Invention breeds invention.
—RALPH WALDO EMERSON
SOLVING ONE PROBLEM creates new ones. Every invention, then, presents an opportunity for the inventor to build on its ideas or to solve the unanticipated problems that it may have produced. One good insight is almost never enough to achieve a breakthrough or trigger a transformation. But whoever comes up with one insight is the most likely person to generate another idea that makes the original one far more valuable. The inventor may also bounce the initial idea off of someone else, who then adds to it or implements it in an unexpected way. When ideas and inventions accumulate in this way, there is a powerful multiplying effect. A series of brainstorms may yield an idea that rates a solid eight on a scale of ten. But if you can build on it with a follow-on insight that also rates an eight, suddenly you have a sixty-four. If you keep at it, layering insight on top of insight, you can build something worth a million.
More significant than the seminal idea is the inventive process that follows—the explosion of eurekas that leads to the complex end result that the world recognizes as a complete invention. “Discovery is almost never a single idea,” wrote Hungarian mathematician George Pólya. “Always look for new, related problems after solving the initial one.”1 If the original idea is elegant enough, it should by its own virtue lead to an exponentially more valuable cluster of insights.
Ronald A. Katz has been multiplying insights in this way for more than forty years. Katz didn’t set out to be an inventor, and yet he unleashed this thinking strategy so methodically that he has quietly become the most financially successful inventor in history. He has never studied engineering or computer science, and yet he was the first to sketch out a critical set of new information technologies that the world would want and need, an achievement that has put many major corporations on the defensive. He has never worked in a corporate research lab, and yet he has created sophisticated new business models that enable him to be compensated for his ideas. He didn’t even consider himself an inventor until more than ten years into his career, when the company he cofounded was struggling to survive and he resorted to licensing his patents as a way of keeping the business afloat. His inventions have made him extremely wealthy, and yet he has received remarkably little recognition.
These days, Ron Katz works in a six-room suite in a low-rise office building just off Sunset Boulevard in Beverly Hills. The small staff of Ronald A. Katz Technology Licensing, L.P., consists of attorneys and administrators who draw up contracts, resolve disputes, and process an avalanche of improbably fat checks sent in by dozens of famous corporations. A visitor sees no clutter, no gadgets, no machine tools, and no engineers at graphical workstations. Except for the fact that the walls of Katz’s conference room are lined with plaques displaying his portfolio of patents, the place bears no resemblance to what one would expect of an inventor’s lair. But what happens here is only the end result of an epic process of layering one insight upon another.
Katz grew up in an inventive family. Born in Cleveland in 1936, he moved with his family to Los Angeles when he was eight years old. He traces his ingenuity to his father, Mickey Katz, a Borscht Belt musician, composer, lyricist, and comedian. The elder Katz gained fame for Jewish self-parody songs such as “Duvid Crockett,” “How Much Is That Pickle in the Window?” and “Knish Doctor” on albums with titles such as “Comin’ Round the Katzskills” and “Greatest Shticks.” A clarinet and saxophone player in the Spike Jones band and later the leader of his own touring troupe called The Borscht Capades, Mickey Katz was a practitioner of what his son calls a “genius form of klezmer,” the wildly spirited and improvisational genre of Jewish jazz.
Ron Katz’s older brother, Joel, went into the family business. After touring with their father’s stage show as a teenager and moving to New York City, Joel changed his last name to Grey. Some years later, he originated the role of the outrageous master of ceremonies who shared the stage with Liza Minnelli in Cabaret, winning a Tony for his performance in the 1996 musical and then an Oscar for best supporting actor in the 1972 film adaptation.
Instead of following his father and only sibling into the world of entertainment, Ron Katz has made a career of proving that plenty of good can come from sitting alone in your room. Building on insights that he had in the 1960s and 1970s, he developed his most valuable inventions in the mid-1980s working by himself in his home office. Joel Grey has always been wowed by his younger brother’s persistence. “Even as a kid, he was always out hustling and selling his ideas,” says Grey. “He is a phenomenal brain. He’s tenacious about what he believes in. I’ve seen him struggle. But he’s always stayed with it. He never lets it go.”2
The seed of Ron Katz’s thicket of insights was planted more than forty years ago. After graduating from UCLA with a business degree in 1958, Katz took a job as an accountant at a large dam-building project three hundred miles north of Los Angeles, living in a one-bedroom trailer with his wife and young son. Like almost everyone else, Katz took his paycheck directly to the grocery store. That simple experience led to an initial set of ideas. Years before the advent of credit cards, credit reports, automatic credit authorization, and the marriage of computers and telephones, Katz began thinking about all these things.
