THE STAGGERING COST OF INVENTING
The cost to obtain a U.S. patent is overwhelming for most inventors. In 1850 an inventor could expect to pay around $50 to obtain a patent, a price that included the $30 government filing fee. Today that number is well above $25,000—a price that is mostly due to the problems in shepherding the application through the patent office.
Litigating a patent against an infringer is a whole different story. The outrageous cost of obtaining a patent pales in comparison with what it takes to enforce a patent. Although patent litigation has always been expensive, even during the boom times of the 1850s it is nothing compared to today.
The patent wars of the 1850s—the result patents being issued by the thousands in the 1830s and 1840s—were front-page news, in large part because of the personalities involved and the massive amounts of money invested in these cases. McCormick paid his lawyer Stanton $10,000, just to be topped by Goodyear, who paid Daniel Webster $15,000. A half century later, Henry Ford spent over $250,000 to prove that he did not infringe the industry-blocking Selden patent. These figures were widely circulated at the time, creating the impression that patent infringement cases were outlandishly expensive.
Today, the costs of even routine patent cases are in the millions. According a 2009 American Intellectual Property Law Association survey of the patent profession, costs to take a patent case to trial are based on the value of the damages. For cases valued over $25 million in damages, the data shows that it costs $3 million on average to get the case to the end of discovery and a total of $5.5 million to reach a jury decision. With these figures, how can anyone expect to enforce a patent—assuming they can get one in the first place?
It’s a nearly insurmountable obstacle facing small inventors and corporations. Suppose a small company discovers an infringer who just took several of the company’s accounts, selling them the infringing product at a lower price. The small company doesn’t want to sue, mostly because they don’t have the $5 million required to litigate. So what can this small company do? No start-up can afford to spend the money required to litigate and any sophisticated infringer knows that.
So the small company decides to sit down and talk with their competitor, in hopes that they will be reasonable and take a license. To get started, the start-up either calls the infringer or sends a letter explaining that they have a patent and they’d like to have a discussion about how to handle the infringing sales. Based on this action alone, the powerful corporation can run to court and sue the patent holder for what’s called a declaratory judgment, an action to have the patent declared invalid. They do this in a part of the country that is favorable to them, where they can be sure it will cost the small company a fortune to litigate. Now the patent holder must spend millions just to save its patent from being invalidated. Of course, the patent holder can counter claim for patent infringement, but if the small company doesn’t have a war chest of millions of dollars, they are only digging their grave with two shovels instead of one.
To avoid this, the small company must first file its own patent infringement suit in the jurisdiction they think is most favorable. They then call up the infringer, apologize for suing them while in the same breath explaining why they had to do it this way. Not a good way to start a settlement discussion. And, this course of action really isn’t an option because it involves suing the infringer, which that small company can’t afford.
Then what is a small company to do? Even with the odds stacked against America’s innovators, some strategies can still work within the patent system, although none of them are ideal. Patent holders can use the court system to their benefit in cases where potential damages from infringing sales are high. They can do so through the use of contingency litigation—where the patent holder hires a law firm that is willing to take the case for a portion of the fee. There are literally thousands of ways these deals can be structured, but they each involve the law firm getting a piece of the action. This gives the law firm an incentive to win the case because they now have a vested interest.
Contingency litigation, however, involves immense risk. To take a major piece of patent litigation all the way to trial could cost a law firm $5 million to $10 million, or even more. Being on the losing end can put even large law firms out of business if not managed appropriately. So before a law firm will take patent litigation on a contingency fee arrangement, they will want to compensate themselves for taking the risk. And the law firm’s take is based on the size of the damages award. For example, if a law firm receives one-third of the recovery, the law firm will want a case where it gets at least three times what it spends on the case. So, if the case requires the law firm to invest $5 million, the law firm will want to get paid $15 million if it wins. Because the law firm is getting a third of the recovery, the total damage award should be $45 million. Typically, damages are based on reasonable royalties, which often hover around 5%. To collect $45 million, that means there must by $900 million in infringing sales. Few products reach this amount of revenue generation.
