(FORTUNE Small Business) – Keri Beyer had every reason to think pottery Barn Kids would continue to treat her fairly. Back in 1995, Beyer had launched a children's furniture company in Stillwater, Minn., called Wigglestix. In her first few years she sold mostly to mom-and-pop furniture stores, but fulfilling small orders from a tiny bed-and-breakfast town on the Wisconsin border wasn't getting her anywhere. In 1999 she hit her first home run, when Pottery Barn Kids placed an order for $400,000 worth of furniture, more than Beyer's first three years of revenue combined.

So when Jennifer Kellor, a rep from Pottery Barn Kids, checked in a year and a half later to ask about new products at Wigglestix, Beyer was thrilled and says she anticipated another big order. Kellor twice flew out to Minnesota from Pottery Barn's headquarters in San Francisco and took digital photos of Beyer's latest pieces, including a scalloped bookshelf, a farmer's bench, and a wooden desk with a hutch. Kellor also wanted to know Beyer's thoughts on future lines and upcoming trends in the business. Back on the West Coast, Kellor phoned to ask for product samples, and Beyer enthusiastically complied. She had to pay her ten employees overtime to get everything finished, but says she figured it was worth it, as it allowed her to ship thousands of dollars' worth of merchandise overnight, including the bookshelf, the desk, two coat racks, a lemonade stand, and eight footstools (one in each color available).

For the next few months, Beyer heard nothing. She tried to check in, but all her e-mails and phone calls to Kellor went unreturned. When she reached other people at the company, she says, she was given excuses why they no longer seemed interested. "The price is too high," one person told her. "We still have footstools left over from last season," another explained.

Then the 2001 Pottery Barn Kids catalog came out. In it was a scalloped bookshelf that looked suspiciously like the Wigglestix bookshelf--smaller but with the same basic design. There was also a desk-and-hutch set strikingly similar to Beyer's, though it was priced almost $100 cheaper. Beyer says she was ashamed and angry, and thought about taking some kind of legal action but ultimately didn't. "It's not like I invented 'The Desk,' " she says. "And they changed the legs, so I couldn't be totally sure." Ironically enough, a different rep from Pottery Barn Kids contacted Beyer months after that, again asking if she might be willing to show the company some of her newer products. Of course Beyer refused.

Tracy Brown, the director of public relations for Williams-Sonoma, which owns Pottery Barn, disputes this version of events. "Wigglestix was unable to keep up with production, and we experienced serious quality issues with their products," Brown wrote in an e-mail. "We lost sales, and were disappointed that we were unable to continue doing business with them." Beyer acknowledges some production glitches but says that still doesn't justify what happened. "The fact is, they took my ideas and my products and ripped me off."

Her experience, although alarming, is not all that unusual, say many independent designers who have shown products to big companies and then seen similar versions suddenly appear in catalogs and stores. John McCarthy, president of a kids' clothing company called Mack & Moore, sold a unique $75 fuchsia coat made of fleece with flowers and stripes on it. He sent the coat to Kmart, along with a few other samples, in hopes of getting a contract, but Kmart said it wasn't signing any new vendors. A year later one of Mack & Moore's sales reps happened to be shopping in Kmart and found a knock-off of the fuchsia coat selling for less than $20. Similarly, Karen Krieger, who sells metal jewelry and frames to galleries, couldn't believe it when her cousin found a "cheapened and uglified" version of her signature "Change of Heart" picture frame, which she sells wholesale for $41, on the shelves at Target for $9.99. Some of the galleries Krieger dealt with dropped the suddenly less exclusive product, and her frame sales plummeted from $90,000 to $30,000.

Calls to Kmart, which is currently in bankruptcy proceedings, were not returned. A spokesman from Target, Douglas Kline, says that he's not aware of the incident with Krieger and her picture frames, but that the company has a huge reservoir of design partners and resources.

Experts say there's no way to quantify the monetary losses from this type of intellectual-property theft, since so much of it goes undetected and unreported. U.S. businesses as a whole lose some $200 billion a year because of counterfeit consumer goods, according to the International Anti-Counterfeiting Coalition. Most of that comes from big companies--particularly in the fashion business--having their stuff copied by small-timers (like those Chanel bags you see selling on city street corners for $15). But a growing component comes from knockoffs in the other direction--when big companies copy goods made by entrepreneurs. The problem is clearly getting worse, says Joel D. Joseph, the chairman and general counsel of the Made in the USA Foundation, which helps represent craftspeople in intellectual-property lawsuits against big retailers. One explanation has to do with simple economics--it's expensive for retail chains to come up with their own ideas, and much cheaper to simply borrow them from outsiders.

