Procter & Gamble's patent suit is backfiring

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Article Highlights

  • P&G strategy backfiring: P&G sues Clio, leading to Clio filing a petition with USPTO claiming that P&G's patents are invalid.

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  • When it comes to public policy, there are few issues thornier than devising the best ways to protect intellectual property.

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  • A lighter-touch patent regime for consumer products would provide the needed balance in intellectual property law.

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A drama is unfolding that could cause serious trouble for huge companies used to winning aggressive patent-infringement lawsuits against their smaller competitors.

The huge company in this case is Procter & Gamble, which dominates the market for home devices that make your teeth whiter. P&G derives about $250 million in revenues a year from its original Crest Whitestrips, launched in 2000, and Crest Advanced Seal Whitestrips, which stay on even if you are drinking or kissing.

Whiteners are high-margin products that cost little to make, and their launch was "the largest product introduction in the history of Procter & Gamble," according to the lead inventor Paul Sagel.

Now, P&G's lock on the market is loosening - ironically because P&G itself sued Clio USA, the maker of private-label whiteners and two distributors. The suit was apparently enough to scare Target, one of Clio's customers, which removed the product from its shelves in April. Earlier, Johnson & Johnson discontinued its Listerine Whitening Quick Dissolving Strips in a settlement with P&G. But the new suit also inspired Clio to file a petition last July with the U.S. Patent and Trademark Office claiming that P&G's patents are invalid.

Now, P&G's efforts are having a boomerang effect. They may even be responsible for a decline in P&G stock from $82.92 a share on April 29, when it was becoming clear that the giant company's legal actions were backfiring, to $79.93 at the end of last week. During the period, P&G stock fell 3.6% while the broader U.S. market, represented by the Standard & Poor's 500 Index rose 4.4%.

"Procter & Gamble could soon lose patent protections on Crest Whitestrips,...which would be bad for P&G but good for consumers," writes Dan Monk, a reporter for the WCPO in Cincinnati. In the wake of a recent Supreme Court decision involving similar issues, Limelight Networks v. Akamai Techs., Inc., P&G on June 17 filed a motion asking a U.S. District Court in Ohio for permission to withdraw several of its claims against Clio.

There's no doubt why. "Any time you bring a lawsuit and put your patents in play there is always a chance that you will not only lose the case but wind up with a ruling that your patents are invalid," says Joseph Dreitler, a former P&G lawyer who heads a copyright and trademark firm in Columbus.

When it comes to public policy, there are few issues thornier than devising the best ways to protect intellectual property. What deserves a patent? For how long? And under what circumstances can it be challenged? Those are tough questions, and unlike matters like tax rates or trade barriers, little guidance to a simple solution is provided by ideology or principle.

There may be a moral dimension to ownership, but intellectual property has always lacked the permanent protection offered to other things that people possess. For instance, if I buy a house, I own it forever - or until I sell it. No one can knock on my door after 20 years and say he's moving in.

The founders thought that unique products of the imagination were important enough to enshrine in the U.S. Constitution, but they made a purely economic argument, not one based on an inherent or civil right: "The Congress shall have the Power To...promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to the respective Writings and Discoveries...."

It's up to federal policy makers to decide what constitutes a patent and how long it should endure. Lately, members of Congress of both parties, plus the President, have concluded that our intellectual property laws need changing. One big worry, reflected in proposals by Sen. John Cornyn (R-TX) and Sen. Chuck Schumer (D-NY), among others, is that it is too easy for investors (including government entities) that own multiple patents to intimidate alleged infringers - often innovators themselves -- through the courts.

But again, it's not an open-and-shut case. The patent investors, or trolls, also serve a useful purpose by earning income for inventors whose patents may never have made it into commercial circulation - and by making it easier for new inventors to build on previous inventions by unearthing obscure patents and making them easily available in pools.

Another big issue is whether software or business processes - such as Amazon's one-click system for purchases online - should get patents at all. And how different should an invention be in order to get its own patent, rather than being subject to expensive legal action from a prior patent holder?

