Small Business: In a Real Crunch

David Roth's quirky idea for a restaurant--40 varieties of cereal served in a comfy, living-room-style café--has attracted both customers and attention with its playful décor and creative alternatives to greasy fast food. (Chex and Cheerios in chocolate soy milk with Pop Rocks, anyone?) Cereality's first three cafés, in Philadelphia, Tempe, Ariz., and Chicago, are thriving, but as the company tries to move from small-business start-up to national franchise, Roth has had to leave the fun and games aside to face a looming challenge for every new retail concept: once your idea proves itself, competitors flock, knowing that the initial risk has been taken. Roth is now facing serial cereal challengers--he calls them copycats--that have popped up looking for their own bite of this emerging restaurant segment. And like siblings squabbling over the last bowl of Froot Loops, the eateries are getting into a messy fight.

Cereality's competitors, mostly entrepreneurs like Roth, have included an Iowa City restaurant named Cereology, later redubbed the Cereal Cabinet; the Cereal Bowl in Miami; and Bowls: a Cereal Joint in Gainesville, Fla. "With any good business idea, you're faced with people who see you've cracked the code and who try to cash in on it," Roth says.

Although Roth and co-founder Rick Bacher initially saw themselves as little guys leaping into a cutthroat restaurant world when they opened their first store in 2003, they have in a sense become Goliaths. They have even partnered with giants like Dodge, Old Navy and Quaker. To protect itself, Cereality has applied for trademarks for its name and about 50 slogans it uses in signs and ads. (Be careful next time you say, "It's always Saturday morning," or ask over the breakfast table, "What's in your bowl?") It has also applied for patents covering dozens of business processes, from cereal-storage methods--no one likes stale granola--to ways of combining Kix and Trix in a takeout box.

And they called the lawyers. After hiring Perkins Coie LLP, the Seattle law firm that helped Amazon.com patent its one-click buying button, Cereality sent warning letters last summer to the Cereal Bowl and Bowls, admonishing them to avoid using similar-sounding product names and slogans. Cereal Bowl fought back, sending its own warning letter to Bowls and a defiant reply to Cereality. Sensing the competitive crunch, the Cereal Cabinet shuttered and switched to Jamaican food. In March, Cereality raised the stakes, suing yet another start-up, Ohio's Cerealicious, for trademark infringement.

"Some of Cereality's patent claims may be valid," says Kenneth Rader, 24, CEO of the Cereal Bowl, "but others are ridiculous." Rader acknowledges that it would be unfair for others to copy Cereality's method of serving cereal in Chinese-food containers, but he draws the line at Cereality's attempt to lay sole claim to the idea of mixing brand-name-candy toppings with cereal.