"In-house designers continue to develop the standard product line while the company looks outside for innovative ideas that they will license--or steal," says Krystina Castella, a designer and consultant who teaches at the Art Center College of Design in Pasadena. After that, the companies can get the products made cheaply overseas and undercut the original entrepreneurs on price.

Unfortunately, the people who see their work replicated elsewhere often say it's tough to stop. "As a small business person, there's only so many things you can do," says Beyer at Wigglestix. "Taking on Pottery Barn Kids seemed like it would use a lot of the resources that I don't have--time and money. I let go of the fact that there was not much I could or wanted to do to address their ripping me off."

What Pottery Barn, Kmart, and Target are accused of may be unethical, but is it illegal? After all, companies borrow from one another all the time. Different designers might hit on the same idea, and often the products in question aren't identical. "A crate is a crate, honey," Mitchell Salzman told his wife, Susan, when Pottery Barn Kids introduced a storage line similar to the one she'd come up with for their store, Little Folk Art, based in Santa Monica, Calif.

In fact, the precise difference between borrowing and stealing is often hard to pin down. "There is no bright-line rule," says Paul R. Levenson, an attorney who handles intellectual-property cases at Kaplan Gottbetter & Levenson in New York. "It's a case-by-case decision." Most entrepreneurs have long thought that infringement boils down to numbers--that if a company alters, say, 30% or more of an existing design it can avoid being sued. But Levenson says the percentage rule isn't legally valid. (And besides, the math can get fuzzy; what's 30% of a crate?) When pressed for specifics, Levenson explains that an infringer can't change the color of a design and call it his own. He can't change the size and call it his either. But can he change the proportion? Maybe. The shape? Yes.

Even if design theft isn't always black-and-white, however, some recent incidents seem pretty egregious, less like the sincerest form of flattery and more like flat-out copying. When Judi Boisson, owner of Judi Boisson American Home Collection, a home-furnishings company in Southampton, N.Y., recently sent a cease-and-desist letter to Lillian Vernon Corp. for copying one of her quilts, the company asked if it could continue selling the knockoff for another six months. Ingo Williams' company, Bedford/Downing Glass, had been successfully selling glass picture frames to upscale retailers, including Bloomingdale's and Barneys, for years before his idea started to be knocked off by everyone from Pottery Barn to Z Gallerie. "My frames are made by the Chinese army, Mexican Peyotes, Inuit Eskimos, and Indian children," he says. "But they are no longer my frames." One corporation, Fetco International, bought up a type of textured glass Williams used and shipped it to a Chinese manufacturer, so he had to stop making them for nearly six months.

David Hochberg, vice president of public affairs at Lillian Vernon Corp. in Rye, N.Y., says that the company never knowingly or willfully infringes on copyrighted artwork and immediately stops shipping any items in dispute until the dispute gets resolved. "Ninety-nine percent of the time these issues are settled out of court and amicably, with a royalty agreement for the designer," he adds. Fetco did not return calls by press time.

One of the most extreme examples involved X-IT, a tiny company started by two Harvard Business School students who came up with a collapsible fire-escape ladder for homes. They launched the company on a shoestring and even used a photograph of their own family members on the box because they couldn't afford models. Then Walter Kidde Portable Equipment, the largest U.S. maker of home-safety products, considered buying X-IT. Kidde signed a confidentiality agreement and looked at plans for the ladder, among other things, but then announced it wouldn't buy the company after all. A few months later Kidde introduced a ladder that not only was similar to X-IT's but came in identical packaging, with the same photograph of X-IT family members on the box.

Most of the several dozen designers interviewed for this story say the company with the worst reputation for knocking off original products is Pottery Barn. People are allegedly so spooked by the company that its buyers have taken to hiding their nametags at trade shows just to get designers to talk to them, according to Richard Stim, a California attorney who sued Pottery Barn for a client.

In some cases the company borrows not only the design of a product but the name as well. Jasmine Redfern designed a "Gumball Lamp" with a unique base of beads for her company, Whimsy Designs, based in Wesley Hills, N.Y. Redfern displayed her lamp at a big trade show but never sold it to Pottery Barn Kids. Yet a "Bubblegum Lamp" with a similar design appeared in the company's winter 2002 catalog. And Salzman, the designer in California, made an armoire with fabric on the inside of the doors and named it the "Samantha" armoire, after a young client who was the original benefactor of the piece. A "Samantha Armoire," also with fabric lining the inside of the doors, started appearing in the Pottery Barn Kids' winter 1999 catalog and is still available.