Even so, patent holders can succeed and the stories are often heartwarming. Take the case Dr. James White, the college professor who invented a way for disk drives to read and write data without crashing. When Dr. White began his research, disk drives were constructed of a rotating disk, called a hard drive. The electronic component that recorded data onto the disk was called a read/write head. An arm held the head above the disk and moved it to the correct location to read or write the data. However, the head had to float above the disk surface by a set distance to record the data onto the disk and retrieve the stored information. The key to getting the whole thing to work was called a slider—the component that held the read/write head below the arm. As the disk started spinning, the slider would begin to float above the disk. Think of the slider as a miniature airplane flying above the disk surface. But if something changed the trajectory of the slider, usually when the disk was bumped, the slider would crash into the disk. Not only did this interfere with the recording of data, but it could ruin the disk.
Dr. White solved this problem by creating an aerodynamic design for the slider that kept it from crashing into the disk. He developed very elaborate computer models to simulate the flying conditions and kept changing the design until he found a stable slider configuration. Then he figured out a way to manufacture his design, using techniques from the semiconductor industry.
After being awarded his patent, Dr. White took his idea to the computer industry. They all loved the design—so much so that it ended up in the majority of disk drives. The problem was that nobody wanted to pay him for it. They stalled and stalled in their negotiations, knowing a college professor couldn’t possibly have enough money to bring a patent infringement suit. That’s when he came to my firm, where we decided to take the risk because the potential damages were massive. As a result, Dr. White sued most of the disk drive industry, most of which ended up taking licenses.
Dr. White’s case is rare. The vast majority of America’s inventors, or the people in America who should be inventing, aren’t so lucky. Our most important class of inventors—the solo tinkerer or small technological start-up company just introducing a product to market—find themselves in a gaping abyss, abandoned by our legal system. They have an innovative product with good sales, perhaps in the range of $10 million in revenue a year. They are lean and have almost no room in their budgets for extra expenses. Because they have a niche market, total annual sales might peak at $50 million, so when the big corporation comes in and takes $10 million of the market, it really hurts. Yet no law firm is going to be willing to take this on contingency. There just aren’t enough damages on the table. So here we have the bread and butter of America’s idea pool who are unable to enforce a patent—if they can even afford to obtain one.
Is there no hope?
Perhaps some, though not much. To reach a settlement, the patent holder needs to find some other way to make an attractive proposal to the infringer and bundle the patent as part of this business arrangement. Of course, this won’t give the patent holder the full value of his patent, but when there aren’t many other options, it’s one of the best. When going down this path, the patent holder must realize that flat out stopping an infringer is going to be tough. Offering a reasonable license in combination with other incentives is often a more realistic approach. And “reasonable” means a highly discounted royalty rate.
Perhaps the best example of this is T.J. Izzo, who invented the Izzo double-strap golf bag. Any serious golfer has seen this strap. Before its introduction, golfers (or caddies) toted the golf bag over one shoulder. With a heavy tour bag, this was worse than backpacking with a 70 pound pack, mainly because the weight was unevenly distributed on one shoulder. T.J. was a talented golfer and loved to hit the course whenever time permitted. He wouldn’t take a cart because he loved to walk for the exercise. But when he hurt his back, that all stopped because the single-strap bag kept pulling his back out, taking a toll on his golf game. In 1990, T.J. came up with the idea of a dual strap golf bag. His first prototype was made from towels and duct tape. From there, he marketed the dual strap bag out of his home in Evergreen, Colorado. A year later, he formed IZZO Systems, Inc.
T.J. wasn’t the first person to put two straps on a bag. That had been done at least a century before. What T.J. did invent was a way to use two straps while evenly distributing the weight and preventing the clubs from sliding out. If you’ve ever used one of T.J.’s bags you soon discover why they are so comfortable, enough so that nearly all the caddies on the PGA tour took to them instantly. The invention was so successful that Frank Thomas, technical director for the USGA, told Golfweek that “One of the four greatest innovations in modern golf is the double strap for golf bags, patented by T.J. Izzo.” The rave reviews also made the New York Times after T.J. signed up the Wilson Sporting Goods Company of River Grove, Illinois, as its first licensee. “The new bag is designed to balance the weight of clubs more evenly across the back than single-strap bags do.” The 1992 Times article stated. “‘Once you see it, it kind of hits you in the head,’ said Jim Grundberg, Wilson’s business manager for golf bags. ‘You can’t believe the idea hasn’t been around before.’”
After signing Wilson, T.J. found it tougher to make new deals. New licensees wanted the technology but didn’t want to pay the license fee. Some were worried about already razor-thin margins. Others felt as if no one should get a patent on a double-strapped golf bag. Then there were those who thought they could design around the patent.
