WAVEFRONT Issue Spring 1987

	What a Mess




	NO, 3,506,327. Title: Wavefront Reconstruction using a Coherent
Reference Beam. Expires April 14, 1987.

	NO. 3,838,903. Title: Wavefront Reconstruction. Expires Oct. 1,

	No. 3,838,787. Title: Holograms. Expires July 15, 1992.

	These are the principal holography patents--the unstable centre
of a complex legal imbroglio that threatens to undermine the growth of
the holography industry.

	Unstable because the validity of the patents themselves is being
called into question.

	Threatening because these patents--and the risk of suits for
infringing them--are now a major factor in some firms' decisions to stay
out of the holography market entirely until the patents expire. The
immediate loss for the industry is millions of dollars of business. The
long-term ramifications could include a divided and divisive business community.
As Emmett Leith ruefully told Wavefront: I hoped it would never come to this.

	Holography COMMUNITY

	by Carolyn McLuskie

	IN 1962 Leith, then (as now) a research scientist at the University
of Michigan, published a paper which outlined an amazing new process for
creating three-dimensional imagery which he and research assistant Juris Upatnieks 
had discovered.

	As do many universities, the University of Michigan had a policy
of offering patentable processes to interested companies in return for
royalties. In 1964 the university had such an arrangement
with Battelle Memorial Institute. Battelle and the Du Pont Company
owned a joint venture, Holotron Corporation. When Battelle acquired the
patents they were assigned to Holotron. In 1976 Holosonics, a maker of
ion lasers and equipment for optical and acoustical
holography, acquired the patents when it purchased Holotron.
When Holosonics went bankrupt in 1979, leaving $5.5 million in debts,
its principal assets were these patents. They are now held by
Holosonics' main creditor, Citibank, which allows use of the patented
techniques by selling licenses in specific areas covered by the patents.
In 1981 American Bank Note purchased a license for, among others, the
three principal patents, from the trustee of Holosonics.

	BY the time American Bank Note jumped into the holography business,
several companies had already applied for and received licenses to
manufacture holograms, including IBM and Atari. However, according to a
preliminary prospectus from ABN dated August 13, 1986, the company
believes "that its license, although subject to prior licenses, grants
it the exclusive right to use the Principal Patents to originate
holograms for use in certain security and anti-counterfeiting fields"
(italics mine).

	ABN has been characterized as waging a war against professional
holographers--aggressively pursuing contracts through a.combination of
threats, coercion of clients and litigation, by which it hopes to
contain potential rivals in the field until the patents run out in four
years. ABN warns potential buyers that they will be infringing its
licenses if they hire firms other than ABN to do jobs in security

	It is significant to note that the 1986 prospectus acknowledges
that if any of ABN's licenses are held invalid or impaired, "the
Company's competitive position could be adversely affected", since
"there can be no assurance that the Company will be able to procure
patents or licensed technology that may be necessary to the Company's
product development and growth or that the Company's products and
methods of production will not be rendered noncompetitive by future
technological changes."

	The prospectus also notes that "if the licensed patents are held
invalid or held not to have been infringed, the Company will continue to
have the right to use the technology covered by the licensed patents. In
the event of a holding of invalidity, however, its competitors would
have the right to use the technology. "

	These statements indicate that ABN is well aware of the potential to be declared invalid. 
It should be noted, however, that a prospectus is an
information paper for potential investors and must supply all
relevant facts, including potentially damaging admissions. Otherwise, if
the patents are found invalid and ABN's market edge dies, investors who
lose money could sue ABN for not telling the truth about its position.

	PATENT law states that one cannot claim anything that has been
published and has been in the public domain more than a year prior to
the patent applica tion.

	Leith cannot say for sure whether the paper he wrote, entitled
"Wavefront Reconstruction and Communication Theory" and published in the
Journal of the Optical Society of Amenca in October, 1962, would
constitute public disclosure before the patents. "To a degree, yes, and
to a degree, no. There are some areas that may be covered. Certainly
there are some basic ideas in there. The idea of what we called carrier
frequency holography, which the world has chosen to call off-axis
holography, is in there."

	Would that mean his paper constitutes disclosure in the public
domain, i.e. prior art, which invalidates the patents?

	"That would be a possibility. To a degree it does, but does it
invalidate it completely? The patents cover reconstruction techniques
which presumably are not described in that paper. It certainly is true
that the paper is prior art for a lot of what constitutes the present day
techniques of holography. The question is does it describe everything or
does it not describe everything? The aim in the patents was not to make
any claims that would be invalidated by the prior art."