"We often take inspiration from antiques, classic designs, forms, and historical styles (none of which are patented or under any copyright)," responded Brown, the PR woman for Williams-Sonoma and Pottery Barn, in an e-mail. "These ideas are then evolved into unique and stylish products by our own team."

But some entrepreneurs don't see it that way, and they're trying to fight back. (For advice on steps you can take, see "Protecting Yourself.") Judi Boisson, the quilt designer, says she'll go to any length to stop copyright infringers. She sued Pottery Barn Kids in 1999 for copying her "galaxy" quilt; that case was settled out of court and Boisson is restricted from discussing the outcome. She has also won more than $1 million from other big retailers, including QVC, Target, and Burlington Coat Factory.

"There's no basis for this outrage," says Stacy J. Haigney, the general attorney for the Burlington Coat Factory Warehouse. "If by chance we do infringe, there are judicial remedies for the copyright holder. In this case the manufacturer paid for the damages." A QVC spokesman declined to comment.

Even more striking, X-IT, the tiny company that made the fire-escape ladder, sued Kidde last year and won the biggest civil jury verdict in Virginia history: $116 million (it will probably be reduced by the judge). Kidde declined to comment.

Taking on a big company can be expensive, though. In intellectual-property lawsuits in which less than $1 million is at stake, attorneys' fees and costs average $400,000, according to Penta Advisory Services in Washington, D.C., a consulting company. When $1 million to $10 million is at stake, the fees average $1 million. Most small businesses can't afford that, especially when the outcome is so uncertain. Aldo DiBelardino, co-founder and director of X-IT, had to remortgage his house and dip into his retirement savings to cover his legal costs for the lawsuit against Kidde. And even though his company won in court, he says some bills still remain unpaid, as X-IT hasn't yet received the check for damages.

Entrepreneurs who can't afford a prolonged legal battle often have to come up with more creative ways to retaliate. "Their lawyers can eat my lawyers," says Michael Craig, co-owner and designer at furniture company M. Craig & Co. in Columbia, S.C. His alternative plan: Humiliate them. In Craig's most brazen retaliation, he invited the trade press to watch as he dumped lacquer thinner on a knockoff of his flagship product, the Railroad Baron's bed (an opulent piece made of Honduras mahogany with hidden compartments), and then set it on fire. Another time he took out an advertisement in a trade paper and invited people to M. Craig's fictitious "semiannual knockoff sale," where he advertised that shop drawings would be given out at the door.

There are a few bright spots, however. A few organizations have stepped in to help. Karen Krieger, who had her picture frames copied by Target and was unable to foot steep attorneys' bills or risk her company's financial future, contacted the Made in the USA Foundation, a nonprofit based in Bethesda, Md., for help. In 1999 the foundation created the American Crafts Project, which has since represented more than 50 crafts designers pro bono and filed 20 lawsuits in federal court against stores and distributors (including Wal-Mart, Target, and Kohl's) that were selling foreign-made knockoffs of U.S. designs. The group has a decent track record so far: Courts have granted three injunctions to stop illegal copying, and a dozen accused companies have agreed voluntarily to stop.

Some designers remain fatalistic about the problem, however. Ingo Williams, the designer who makes picture frames in Brooklyn, steadfastly refuses to patent his products or sue. "Intellectual property is not a retirement fund," he says, adding that he wonders whether getting knocked off is the natural evolution of a good idea. His somewhat stoic strategy is to always stay ahead of the big companies and keep coming up with better products.

Others simply give up. Lisa Graves, owner of a jewelry and home accessories company in Oakland called Asil (that's "Lisa" spelled backward), says she repeatedly had her best stuff stolen. She sued Pottery Barn in 1995 to force the company to stop copying her bird-nest napkin rings (the case was ultimately settled out of court). She came up with intricate, aluminum wire-wrapped Christmas lights that miraculously appeared in Target soon after. And at a trade show once, one of her sales reps noticed a woman wearing earrings in a distinctive heart-shaped pattern identical to the set Graves had come up with. Graves says she did some digging and found out her earrings were being sold at stores like Express, owned by the Limited, and Contempo Casuals. She did a little more digging and found out that the knockoff earrings literally had her fingerprints on them--three manufacturers had made a mold of her original bronze version, which included an incidental thumbmark, and used it to reproduce their own copy. (Graves filed cease-and-desist letters against the retailers and manufacturers, and all cases were settled out of court.)

After 15 years in the business, Graves says, she's decided to change careers and do landscape design instead. "Things have really changed," she says. "It's more and more of a struggle to be a small designer. You can't compete."