By John Stewart
Perhaps the Single Most Important Piece of Advice the Association Can Offer is to Seek Qualified Counsel
The ideas, names, logos and inventions of your company are valuable property and often can be legally protected for your exclusive use. But many SEMA-member companies are unaware of the types of intellectual property (IP) their company generates, how to go about protecting them or how to decide exactly which protective investments could be appropriate.
The task of optimizing IP protection will vary from company to company. Perhaps the single most important piece of advice the association can offer is to seek qualified counsel––both when IP issues arise and, ideally, well in advance of any possible entanglements. One such entity is the Ohio-based law firm of Sisson and Banyas, which specializes in IP protection. The firm exhibits at the SEMA Show, and Manager of Legal Protection Jeffrey Banyas is a former racer and SEMA volunteer who participates in a variety of association councils and networks. He is well acquainted with the types of issues that tend to arise in the automotive aftermarket.
"We spend a lot of time here studying the way illegal goods move and what makes companies the target of counterfeiters or knockoff products," Banyas told us. "I tend to separate them into three categories. At the bottom of the tree, if you will, are small, not very well-known companies that don't have high levels of sales or brands that are very well known and are not very attractive to counterfeiters.
"At the other end of the spectrum are the big players, the Nikes, Louis Vuittons and big fashion brands that everybody knows with products that everybody wants, and they're constantly being knocked off. They have teams and teams of people all over the world constantly working against counterfeiters––and they're still getting counterfeited and knocked off because of how lucrative it is to do it.
"And in the middle are a lot of our customers, and really, a lot of the brands at SEMA, that are big enough that if a counterfeiter starts knocking off, say Oracle Lighting, there is a market for them because they have been in business for 30 years, they have a reputation, people seek them out and want to buy their products. These companies in the middle usually don't have teams of people in place around the world working to enforce against counterfeiters."
A CASE HISTORY
Let's take a closer look at the case of SEMA-member Oracle Lighting, which provides an example of a successful IP defense against an overseas infringement.
"A few years ago, we debuted a new product at the SEMA Show that went viral overnight," said Justin Hartenstein, Oracle Lighting chief innovation officer. "People were really excited, and we had a lot of people come over and take pictures in the booth. Some were suspiciously detailed photos, but you don't assume the worst when someone is looking at your product—that's what it's there for. But within a couple months we were alerted that there were images showing up on Chinese websites that looked very similar to our product. And before we were even able to fully launch our product, the counterfeits were already starting to come out."
That Oracle product, the Vector Grill System, was designed to solve an OEM lighting limitation inherent in Jeep Wranglers, providing an original solution to a longstanding issue.
This drawing illustrates the product Oracle Lighting developed and patented. The product resolved lighting limitations inherent in Jeep
Wranglers by replacing the single round headlight with a new front clip that allowed for adjusting each lighting element separately if the vehicle's stance was altered. When the product was counterfeited, Oracle was able to defend their patent and gain redress.
"We did a massive amount of research and put a lot of time into this project, and because we were replacing the entire grille and lighting assembly," Hartenstein explained, "we invested a significant amount of money of tooling. So when the counterfeits came out, we were devastated. The counterfeit product wasn't as good as what we designed but it looked similar and was cheaper, so it's going to fool the majority of low-research consumers. Our first step was to contact Sisson and Banyas, who had done our patent work for the product. The counterfeiters had changed almost every feature in an attempt to get around our IP. It was not an exact replica, but it had the appearance overall. We knew this was going to be a challenge, but we decided to move forward against the counterfeiters."
When counterfeiting rears its ugly head, the decision to seek redress is one that involves many factors, particularly when the infringing company is located overseas.
"Ultimately, it becomes a business decision," said Banyas. "You have to decide how much harm is actually being generated by the infringing sales, or could be generated, and how much money are they actually taking away from you relative to the cost of litigation. You can get monetary damages from courts in China or another country, you maybe can here, but generally it's not something where you can expect a big windfall. And whether it's here or in another country, you're going to spend time with this, and it can be a distraction to your business. We try to make it as minimal distraction as we can but there are decisions that have to be made the whole way through," Banyas added.
"What made it easier for us to decide," Hartenstein explained, "was that we had another product, years earlier that we released at SEMA, and the product was counterfeited shortly thereafter. At the time, we didn't want to spend the money on that because it's expensive and burdensome and who knows if you can enforce it or not, and if they change it, it's not enforceable—and all the reasons why not to do it."
This time around, based on the circumstances and past experience, Oracle's decision was to pursue redress, a tactic that brought with it multiple long-term benefits.
