Patent Reform
Will Help
Women-Owned Entrepreneurs
and Small Businesses
June 2014
Women Impacting Public Policy (WIPP)
1714 Stockton St, Suite 200
San Francisco, CA 94133
www.WIPP.org
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Introduction
As an organization that represents the interests of women and minority-owned businesses, we
understand the importance of endless innovation and the role that the American patent system
has in driving that. Against the backdrop of Congressional patent reform efforts, however, we are
also attune to the rise in abusive patent behavior – known as trolling – seen across American
industry and are concerned about its impact on our economic engine.
In this paper, we have chosen to highlight the specific actions of Proctor & Gamble (P&G) and
showcase particular case of egregious patent abuse, seen in the case of P&G’s efforts to monopolize a teeth whitening market dominated by female consumers.
Patent trolls
The battles over smartphone patents have garnered the most attention, primarily because of the
size of the companies and the high-tech hipness of their products. But legal battles over patents,
particularly lawsuits brought by “patent trolls,” who abuse patent law either to extract undue
royalties from a new product that they claim infringes on their own patent, or block competition
by seeking its outright removal from the market, have become a troubling concern.
According to the Internet Association, altogether some 7,000 businesses were sued by patent
trolls in 2011 and 2012. Troll litigation costs U.S. businesses $80 billion a year, according to
association.
Trolling works because the financial incentives are stacked against entrepreneurs. Stretched for
resources as they are, start-ups often have no choice but to settle upfront—or exit the market
outright—because they can’t afford a lengthy court case. For the troll, a settlement is a double
win: it extracts a payment (or market exit) from the target and avoids a court test of its patent
claim, leaving it free to troll another day. Right now, the payoff for trolling is attractive enough
in the long run that large companies such as P&G are willing to accept the occasional loss of a
case, even a patent invalidation, in order to maintain market dominance.
Businesses unite against patent abuse
Entrepreneurs and small businesses have begun to voice their frustration over patent exploitation.
Groups that represent a cross-section of American entrepreneurs and small businesses, such as
the Main Street Patent Coalition, are urging lawmakers to take action against patent trolls – in
the technology industry and beyond. Since women are heading a growing share of
entrepreneurial businesses, Woman Impacting Public Policy joins them as well. We recently
expressed our support in The Hill, a leading Washington public policy publication.
Make no mistake; we believe companies have a right to protect their intellectual property. When
properly enforced, patent law protects all businesses, allowing them the exclusivity needed to
monetize their upfront investment in research and development. But when large corporations use
their substantial legal resources simply to make baseless or frivolous claims against any would-
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be competitor, it amounts to unfair competition that hurts both entrepreneurs and the consumers
they aim to serve.
Entrepreneurs are hurt because frivolous lawsuits sap time and money. Since the median patent
case takes two-and-a-half years to get to trial, 1 the economics of the matter mean most start-ups
agree to settle, paying a license or royalty fee whether the claim is valid or not. This cost gets
passed on to consumers. In extreme cases, frivolous patent lawsuits force nascent businesses into
bankruptcy, driving lower-priced or more innovative alternatives from the market.
Still, one reason companies turn to aggressive patent assertion is that it pays off. The benefits of
an occasional win outweigh the costs of a series or losses. Although the company is by no means
the only example, consumer products giant Procter & Gamble serves as a clear illustration of this
strategy.
P&G’s pattern of patent abuse
Some of P&G’s business practices give us pause. We’ve explored the company’s litigation background and found it spent most of the 1980s and 90s in a battle with Kimberly-Clark over
patents pertaining to disposable diapers. In 1989 and again in 1991, P&G, maker of Pampers,
sought to have Kimberly-Clark’s Huggies brand removed from store shelves. Courts sided with Kimberly-Clark in both cases, ruling that Huggies did not infringe. The judge in the 1989 case
further ruled that P&G’s super-absorbent diaper patent was unenforceable because the company
intended to deceive a patent examiner by omitting certain test results.
Unfazed by these defeats, P&G in the late 1990s sued Paragon Brands, a spin-off of
Weyerhaeuser Co., that manufactured disposable diapers sold under various third-party brand
names. The lawsuit, which P&G won, marked the beginning of its strategy to use its patents to
attack much smaller competitors that generally offered lower-priced alternatives. For example, at
the time of the Paragon suit, P&G and Kimberly-Clark were estimated to each hold about 40
percent of the $4 billion market for disposable diapers. Paragon was the leading private-label
manufacturer, with about 90 percent of the private label market. Even if we assume the generic
market was the remaining 20 percent of the market left after P&G and Kimberly-Clark, that puts
Paragon’s maximum revenues at about $720 million, less than half of P&G’s $1.6 billion. As a result of the decision, Paragon filed for bankruptcy.
