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In a recent telephone interview with Palomar Technologies' (NASDAQ:PMTI) CFO Paul Weiner, amongst the many issues discussed was why Palomar waited nearly three years to sue Cutera (NASDAQ:CUTR) for patent infringement. Cutera has settled (2006) and is now paying a royalty, but only after it was apparent that they were going to lose the lawsuit. Currently Palomar has filed suit against Candela Corp. (CLZR) and Candela has filed a counter suit. Palomar has also filed suit against Alma Lasers, Inc., a private Israeli company.

Weiner explained that in 1999 Palomar didn’t have the cash to initiate a costly legal action process to protect its intellectual property before “we turned cash flow positive in 2002”. Once Palomar turned profitable and had a positive cash flow the company decided it was time to start enforcing its patent rights.

According to Weiner as early as 1999, Palomar sent out letters to companies selling light-based hair removal devices notifying them that they consider them to be infringing U.S. patents #5,595,568 and #5,735,844, known as the ‘568’ and ‘844’ patents. Currently, Palomar has sent out letters to approximately 30 companies. The vast majority of companies receiving notice are small privately held companies. Three publicly traded companies received notices as well.

To date, some companies agreed to pay a 7.5% royalty to Palomar while others insist that they do not infringe on Palomar’s patents or that the 844 patent may be invalid. As Weiner puts it “anyone using light for hair removal is in violation of our patents”.

The scoreboard is as follows; American Medical Systems Holding Inc. (AMDD) [acquired Laserscope (LSCP)], Cutera (CUTR) and Lumenis, are paying royalties. Proctor & Gamble (NYSE:PG) is licensed through its acquisition of the Gillette Company and will pay royalties on future sales. Candela (CLZR), Cynosure (NASDAQ:CYNO), Syneron (NASDAQ:ELOS) and Alma Lasers Inc. are not paying.

Patent Basics Made Simple

All patents are comprised of three main segments. First, a brief description (short story) as to what the invention is about. Second, a detailed description (scientific jargon) enabling the knowledgeable reader to copy or repeat the invention. In other words for the price of revealing to the world what was figured out you get 20 years of exclusivity. Third, a list of claims that is either accepted or rejected by the patent examiner, in whole or in part.

The patent examiner works by rigid rules and standards. Any claim in a pending patent that is considered to be ‘prior knowledge’ is dismissed. Any claim with a broad scope encompassing implementations not covered in the novelty of the invention itself or is not understood directly from the detailed description is dismissed.

In addition, full disclosure of any and all prior knowledge in the field of the invention must be disclosed to the examiner. Failure to do so usually leads to a cancellation of a granted patent.

Infringement by the Book

Palomar’s patent infringement tactics have been a classic textbook approach. First go after the weak and the obvious. Establish a track record in the courts to show the new judge presiding over the new case that “they are all bad guys”. All judges are human beings. The less experienced judges are more influenced by impression. The more experienced know that the hard scientific facts yield a true outcome. Savvy lawyers know how to take advantage of this inherent flaw in the legal system throughout the world. This is one of the reasons that any legal action is a crap shoot.

Aside from the actual scientific facts there are other legal issues that need to be addressed. One example is the loss of right to protection. In other words you can have a valid patent but can not claim infringement damages for the past or even present or future due to lack of willingness to enforce. Weiner’s choice of words during the interview regarding the extent of the elapsed time prior to taking legal action sounded like a well prepared statement by the attorneys. (This is a compliment.)

Cutera’s Failed Defense

Going through the court records it becomes apparent that Cutera had a serious problem. The technology used in Cutera’s apparatus was essentially a carbon copy of the description in the 844 patent. In essence Cutera tried to make the case that it did not use all of the technology, only part of it and therefore it was not infringing on the 844 patent.

This is a very weak claim. The analogy would be to someone inventing the four stroke engine. Along comes someone else and says that a two strike engine that wasn’t in use beforehand does not infringe even though there is no proven advantage for the two stroke engine. In order for a claim of this type to work you have to be able to prove that less is better and wasn’t thought of by the four stroke inventor.

CFO Weiner would apply a reverse analogy. First, “Cutera’s apparatus was essentially a carbon copy of the description of the three broadest claims within the ‘844 patent”. Second, according to Weiner the correct analogy would be, “To someone inventing the two stroke engine. Along comes someone else and says that a four stroke engine that wasn’t in use beforehand does not infringe even though there is no proven advantage for the four stroke engine. The four stroke engine can’t be sold without infringing the claims to the two stroke invention”.