"We'd already seen what happens when we didn't have a patent," Hartenstein said. "In this case, we had a patent and if we didn't enforce it then we would have spent the money and effort for nothing. The important part was that we had a patent in the United States and one in China, and that makes a difference. Because if you have a patent in the United States, people can't legally import it in the United States. The problem is, the U.S. Customs and Border Patrol doesn't know this. So they're not going to catch it right as it is imported. You're going to have to police it. And that's a constant effort because the factory overseas can still produce it. Enforcing a patent claim in China is much more expensive on the front end, but it saves you money in the long run because you don't have to constantly enforce against multiple distributors, so that made the decision to enforce much easier."
"We are not a big corporation; I started the company in my garage when I was 18. Today, we have 30 employees," Hartenstein continued, "so it's not like we have infinitely deep pockets. But our mentality is that if we can show that we're willing to make the effort to stop counterfeits and use that as an example, then other counterfeiters are less likely, in the future, to copy our products. Ultimately, the court ruled in our favor and awarded us damages. Then there was an appeal—but once again, they decided for us, and we were awarded additional damages in that appeals process," he said.
BUILDING A WALL AROUND YOUR IP
According to Banyas, the strategy of going after the copycat manufacturer, instead of multiple resellers, can make sense even when the infringement originates overseas. "While China is typically the elephant in the room when we are talking about counterfeiting originating outside of the United States, it isn't the only country where we see a problem. We see counterfeiting activity in the Southeast Asian countries––Vietnam, Taiwan, Hong Kong, Philippines are common areas. Behind that would be Eastern Europe––Turkey being the most notable," Banyas told us. In the Oracle Lighting case, the counterfeiter was located in China.
Generally, success will depend on the degree of advance preparation, and how well your legal team understands the justice system in the overseas location. "The first step is to ensure that there are some rights to be able to enforce," Banyas explained. "We'll be looking at what registered property rights they have––if they have a design patent, for instance, or a trademark registered. From there––let's say there is a patent granted and it covers the infringed product, whether it is a design patent or a utility patent––the next thing is, where is that patent granted? Just here in the United States or overseas in Europe––anywhere in Asia, China, India, Korea, Australia? Where is it granted––particularly if it is granted where commercial activity is taking place? Because a lot of times, particularly with counterfeit and knockoff goods, the person selling the product here in the United States is pretty far divorced from where the real harm is happening."
"So what we want to do is get back to where the product is being manufactured," continued Banyas. "If you can get to where the product is being manufactured and if you have rights in that country, I would prefer to enforce there so you can go after the manufacturer. And now you have a lot more teeth and a lot more leverage. That said, it can be difficult to find where the product is actually being made. And that's where we have to get our private investigators involved a lot of the time."
Patent drawings show individual elements of design in detail. Design patents protect the ornamental features or appearance of a product rather than the structure or function. Design patents generally expire 14 years after granting.
Particularly with regard to infringement originating in China, some would say that enforcement is difficult, if not impossible. But as Banyas explained, a thorough understanding of how overseas courts work makes favorable outcomes much more attainable.
"It's very different to enforce in China compared to here because their legal system is very different," Banyas explained. "In U.S. law, you put your hand on a bible and swear to tell the truth, the whole truth, and nothing but the truth, so help you God. Or maybe an affidavit sworn under penalty of perjury, and that's your evidence," he said. "They kind of take the viewpoint in China that everybody lies, and the penalty of perjury is not deterrent enough. So instead of going through this really long and expensive discovery process with affidavits and sworn testimony, China looks for notarized evidence," he explained.
Gathering that evidence is not always easy, Banyas notes, but with the right tactics, it can be done. (Hartenstein likens it to a sting operation.)
As Banyas explained, "They want you to actually do an undercover buy or visit to the factory that is manufacturing the product, and whatever evidence that comes out of that has to be notarized. And the people who are sophisticated counterfeiters in China are on the lookout and will try to insulate themselves––not let you into the factory. A good private investigator will hopefully be able to get you from the public-facing retailer or distributor back to the factory, get you into the factory, and while you're in the factory, your public notary is waiting outside in a parking lot right around the corner.
"When your investigator comes out of the factory and it's notarized, that's what you use to prove your case. You have notarized evidence directly from the factory. Here is a copy of the infringing product and here are pictures we took inside the factory showing the process of making the infringing product; it's all notarized. Then Chinese courts and Chinese judges know that the evidence is good," he continued.