	"I'm just a tiny, little cog with respect to the patent

	Leith feels there's no possibility of one company dominating the
field of holography because the patents are so close to expiration. " One can hardly 
dominate the market with patents, the basic one of which expires in less than two 
months and the rest
of which expire in the next four years." However, he adds that "it could
be an uncomfortable situation for people in the short run."

	For Steve McGrew's California-based company called Light
Impressions, it could be more than uncomfortable--it could mean the
collapse of his successful business. Light Impressions is being sued by
the trustee for Holosonics on behalf of ABN, which charges that the firm
infringes its licenses. ABN is also seeking a permanent injunction
against further infringement, which would effectively force Light
Impressions to fold.

	Light Impressions has a sub-license from Atari, which had received
an exclusive license from the Holotron trustee covering electronic toys,
games, computers, advertising, packaging, novelties. publishing,
decorations, etc., and security applications relating to all the areas
listed. The license Atari got from the trustee predated ABN's license
on security and ABN's license explicitly states it is subject to Atari's
prior exclusive license.

	In 1982 Light Impressions licensed United States Bank Note to
use its 2D 3D technology, patented in December 1986. Using this
technology, Light Impressions made a hologram master for Visa and sold
it to USB, paying Atari royalties on the sale, which, according to its
license, it was entitled to do.

	ABN disagrees, claiming its license gives it exclusive rights to
security applications in holography. Atari now says Light Impressions
owes it royalties on its patented 2D-3D process. The trustee claims
patent infringement, despite the fact that ABN's license is subject to
that prior license and all sub- licenses devolving from that license.

	"We had agreed verbally before we got the license from Atari that 2D
and 2D- 3D holograms were not covered by the Holotron patents," says
McGrew. "Then Atari changed owners and decided it wanted to collect
royalties. Now, that part could have been arbiuated. But part of the
lawsuit was that Atari charged us with setting up the licensing
agreement with USB and pro viding them with the Visa holograms as a ruse
to get around paying royalties. They're suing us for the royalties and
the trustees are suing us, saying we didn't have any right to do the
Visa holograms."
	A year ago, Atari abruptly told Light Impressions its license was terminated., violating 
the mandatory six-month notice period.

	"And they'd been cashing the checks consistently up until then,"
McGrew says. Interestingly, that decision took place after ABN paid a
visit to Atari and came away with a nonexclusive sublicense that covered
the same ground as McGrew's sublicense.

	As a result, Light Impressions is suing ABN, Atari and Citibank,
owner of the patents, for conspiracy to take its license away and give
ABN a monopoly--an anti- trust suit. "We're very angry about this," says

	The case against Light Impressions is being heard in U.S. Bankruptcy
Court and McGrew says it's historical and legal fact that bankruptcy
court is automatically prejudiced in favor of the creditors of bankrupt
corporations. "We're at an automatic disadvantage. ABN is blocking all
our efforts to move the trial into Federal Court down here in California
where it belongs."

	But how valid are the patents? Leith's 1962 paper was not referenced
until very late in the patenting process. There is no indication the
paper was ever seen by the examiner.

	According to McGrew, the patent claims methods that are specifically
described in the '62 paper. "Anyone who reads the prosecution history
carefully will see that either the patent attorneys never read the '62
paper or they were trying to hide its content from the patent office."

	McGrew does feel that some of the claims in the patents might be
valid, for instance the ones on non-destructive testing.

	Dec. 1986, before a closed session of trial attorneys and a
court reporter, Leith gave a deposition on his '62 paper. The purpose of
a deposition is to gather information relevant to the trial. Leith was
represented by Jerry Parsons, ABN's patent attorney. His deposition is
not yet finished and he will be called back again.

	The manner in which Leith's information is being handled is worthy
of note. "Within the process called "discovery"--wherein the lawyers go
out and find all the facts before they argue about them--there's
something called a restrictive order, which allows trade secrets to be
class)fied for trial counsel only," says McGrew. "ABN is classifying
everything for trial counsel only -- including Leith's deposition, which
is already in the public domain and is by no means their trade secret."

	The problem for Light Impressions' lawyers is that this tactic
by ABN means they don't have access to the facts. "There's nothing that could do us 
more good than Emmett Leith's testimony," says McGrew.

	Wavefront has also heard that ABN is attempting to convince people
that there are some claims in the 1975 patent, (No. 3,894,787) which are
specific to the off- axis transmission hologram. That would give them
five more years from April 14, when the first patent expires.

