Electric, America's biggest exporter and No. 1 patent holder, has added some 25 patent attorneys to its staff since 1985, for a total of 125. It still ranks second to IBM, which employs 140.

Inventors and companies too small to hire big-time attorneys can find advice in a growing number of how-to books and videos. Accounting firms hold seminars and give private counseling. Insurance companies, such as HLPM in Louisville, are even beginning to carry policies to protect intellectual property from infringers and legal challenges by insuring a patent for up to $1 million.

With the cost of litigation soaring -- defending a patent in court can cost ( $250,000 to $2 million -- entrepreneurs are financing lawsuits for inventors in exchange for a piece of future royalties. A New York City company, Refac Technology, has sued more than 2,000 companies, including IBM, Kodak, Sears, Exxon and Sony, on behalf of small inventors. Refac raised more than $3 million from investors to finance a series of suits by Gordon Gould, inventor of the laser, against the likes of AT&T and Xerox. The companies settled. Refac's revenues last year, mainly from royalty fees, exceeded $10 million. The courts last year limited such investor-funded suits by restricting third parties from buying an interest in a patent solely for the purpose of pursuing infringement lawsuits.

Can intellectual-property protection be too stringent? Maybe. The computer software industry, which thrives on the rapid exchange of ideas and incremental improvements, fears that vigorously enforced patents could chill innovation and stifle growth. Earlier this year, Hayes Microcomputer, the largest supplier of computer modems, won $11 million in damages from three Silicon Valley firms that copied Hayes' software for sending and receiving data. The ruling alarmed programmers, who fear their own software could land them in court if it merely resembles someone else's too closely. The industry also worries about the breadth of coverage. Can copyrights and patents be used to protect the display-screen appearance, the "look and feel" of software? Such questions are at the heart of Apple Computer's intently watched copyright suit against Microsoft and Hewlett-Packard, which Apple says copied its Macintosh software.

Time was when such fights over intellectual property were legal esoterica. No longer. Get used to them because they are sure to command ever more attention. Says Lisa Raines, general counsel and director of the Industrial Biotechnology Association in Washington: "A patent is the single most important item in the industry today. Without it, no company would invest or invent." As global enterprise relies less on physical materials and more on human creativity, reliable protection of intellectual property will become central to world commerce.