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Brea Firm Won’t Give Up on Nintendo : Patent Fight: Color Dreams founder says he can now compete legally with Japanese company in marketing video game.

TIMES STAFF WRITER

A small local company’s daring effort to loosen Nintendo of America’s chokehold on the video game industry received at least a temporary setback this week when a federal court ruled that retailers can be held liable if they carry products that infringe on Nintendo patents.

Color Dreams says it has developed a legal way of circumventing Nintendo’s patents and is marketing seven video games that work on the highly popular Nintendo system but are not licensed by the Japanese company.

But the court ruling, part of a complex legal battle between Nintendo and Atari Games, is likely to make toy retailers even more reluctant to carry products that don’t display the official Nintendo seal.

“I would be skeptical of carrying (unlicensed Nintendo games) because I wouldn’t know about their quality,” said Larry Ruflin, owner of Toy Express in Anaheim. “And reading that Nintendo can sue retailers--that would help keep it off the shelves.”

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But Daniel Lawton, the self-educated computer wizard who founded Color Dreams last year, is undeterred. “We can stand up and say we’re legal,” he declared, “and we’re competing nicely right now.” He said Color Dreams games have already “saturated” the video-game rental marketplace, and that it’s only a matter of time until major retailers begin selling them.

The controversy surrounding Nintendo centers on the company’s determination to control the production and distribution of the individual game cartridges that play on the Nintendo Entertainment System machine. Nintendo says such control is necessary to prevent the shoddy quality and overproduction that virtually destroyed the computer-game business in the early 1980s.

To ensure that games are produced only by Nintendo-licensed software developers--who must pass rigorous quality-control tests, accept strict limits on the number of games that they can produce and agree to let Nintendo manufacture the cartridges--Nintendo has developed a patented security system.

The patents are for a pair of microprocessors--one in the game-playing machine and one in the cartridge--that exchange special numerical routines when the cartridge is inserted. If the cartridge doesn’t have the patented chip, the game won’t function.

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Nintendo sued Atari Games early last year for violating the patent on this so-called “lock-out chip” and another patent on the design of the cartridge, and Atari sued Nintendo for patent infringement and monopolistic trade practices. The case is not scheduled to go to trial until next year in U.S. District Court in San Francisco.

On Wednesday, a federal appeals court in Washington overturned a district court ruling that prevented either party from suing retailers who carried the games.

Color Dreams, however, says it has developed a way to circumvent the lock-out device without violating the Nintendo patent. Lawton won’t say exactly how it’s done since his technique is not yet patented, but he cites the fact that Nintendo has not yet sued as evidence that the system is not considered a violation.

John Kirby, an attorney for Nintendo, said the company is still analyzing the Color Dreams cartridges to determine what action to take. He noted that Nintendo was “very careful about protecting trademark rights” as well as patent rights.

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A patent attorney familiar with the situation, who asked not to be identified, said it appeared that the Color Dreams games did not infringe the Nintendo patents, and that Color Dreams could avoid trademark problems by using the Nintendo name carefully. But retailers “won’t take the risk with unlicensed games until there is a large body of stuff out there,” said the attorney, who is not involved with either party.

Lawton said that major retailers have rejected the Color Dreams games despite incentives offered by the Brea firm, and he suspects Nintendo of pressuring the stores not to sell his products.

“We’ve offered them at significantly lower prices; we’ve offered guaranteed returns; we’ve offered to make special games just for them,” he said. “But the retailers are afraid they won’t get their full Christmas shipment” of games from Nintendo. Nintendo denies engaging in unfair marketing practices.

Color Dreams, though, believes that its products will soon be irresistible. The company is planning a new “super-cartridge” using a microprocessor that it claims will provide much better graphics and sound than other games on the market. The company, which now employs about 50 people and also uses independent software engineers, has a liberal licensing policy to encourage quality games from outside developers; it now has two licensees.

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Color Dreams also offers to produce customer-specific games that a store or any other company could use as a promotional device.

And Lawton also believes that Color Dreams’ U.S. identity will help. He said Nintendo’s Japanese roots are reflected in the themes used in its games, and that an American firm can do a much better job of creating entertainment for the American market.

“They don’t begin to understand how to make something that Americans will think is funny,” Lawton said. And he hopes that just a little bit of patriotism--Color Dreams games are developed and manufactured in the United States--might help too.

Lawton said he expects at least four more companies to soon begin marketing unlicensed Nintendo games using other methods of getting around the patents, but he’s not worried about them either. “We worked 16 hours a day for a year to get this thing up and running,” he said. “I wish them well.”

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