	"It's a very elaborate mess that nobody's trying to have cleared
up," says Steve Smith of Holographic Imaging Studios in Chicago. "As
long as it stays out of court and the viewpoint has not been resolved,
ABN is achieving what it wants to achieve, which is a lot of PR."

	A close look at the first patent is illuminating. "Figure No. 9
is an off-axis transmission hologram," says Smith. "The object
information is headed directly at the plate and the reference beam is
coming in at what they call a finite angle. In other words, it's a
determined angle. It doesn't matter which one it is and you can't patent
one over the other. The fact is that it's any other angle off normal. To
say 'well, it means anything of a certain angular relationship based
upon derivations...' is a waste of a lot of legal time at $100 an hour.
So I don't see the other two patents having any issue in the off-axis
transmission hologram. But do they have anything to do with the copy of
a hologram?"

	ABN is in a critical position now, says Smith. " The market is just
beginning to grow to the point where it's worthwhile for people with a
fair amount of venture capital to jump in. This is what ABN is concerned
about and that's why they want an extension of four or five years on
this patent."

	THE controversy surrounding the patents has become a headache and
an embarrassment for Leith, who receives tiny royalties now and then
from the process which is now a multi- million dollar industry.

	"The fairly small amount of money that we've gotten in royalties
is certainly not worth anything like the irritation I've
experienced--seeing the suits and the threats of suits," Leith says. "It
annoys me. When I go out among the holographers, they ask: 'Will we have
trouble if we make holograms?' That puts me in an embarrassing and
awkward situation. I say: 'Well, I think not' but I really don't know."

	For others, there's no doubt about it. "The patents are invalid,
that's all," says Ray Malavasi of Daleco, a West Coast marketing group.
"It's very simple. Nothing complicated. As far as we're concerned, their
patents are no good. That's why we're in production. We feel there are
many ways to make a hologram. They have to go to court and prove that
their patents are valid."

	Citing Leith's 1962 paper and the fact that the patents talk
only about coherent light, not white-light reconstruction, Malavasi
says: "I really believe that the technology was around for a long time
and was public knowledge before they patented the processes."

	MALAVASI has a few things to say about ABN's business practices,
too. "ABN's approach is very unethical. They approach our customers and
clients--potential customers and customers we already have agreements
with --and tell them we are infringing on their patents, before they've
found out whether they are valid. They don't even know how we're
shooting our holograms." Malavasi says lawyers from his firm are in
contact with ABN's attorneys.

	Another company, Global Images, which sells embossing and
hotstamping technologies, has opted to ignore the patents. (Most of
Global's contracts so far have been outside of the U.S. however.)
Global's Walter Clarke says the patents are "unrealistic" and that the
company has "historically definitive examples of prior art."

	But some companies literally can't afford to be so bold. McGrew
tells about Flexcon, a pressure-sensitive adhesive coater which has now
set up an embossing system, and which Light Impressions had dealt with
for years. ABN told Flexcon they would be sued if they did not emboss
exclusively for ABN. The result? ABN now has exclusive supplier rights
with them.

	ABN has attempted to contest a contract to put holograms on Chicago
Transit Authority fare cards. (Holographic Imaging Studios has been
doing the

	CTA hologram for the last five months and now has a five-month
extension on that contract.)

	"ABN tried to use its patent clout, even though it came in with
a high bid," says Smith. "CTA's patent lawyer pointed out that the first patent runs 
out in April. ABN hedged, eying there were claims in the later patents that cover 
the same process. The CTA lawyer said: 'We're in a position to go ahead and accept 
this bid and we feel we cant' And will. And did. All I know is I've already made three sets 
of masters. All of them have been used and everybody is happy with it."

	In another case, Hallmark wished to buy holograms, and it wanted
to buy them from Light Impressions. Faced with the prospect of having to
deal with ABN, the company decided simply to stay out of the business
until the lawsuits are over. Other holographic firms have reported
similar lost sales. The immediate effect has been to depress the
industry as a whole, costing millions and millions of dollars in lost
contracts. It winds up costing customers millions too, because they are
forced to buy at ABN's rates, which are two to three times above the
going rate.

	The suit against Light Impressions has serious implications for
the entire holographic industry. "If they succeed in beating us, they
don't have to beat anybody else," says McGrew. And in an industry which
grossed a mere $23 million in 1985, few firms can afford the financial
risk of patent lawsuits.

	Even when a firm is in the right, it sometimes cannot sustain
the legal battles required to prove it. Diffraction Company had an
ironclad case against several firms which had pirated its diffraction
foils, but after $200,000 in legal fees, it threw in the towel.