And then there is the simple nitty-gritty of who got there first. Some of the day-to-day battles in the courts descend into absurd complexity. A good example is the whitener case involving P&G.

The active ingredient in teeth whiteners is no great invention. It's hydrogen peroxide, a molecule with two hydrogen and two oxygen atoms that's used for cleaning floors, bleaching hair, and curing acne. The issue is applying the H2O2 to your teeth.

Dentists perform in-office whitening, with bleaches in combination with heat or a laser. You can get whiteners in your toothpaste. But it is whitening strips that have developed into a hugely profitable market for P&G.

P&G's only serious competitor is New Jersey-based Clio USA, which sells generic strips to retailers such as CVS, Target K-Mart and Rite-Aid, which market them under their own brand names (for example, CVS Ultra Whitening Strips); the generic brands typically sell for 20 percent to 50 percent less than Crest strips.

The main issues at stake are arcane. One is that Clio's strips fade from transparent to white in one or two minutes. P&G's suit against Clio is set for trial in August.

Meanwhile, in January, the U.S. Patent Trial and Appeal Board made a preliminary ruling in Clio's favor, which P&G then challenged twice unsuccessfully. (The board said that "there is a reasonable likelihood" that Clio will prevail.) A final decision could come late this year, and there is a decent prospect that P&G's patent will be invalidated.

The courts are clearly not the best places to resolve such business disputes - though pressure from the possibility of adverse rulings or huge legal expenses may be the necessary impetus to get the parties to reach a mutual decision.

There's no doubt that consumers are best served when makers of things like whitening products slug it out in the marketplace over matters of price and performance - rather than using the court system, which, on the whole, seems to thwart innovation and competition. A lighter-touch patent regime for consumer products, as opposed to pharmaceuticals or important scientific inventions, would provide the needed balance in intellectual property law.

The tough part is writing this lighter-touch regime for consumer products into law. Perhaps the courts and the Patent Office can recognize the damage they're causing and make an adjustment on their own. That's the best answer. But don't rule out a wholesale renovation of intellectual property law - and the unintended consequences such sweeping changes always cause.

Meanwhile, it's frankly heartening to see a smaller company taking on a lawsuit-filing behemoth like P&G. "Clio is the only company to fight against P&G for two years, because we believe the P&G patent will be invalidated," says Peter Cho, a vice president at Clio. "We will fight against it to the end."

James K. Glassman, former U.S. Under Secretary of State for Public Diplomacy and Public Affairs, is a Visiting Fellow at the American Enterprise Institute.  

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About the Author

 

James K.
Glassman
  • James K. Glassman is a visiting fellow at the American Enterprise Institute (AEI), where he works on Internet and communications policy in the new AEI Center for Internet, Communications, and Technology Policy.

    A scholar, diplomat, and journalist, Glassman rejoins AEI after having served as under secretary of state for public diplomacy and public affairs, during which time he led America’s public diplomacy outreach and inaugurated the use of new Internet technology in these efforts, an approach he christened “public diplomacy 2.0.” He was also chairman of the Broadcasting Board of Governors, the independent federal agency that oversees all US government nonmilitary international broadcasting. Most recently, Glassman was instrumental in the creation of the George W. Bush Institute, where he remains the founding executive director.

    Before his government service, Glassman was a senior fellow at AEI, where he specialized in economics and technology and founded The American, AEI’s magazine, which he led as editor-in-chief until his departure from AEI in 2007.

    In addition to his government service, Glassman was a former president of The Atlantic, publisher of The New Republic, executive vice president of US News & World Report, and editor-in-chief and co-owner of Roll Call. As a columnist for The Washington Post, Glassman wrote about political and economic issues. He was also the host of CNN’s “Capital Gang Sunday” and of PBS’s “TechnoPolitics.” In 2000, he cofounded TCS, a technology and policy website. His most recent book is “The Secret Code of the Superior Investor” (Crown Forum).


    Glassman has a B.A. in government from Harvard College where he was a managing editor of The Crimson.


     

  • Email: [email protected]

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