"The other thing I'll say about cost verses benefits––going through this process in other countries that don't have this expensive discovery process that we have here in the United States," he continued, "often it is less expensive than the cost of comparable litigation here in the United States. Here, if you're talking about patent litigation and go all the way through a jury trial, you're talking at least mid-six-figure cost in legal fees, attorney fees, expert witnesses, discovery and everything else that goes with it," Banyas told us. "In China, we'll get through Chinese litigation for 10% or 20% of that cost. And it gives you the added protection of going right back to the manufacturer where the harm originated."
Hartenstein agrees: "It worked out really well for us in the long run. I do feel like having that historical evidence–– that we're willing to enforce our patents–– puts a lot more teeth in it. And honestly, we've had a 100% success rate moving forward…We've had very good success."
THE RISK/REWARD DECISION
While every case is a little different, when it comes to advice about how companies might best protect their IP, Banyas provided some general guidelines.
"Number one, every company has a brand—a brand name and logo, usually both," he said. "Make sure you have registered trademarks on those. Have them registered in the United States and have them registered in the markets where you expect counterfeiting or knockoff activity," he said. "Number two, this is a really highly innovative industry, so find a patent attorney that you can trust. If you are bringing new products to the market, before you launch them, make sure you have an evaluation done as to whether or not they are potentially patentable. If they are patentable, make a decision on whether you want to file an application."
According to Banyas, the decision to spend the money on a patent would be based on a number of factors, including timing.
"What I see far too often is people who try to launch the product, then make the decision to file the patent application one, two years later. By that point in time, literally, the patent laws won't allow you to be granted a patent on that invention anymore. In some instances, you might get a one-year grace period in the United States if you've filed your patent application, but in other countries, there is no grace period. The minute you put it on the floor at the SEMA Show, if you don't have a patent application filed, sorry, no patent for you. And you want those to be proactive and affirmative decisions that you make ahead of time, not a reactionary decision where you're trying to put toothpaste back in the tube."
In short, you must have some rights in place if you hope to enforce.
"Whether you're in the United States or overseas, the courts are not going to find in your favor if you have no registered IP rights. So get them in line first and consider where the key countries are––whether it's Asia or maybe you've got significant sales in Australia and you have got a distributor down there and want to make sure they're protected. Or if there is a huge market for your product in Canada or Europe somewhere. So consider where you'd like to have those rights filed and strategically build that wall around your intellectual property as high as you can," Banyas advises.
Second, consider what to patent, and what to leave unprotected.
"Most companies can't patent everything," Banyas noted. "It's kind of an ongoing decision and very much a business decision. The first thing to look at before you launch the product is the product life. If you're looking at a very niche product and you think the market is only going to be, say $20,000 in sales, generally speaking, that product is not worth filing the patent application. Even if counterfeiters or knockoffs take 50% of your market share, 50% of $10,000 is only $5,000––there is not much meat on the bone that you're trying to protect. If you've got a product that you're thinking is going to be a big hit and generate hundreds of thousands or millions in revenue, then you're probably going to want to go ahead and put a patent application on that. Because if somebody comes in and starts knocking your product off, even if they only take 5% or 10% of your revenue, that becomes a pretty big number.
"It's an ongoing decision as well," he continued, "because if you have some products that you think are going to be a big hit but two, three years into it, the market hasn't responded to it the way you thought it would or technology has evolved in a different direction, you have to be willing to cut that patent application loose. Because the economics don't justify it.
And the other thing you've got to be evaluating is, what is the likelihood of getting something patented? A good patent attorney will do background searches and prior art searches before they file an application. Does it meet the novelty requirement––the non-obvious requirements for getting granted a patent? And [could it be] granted a patent that is going to have a broad enough scope to make a difference? A lot of times, you can get a granted patent on an invention, but the patent is so narrow that it becomes really easy for someone to design around it."
At the end of the day, the nature and scope of IP protection will vary from company to company, as will the decision to enforce. In the case of Oracle, Hartenstein feels that their experience should demonstrate that enforcement, even overseas, is a viable option.
"People have told us for the longest time, 'You can't go to China and fight for your IP," Hartenstein said. "And I feel like there are so many people who didn't enforce their rights and just let these companies walk all over them." This time around, Hartenstein has no regrets.
"Honestly, we'd invested so much in that project, if we had just walked away from this and not pursued it, it would have made a substantial hit for the company and would have delayed us from having the capital to pursue other projects. It could have evolved into a much bigger problem. I feel there are companies that have produced something novel that haven't gone over there to protect their rights because someone told them it wasn't possible. We want to get the word out that this is something that you can, and should, enforce overseas. People shouldn't feel that their hands are tied when it comes to these things."
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