	MANY commercial mass production processes today use not only the
off-axis transmission hologram (H1), but also the Benton white-light
transmission "rainbow" hologram (H2). At this time, Polaroid attorneys
have declined to enter into the fray concerning patents and licensing,
and have even offered a list of disclaimers with regards to the Benton

	One could speculate, however, that future enforcement of these
patents will be a matter of coqrse once the ABN issue is cleared up.

	It may be possible that in future, some inroads can be made by
class- action suits by consumers or producers of holograms. As Wavefront
went to press we heard rumors that several businesses in Europe are joining in a class-action 
suit against ABN over its
new patent on hot stamp foils, recently issued in Europe.

	Of that recent patent, McGrew says: "It covers things that I
know people have been doing since 1977. It's truly ridiculous. That's
what patent examiners are supposed to find out, but I have discovered,
much to my dismay, that examiners are human and very busy, and what they
like better than anything else is getting work off their desks. The
Holotron patents are a good example of that."

	HOWEVER ABN is not the only bad player. Says T.H. Jeong, head of
the physics department at Lake Forest College in Illinois and educator
of a great many holographers practising art and commercial applications
in the field: "Right now the holographic community is fragmented and
that's the worst thing, because each little group is trying to backbite
another little group."

	Steve Smith agrees, and offers a hypothetical example. Holographers
A, B, C and D separately visit a potential client. A tells him: "We're
the only ones who produce high-quality images. B, C and D do this wrong;
they don't deliver." Holographer B goes in and slanders A, C and D. And
so on down the line. "We know this because when we go to see people and
go over what can be done in a holographic image they say 'You guys are
the first ones who haven't slung mud all over the wall. So either you a)
don't know anything about holography at all or b) maybe you really are
legit and you just don't try to market that way but c) we're so turned
off by all of this that we've decided to stay out of it completely until
this issue clears up'."

	"It isn't just ABN doing this," says Smith. "This involves many
people who I thought were decent people, who got hungry. We used to sit
side by side in places like Lake Forest College and talk about the
excitement of doing holographic images. Now we know so much
junk about each other, it's amazing we aren't all writing

	What disturbs Smith is the effect on the field. "The guy who
hears six different versions of the story gets the perception of a field
mired in mud, and he loses his excitement over what he wanted to do.
We've seen that a number of times."

	The bottom line for Smith is this: Buyers are looking for high
quality origination and they're going to buy it from the person who does
it consistently at a reasonable price. He'd like to see holographers
stop the mudslinging and unite to present a clean face to everybody.

	Another problem that both Jeong and Smith identify is the existence
in holography of smooth operators who want fast bucks. "To me," says
Jeong, "the people who least deserve anything are people who didn't
create the idea, who have no love for holography, only see the dollar
sign and come in and grab it at the expense of all the people who have
sweated blood through the years--who have learned the art of holography
and have tried to carry the field forward scientifically and
artistically. I hope people have enough foresight to see that if people
stop creating holography, it won't go very far."

	For Smith, the people doing the most disservice in the holography
community right now are those who are marketing pulled together
contracts of photo-resist and embossing technology. "The new buyers of
this embossing technology think they have the whole package and all they
have to do is hire a technician out of a school of science and optics
for $15,000 or $20,000 a year to make very beautiful holograms for them.
Then they'll include that in their costs and devalue the worth of
holographic origination. These buyers have developed the view that the
holography is a hindrance to be gotten out of the way." To which Jeong
adds: "It's not enough to sell blank canvasses and paint brushes.
Somebody has to put paint on canvas, namely the creative people."

	Smith suggests that holographers interested in doing professional
art take a look at the field of professional photography for pointers on
how to do business. "We're image-makers in a new medium," he says. "We
deserve as much respect as any other image-maker, and why not look
towards that?"

	SMITH says he has been contacted by some of the buyers of these
embossing packages. They complain that their product doesn't look
anything like his,then ask him to show them how. "I say: 'No, I do this for a living.
If you want to buy this from me, you'll get the benefit of all my
knowledge as an image-maker. But I can't teach some guy standing in your
studio what lighting and composition are all about. That's something
that's felt. That's not something that is written on a piece of paper."

	MCGREW'S new 2D-3D patent has many holographers rushing for
their patent lawyers. "The patent describes a specific way of making the
2D part of 2D-3D," says McGrew. "It does not cover all ways of doing
2D-3D. The first three claims are method claims--they describe how a
process is done. They are not different methods; just different ways of
saying the same small thing, with small variations. The theory is that
if there are arguments over whether something was properly worded and
one claim gets knocked down, then you have something else that will

	The last claim is a product-by-process claim, McGrew says. "Any
product that's made by the process is covered by that claim, as opposed
to using the process."