Rather than file lawsuits—which T.J. was smart enough to see would get him nowhere—he took a different approach. He’d call up a big bag manufacturer, like Nike or Titleist, and invite their executives to play a round of golf, followed by a nice dinner. Then he’d schedule a business meeting with them the next day. Of course they knew he was trying to sell them a license, but few people will turn down a free day of golf and dinner. When it came time to discuss the details of the deal, T.J. explained why the world of golf would take to his new bag and that they didn’t want to be left behind. He offered them very reasonable royalty rates. But he also threw in other perks and incentives. He’d reduce his royalty rate even further if they’d let him do some advertising on their bags. His company also started sponsoring junior golf tournaments, which the golf equipment companies and the professional golf associations loved because it encouraged more people to golf. This generated immense goodwill and made it easy for manufacturers to want to do business with him.
Using this creative approach, T.J. was able to sign up most of the major equipment manufacturers before selling his company to well-funded investors who did have the money to enforce his patent—which they did. T.J. now dabbles in several other ventures, but mostly enjoys life while playing golf.
The problem with patent litigation is even worse if you are small and on the receiving end of a patent infringement case—where large corporations can almost shut down a competitor at will. It takes just as much money to defend a patent infringement case as it does to bring one. Because of this, if a large company wants to force an emerging competitor to spend $3 million, all it has to do is sue for patent infringement. It can take a start-up to bankruptcy almost overnight.
Several years ago, I received a call from Maverick, a highly innovative mountain biking company. Paul Turner, Maverick’s founder, was best known for inventing RockShox. He’d sold his interest in his previous company and was now marketing a new mountain bike frame. The new design had attracted many in the biking industry. The draw to this new frame was that it provided increased traction when going uphill, but was stiff enough on level ground to provide an efficient ride.
Maverick had filed for patent protection and was on the verge of joint development agreement with a leading mountain bike company. In an apparent effort to stall this deal, one of Maverick’s well funded competitors, a well known American bicycle company, threatened Maverick with a patent infringement suit, then forwarded a copy of its cease and desist letter to the potential partner. The threat of suit for patent infringement had the desired effect, bringing Maverick’s negotiations with the partner to a screeching halt. The potential partner backed out of the deal and terminated discussions. From Maverick’s perspective, this was pure harassment—and an actionable intervention in Maverick’s relationship with a potential joint venture partner.
The mood around Maverick was glum. On the verge of signing a major licensing deal, the company was now facing a multi-million dollar suit involving a patent that had almost no resemblance to Maverick’s design. So what could they do? Spending millions litigating didn’t make sense. But without a major partner, the technology would likely languish.
With few options, the company decided to take a gamble and went on the offensive. Maverick led off by filing a civil complaint against its competitor on January 10, 2001, in the United States District Court for the District of Colorado. In a nutshell, the complaint asked the court to declare the competitor patent invalid and to require the competing bicycle company to pay damages, attorneys’ fees, and costs in connection with its willful and bad faith interference with Maverick’s business relationship with the other bicycle company.
However, Maverick didn’t serve the complaint, giving the parties about three months in which to discuss settlement options before the law suit would really begin. After filing the complaint, Maverick sent the competitor a letter informing them of the lawsuit, and clearly stating that the revival of the business relationship between Maverick and the potential manufacturer was critical if the matter was to be resolved amicably and without litigation. Maverick also explained its plans to invalidate their patent because the invention claimed in the competitor’s patent was actually invented by Maverick several years earlier. Because Maverick made the invention well before the filing date of its competitor’s patent, Maverick planned to file appropriate paperwork to initiate an interference proceeding in the U.S. patent office. The anticipated outcome of this proceeding would be both a declaration that Maverick was the first inventor of the invention and an assignment of all relevant patent claims to Maverick.
The all-out attack had the desired outcome. After receiving this communication, Maverick’s accuser agreed to talk and the parties quickly came to terms on a settlement. Even with a quick settlement, Maverick incurred significant legal fees. But it could have been worse—a lot worse. If Maverick hadn’t had the funds to raise its defenses, the company could have quickly gone out of business, even if it eventually won at trial. Imagine how many mountain bikes a company would need to sell to make a million dollar profit. Even worse, while embroiled in a lawsuit, no manufacturer would be willing to keep doing business with Maverick. There are just too many other designs for them to choose from.