P&G’s successful judgment in the Paragon case, followed by second win against Drypers, another supplier of private label brand disposable diapers, emboldened the company to go after
more generic competitors in product areas such as shampoo, mouthwash and skin cream. Patents
weren’t always the issue. P&G began suing over more subjective criteria, accusing competitors of deliberately confusing consumers by adopting similar packaging and labeling. About this time
1
Chris Barry, Ronen Arad, Landan Ansell and Evan Clark, “2013 Patent Litigation Study, Big Cases Make Headlines, While Patent Cases Proliferate,” PwC 2013 Patent Litigation Study, 2013, p. 21. Available at
http://www.pwc.com/en_US/us/forensic-services/publications/assets/2013-patent-litigation-study.pdf.
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the media began wising up to P&G’s legal bullying. Quoted in an article in the Dayton, Ohio
Business Journal, Gregory Rubin, CEO of Garcoa Laboratories, a maker of hair care products
that was defending itself in just such a labeling claim, asked, “There’s confusion that it says Kroger?” referring to the grocery store chain that branded the product. “The consumer’s not confused. The price difference alone takes the confusion away.” 2
Litigation instead of market competition
Over the years P&G has successfully defended its patents in a number of cases. Yet alongside
these wins, P&G has piled up a sizable share of patent defeats, some which invalidated the very
patents the company was trying to defend. P&G’s persistence in taking competitors to court,
combined with its checkered record of rulings, forces us to ask if its patent litigation is motivated
by a genuine desire to protect intellectual property or if it’s a weapon that is routinely deployed anytime it feels threatened by a legitimate competitor.
P&G has been using questionable patent claims against makers private label brand oral care
products. It successfully pushed the New Jersey-based start-up Hello Product out of the
toothpaste market in 2014. In teeth-whitening strips, P&G used its patents to block Johnson &
Johnson’s entry in 2008. It was then able to use those patents to delay competitors’ entry for several years, like Colgate,GlaxoSmithKline and Church & Dwight, long enough to overtake
them as market share leader in oral care products. They tried to launch teeth whitening strips, but
were unable to mainly because of P&G’s patent relating to these products. More recently, the P&G Crest brand has come under increasing pressure from private label
brands. Its share of the $438 million teeth-whitening market dropped to 67 percent in 2013 from
74 percent in 2011, while private label share grew to 14.5 percent from less than 10 percent,
according to market research firm Euromonitor International. 3 P&G’s response has been to sue three competitors, Be-Well Marketing, CAO Group and Clio USA, for alleged patent
infringement to consequently increase P&G’s market share by expelling competition. New Jersey-based Clio manufactures more affordable, private label whitening strips sold to major
retailor chains such as Target, Rite-Aid, CVS, K-Mart and Family Dollar.
As if to emphasize its troll-like strategy, P&G even sued Clio and Clio’s Canadian distributor, Brushpoint, which distributes to CVS and Target in the U.S. The fact that P&G sued Clio and
Brushpoint in a Canadian court, even though Clio has literally no business or customers in
Canada, speaks volumes to how P&G has increasingly become reminiscent of a patent troll in
this case. P&G will go to any extent to aggressively sue its competitors in any venue that will
hear its case – with the primary objective to block out competition.
2
Jon Newberry, “Procter & Gamble Files Lawsuit Regarding Look-Alike Products,” Dayton Business Journal, August 26, 2011, available at http://www.bizjournals.com/dayton/print-edition/2011/08/26/procter-gamble-fileslawsuit.html?page=all.
3
Susan Decker, “Diaper-War Veteran Wages New Patent War Over White Teeth,” Bloomberg.com, May 5, 2014,
available at http://www.bloomberg.com/news/2014-05-05/diaper-war-veteran-wages-new-patent-war-over-whiteteeth.html.
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P&G’s actions against Clio, Be-Well and CAO Group follow a two-decade pattern of defending
patents and trademarks, despite an uneven record of success.
Responses to P&G’s warrantless claims
Clio, for its part, fought back. Not only did it produce third-party evaluations that its teethwhitening products were non-infringing, it took aim at the validity of P&G’s own patents, claiming that they were derived from existing third-party technology or “prior art” as it is called in patent law circles.