Candela’s Game Plan

Candela is taking a totally different strategy. One of the primary pitfalls in the patent game is the scope of the claims. On one hand a broader scope offers better protection from copycats. In addition, circumventing a patent becomes more difficult. On the other hand it also increases the possibility of the patent being invalidated due to prior knowledge. Palomar has to be very careful how it is going to define the claims themselves.

Candela’s lawyers filed a broad claim countersuit saying Palomar owes royalties for its acne and wrinkle products. Palomar probably finds this very annoying and will probably request from the court that Candela limit its counterclaim to specifics. At this juncture Candela will probably request from the court that Palomar do the same. Once the scope of the claims and counterclaims are defined (and the Judge orders both sides to stop mincing words), we can make an intelligent assessment of the outcome.

CFO Weiner totally disagrees with the above. “The suit against Candela is in the early stages but they will likely take a similar strategy as that taken by Cutera. The broadness of the Palomar claims has already been validated through the judge’s ruling in the Cutera case. The reason we went after Cutera first was because Cutera only infringes on the three broad claims. Once successful with Cutera, then other companies will have a much tougher time claiming that they do not infringe and that our patents are invalid due to prior art. Other competitors’ products, including Candela’s and Syneron’s products, use more of the claims than Cutera and therefore infringe on many other claims within our patents.”

Syneron’s Wait and See Approach

At this stage Syneron has adopted a wait and see approach. Syneron is definitely the toughest nut to crack for several reasons. Palomar is no fool and Syneron knows this.

First, Candela might do all the work for Syneron free of charge!

Second, in order for Palomar to go after Syneron it has to risk broadening its claims. Palomar will use the ‘rubber band’ approach. When necessary, as in the case of Candela, the claims will be narrower. If that works, then Palomar has to do so without limiting its possibility of stretching the scope of it claims in the future (so that it can go after Syneron). This is not as simple as it sounds. Even the best tongue twisting lawyer knows that all it takes is one poorly worded sentence and Syneron is of the hook.

Third, Palomar has to weigh the risk of losing its patent altogether by interpreting its claims in a broader sense. Even Palomar would never claim to have invented the laser for non invasive surgery or for “Surgical procedures [that] may be performed using pulsed ultraviolet light utilizing a mix of complete photoablation with some thermal effect as desired by the operating surgeon”. (Quote from U.S. patent # 5,735,843 – one patent prior to 844!). Notice that Palomar claims that their patent is valid and does not infringe on 843 even though it uses a laser for photoablation.

Fourth, using the four stroke engine analogy, Syneron claims to have a six stroke. In fact Syneron actually quoted the 844 patent in its patent application for U.S. patent # 6,702,808 and the patent was granted by the examiner. The Syneron patent specifically details the use of light for the removal of hair.

Syneron (ELOS) Approved patents

1 6,939,344: Method for controlling skin temperature during thermal treatment

2 6,889,090: System and method for skin treatment using electrical current

3 6,702,808: Device and method for treating skin

4 6,662,054: Method and system for treating skin

A draft copy of this article was sent to Palomar, Candela and Syneron. Palomar’s CFO Paul Weiner disagrees with the above:”I disagree with your comment here because even if we were not successful against Candela, Syneron would not be out of the woods because the Syneron products infringe even more claims than Candela in the ‘844 as well as claims in the ‘568 patents… We do not need to broaden our claims to go against Syneron. Our suit against Cutera proved that our broadest claims are valid. Our following suits will use those broad claims as well as other claims”

Syneron and Candela both opted not to respond. Ziv Karni from Alma Lasers was out of town and could not be reached. (He really was out of town.) No attempt was made to contact Cynosure.

Conclusion

I wouldn’t want to speculate on the outcome of any of the patent lawsuits. What is for certain is that the market doesn’t like uncertainty. One item though has been cleared up. If there was any doubt about Palomar filing suit against Syneron, Paul Weiner has made it abundantly clear that this day is very near indeed. This dark cloud hanging over the entire industry including Candela is causing investor caution disorder and is depressing the stocks. The best outcome would be if the parties could get together and find someone that they mutually trust and arbitrate the matter. I have some ideas that might work and based on my past experience with patents if there is a will there is a way. The problem is that the sides are too pissed off at each other to sit down at the table together. Childish, if you ask me.

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Source: Palomar Technologies' Patent Play