	McGrew says Light Impressions does not intend to collect more
than one royalty on any product. "Say a holographer does a 2D hologram
for a client. He makes the master and has an embosser make copies from
the master, which he then sends to a client. According to patent law,
the inventor would have the right to charge royalties from anybody who
makes, uses or sells the patented process, apparatus or product. There's
more grey areas there and it's hard to say whether that's the case with
ours. However, if a process makes the product possible, then it's
reasonable to charge royalties for the product. The sensible thing to do
is charge a reasonable royalty that won't slow the sale; that lets
everyone stay in business and make money with a minimum of hassle.

	"So what I've elected to do is license holographers and embossers
and if the holographers want to pay the royalties instead of the
embossers, that's fine. If the embossers want to pay instead of the
holographers, that's fine. For the same part of a process, only one
royalty needs to be paid. So there's one royalty on origination' one on
embossing. And the royalty on embossing is at the manufacturers level."

	Smith's question about McGrew's new patent is: How much does one
owe to a patent person? "The royalty has to be indicative of the extent
of the use of the patent. If you used his technique to do a totally 2D
design, then you owe McGrew the full royalty. If you use only a tiny portion, say 
10 percent, then you should owe only a percentage, according to my lawyer."

	Smith also consulted a lawyer about the replication process, the
embossing of a hologram. "My lawyer says the embosser does not owe, nor
will he ever owe any money to any of these people on these patents,
because the embosser is not using a technology to reproduce these images
that involves anything to do with the patent."

	Smith predicts that within 30 years we'll see a whole series of
independent originating houses, like there are in photography today,
with as many independent replicating houses or embossing companies as
there are lithographers today. "This kind of creative competition is
what extends the quality of the image."

	Meanwhile, the debates go on. And on. Debates about the original
patents and about new ones. And the interpretations continue to swing
wildly back and forth depending on who is doing the interpreting. But
the bottom line still is that the claims were accepted and--the patents
were issued.

	JEONG feels that in an ironic way, the current battles in holography
are a good indication of its healthy state--the fact that people think
it's of great enough value to fight over. "My hope is that once the fog
clears on exactly who owns what, those who own patents will have the
foresight to assign reasonable royalties and give rights to pursue the
craft to people who do good work. Those who use others' patented ideas
should pay royalties if it's legitimately proven that such patents are
indeed sound. Just compensation should be given to the original
inventor. The person who should reap the greatest benefits from
holography, both in reputation and in financial reward-- since people are
making money--is Emmett Leith. He invented the thing!"

	But Leith has no illusions about what is due the inventor. "The
inventor doesn't get anything whatsoever. Companies don't share their
royalties or their patent profits with the inventors. I guess our
situation with the university is unusual in that we get nothing at all."

	To an inventor working for a company Leith would have this to
say: "Sure, invent. It's fun. Inventing is the most fun thing there is.
But whether your stuff gets patented or not is going to be determined by
the policy of your company. You have nothing to say about it."

	On the other hand, he says, an inventor who has his or her own
private company "has to make an economic judgment right there on the
basis of your profit motives."

	"If you're at the university, as I am, I would say don't patent.
We publish half a dozen papers in the course of a year and typically
they're just full of patentable things. But we don't patent them, which
throws them into the public domain. That's typical of the way things
work in a university. I'm perfectly happy that way."

	FOR Jeong's part, he would be perfectly happy to see holography
become a billion-dollar industry. "I want to see the field be open and
nourished rather than closed and restricted. I've been teaching
holographers all these years and I have an obligation to see that they
have something to do. I wouldn't want to train a lot of students into a
field they can't work in.

	"I see a possibility of a class-action suit if the holography
community becomes stifled and everyone's afraid of making holograms.
That means a consolidated effort, not representing one or another
individual, but a group which investigates the validity of all the

	Jeong is planning a forum on patents to air the issues in open
debate. The earliest he sees this happening is at the next SPIE
conference in January. The next possible gathering would be at Lake
Forest in the summer of 1988.

	"There's nothing like having everybody in one place and actually
responding to each other. I'd like to see American Bank Note send
someone, McGrew, Smith, everyone, the community at large, including
nameless holographers who are just--fearful. Let everyone who has
something to say on this matter speak, so that we all know where things
stand--facts, figures and opinions. Let's get together and talk about it.
That is the only way the waters can ever get cleared up."