In a preliminary finding, the USPTO’s Patent Trial and Appeal Board agreed that, “there is a likelihood of unpatentability” on three key P&G patents on teeth-whitening strips because they
relied on prior arts.
A final ruling is expected later this year. If upheld, it will mean P&G was wielding invalid
patents as a legal threat in an attempt to monopolize the teeth-whitening strip market. That may
offer little solace to competitors who were forced from the market, but it will mean that over the
last several years consumers were forced to spend millions more on whitening strips when lowerpriced alternatives should rightfully been available. Moreover, if P&G patents are invalidated as
USPTO preliminarily ruled, consumers could get compensation for their unjustified spending for
so-called patented high-priced teeth-whitening strips. This outcome would be more than
appropriate considering P&G’s crest strips patents were originally ruled unpatentable.
In the meantime, P&G is trying to expedite a decision in the Clio case from Southern District of
Ohio, based in P&G’s home city of Cincinnati, hoping to beat the USPTO clock. As in most cases, courts tend to favor local litigants. In fact, of the 78 lawsuits P&G has filed against
competitors since 2000, 23—almost one-third—were brought in the Southern District of Ohio
for the purpose of the use of home court advantage. 4
P&G’s pressure on competitors’ customers creates fewer choices for consumers
Private label brands can be one-quarter to one-half off the price of national name-brands.
Litigation alone brings headaches. Potential distributors fear risk and back off agreements.
For example, P&G’s suit has taken its toll on Clio. In addition to over $1 million Clio has spent
defending itself, concerns about the lawsuit led Target, which had accounted for $3 million of
Clio’s annual sales, stopped stocking Clio’s teeth-whiteners product at the end of April, as
reported by Bloomberg. 5
P&G’s suit consequently forced Target to end its private label agreement with the generic supplier, despite Clio’s strong position in the case. This is a loss for consumers as Target’s price for a package of 14 Clio strips was about $20, while the Crest-brand’s same size package, ranged about $40.
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www.pacer.gov
Susan Decker.
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Today, P&G’s legal department stands at 580 people, according to the website Inside Council, which unabashedly praised the company’s legal team for its patent assertion strategy. 6 It’s good to be a lawyer at P&G because that’s the one place the company hasn’t been paring back. Overall, P&G said plans to eliminate about 5,700 jobs this year as part of cost-cutting measures.
For entrepreneurs seeking to enter the personal care segment, no matter how small a share they
seek, the risk is clear. Compete with P&G and you will get sued. Not only does P&G’s aggressive litigation discourage women entrepreneurs, it hits women in the pocketbook. Women
of all ages and incomes make up a predominant share of buyers of teeth-whitening strips and are
the primary demographic targeted. 7
Momentum builds for reform
The good news is that our voices are being heard. President Barack Obama has called for reform
patent laws to mitigate trolling and has been joined by leaders of both parties in Congress. The
Small Business Administration has similarly called for patent reform to help protect America’s small business community. The Senate Judiciary Committee is marking up a patent reform bill
and aims to bring it to the floor before summer. The House of Representatives has already passed
the Innovation Act with bipartisan support. The bill requires plaintiffs to be specific about
infringement claims. If the court finds the claim frivolous, it would force plaintiffs to pay the
defendant’s attorney fees. States such as Virginia, Kentucky, Oregon, Texas and Utah, all concerned that patent trolling is
hurting the entrepreneurial climate they are taking pains to cultivate, also have legislation in the
works. While each approach the issue in different ways, the all seek to impose a higher cost on
patent plaintiffs if their claim is determined frivolous or invalid.
None of this should be construed as a call for radical change of patent rights. But both the
headlines and the underlying numbers show that bad players who see a profit opportunity in
abusing a good system. The correct solution will remove the profit from nuisance litigation and
restore it to its rightful source—the American entrepreneurial spirit.
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Ashley Post, “The 2012 IC10 winners--Procter & Gamble: Recession Response,” InsideCounsel, August 23, 2012,
available at http://www.insidecounsel.com/2012/08/23/the-2012-ic10-winners?page=7.
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Laurie Mercede, Thomas Lawrence, Nayyar Khan, Dina D’ambrosia, “Crest Whitestrips Research Design Project,” Wharton School, University of Pennsylvania, 2010, p. 24 (Powerpoint), available at
http://www.slideshare.net/thomascl/crest-whitestrips-market-research-pdf.
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