“I was fascinated by the inefficient way that checks were approved,” Katz recalls. “You’d go to the grocery store with your personal check or paycheck to get your food and some cash back. The grocers were the check cashers, and they still are in many cases. At the very most, they took your driver’s license number, and they may have looked at a typed list, by last name, of people who had cashed bad checks. This didn’t seem to make sense. It was a system that led to bad behavior because people recognized that the system was so limited.”3
A year later, Katz moved with his family back to Los Angeles to take a job as an administrative assistant at the computer division of industrial giant Bendix Corp. As he learned about the versatility of computers, he began to imagine a new application: a computerized service for authorizing checks. “What you really needed was a list of everyone’s IDs, and something that was dynamic, something that could verify a check in real time. You needed to look at the history and the patterns of the proffered IDs—not just the cashing of bad checks but the patterns and the number of checks they cashed.” He ran the idea by Robert Goldman, an older colleague and friend. An electrical engineering graduate of Cornell, Goldman was then the director of technical information at Bendix. Based on their excitement about this new idea, the two men quit their jobs and started their own company. Instead of calling it Goldman Katz, the pair came up with the name Telecredit, which opened for business in a one-room office above a shopping center in Brentwood, California, in 1961.
Over the next several months, Goldman wrote a special program for a modified early IBM mainframe based on his and Katz’s concepts; meanwhile, Katz obtained the numbering system for the state’s 8.5 million driver’s licenses from the Department of Motor Vehicles, along with a current list of bad check writers from the Los Angeles police department. The LAPD cooperated because Telecredit promised to help solve the department’s overflow of cases. Whenever a merchant received a bad, stolen, or forged check, the evidence was turned over to law enforcement for investigation and prosecution. Nationally, the FBI had pegged check fraud as a $1 billion sinkhole for banks and merchants, and J. Edgar Hoover was cursing “fountain-pen bandits.”
Early subscribers to the Telecredit service, including the Ralph’s chain of supermarkets and the Sears, Montgomery Ward, and May department stores, typically paid twenty cents per call to verify checks over the phone. Operators at Telecredit did two things: They typed the license numbers into the system to see whether the customer had a history of writing bad checks, and they asked for eye color and date of birth to guard against fake licenses, entering that data into the system as well. “This data never before existed on computer,” Katz says. “This was as high tech as you could imagine for 1961.”4
As the service gained critical mass, people began to take notice. IBM sent a film crew to document the Telecredit application for its sales force and customers. In early 1963, Time magazine featured the company in a short piece, under the headline “Checking the Bouncers.” Almost as an afterthought, Katz hired a young and talented patent attorney he had worked with at Bendix and filed for a patent on the basic system of “real-time, online, credit authorization,” just to protect the company’s basic idea.
Success led to a certain sort of chaos. “People began to depend on us,” Katz says. Telecredit grew to hundreds of employees taking up three floors in a building in Century City, California, and the LAPD insisted on installing a special hotline there. Whenever a bad check writer was uncovered—something that happened two thousand times in 1964 alone—an off-duty police officer working at Telecredit phoned the LAPD dispatch center, which sent a patrol car to the scene. An officer would say something like, “We have a bad check writer at the Ralph’s on 420 Fulton.”
Often, check kiters were involved in more serious crimes, and sometimes they had guns. Occasionally, shootouts erupted as police and security officers chased an alleged criminal from a store to a getaway car. Telecredit was becoming like a branch of the LAPD. Anyone who has seen the movie Catch Me If You Can, based on a true story and starring Leonardo DiCaprio and Tom Hanks, has a sense of what it was like to stop check kiting in the 1960s. “This was going on twenty-four hours a day,” Katz says. “It was an exciting but very wild time.”
The business model was a little bit wild, too. Telecredit was charging twenty cents per call, and it was costing the company forty cents per call to operate the service. Katz spotted a newspaper ad touting the practice of going public as a way to raise money, and that led to his and Goldman’s decision to sell 155,000 shares in the company for $1 each. Telecredit was now a public company in constant need of cash, and it took on hundreds of thousands of dollars in debt. The company didn’t have a single profitable month during the 1960s.
But Katz and Goldman had invented what later would be recognized as the first computer-automated call center providing online real-time credit authorization—and they continued to innovate. “It was like a laboratory,” Katz says. “The creative stimulus was seeing how things work and thinking how they could work better.” The two men didn’t yet consider themselves inventors, only entrepreneurs who had new ideas as a by-product of growing the business. To improve the economics of approving checks, they developed a real-time credit-authorization terminal that eliminated the human operator. When store clerks punched in an account number, the terminal consulted a remote database and spit back a verdict. The terminal had three lights: green if there was nothing negative on the check writer’s record, red if there was a negative history, and yellow if the customer was trying to cash a second check in the same day. Telecredit was successful in selling to a number of banks what were the first point-of-sale real-time credit-authorization terminals that accessed and updated a central database.
To protect their ideas, Katz and Goldman continued to file for U.S. patents, including one for a related idea that later became quite valuable. “Magnetic stripe cards had just come out,” Katz recalls. The two entrepreneurs had an idea for creating a card-reading processor device to allow people at the point of sale to verify their credit without going to a central database. Goldman then suggested that the cardholder’s account data be embedded on the magnetic strips; in this way, cardholders could identify themselves by swiping their cards through the machine, which would read the data and allow cardholders to perform account functions. At the end of the transaction, the system could update the customer’s account. No one knew it at the time, but Goldman had invented a core element of what soon became known as the automatic teller machine.
All this work and creativity took its toll. As is typical of hard-driving entrepreneurs, both Katz and Goldman were physically burning out. “We had run this incredible, leading-edge business—we caught crooks, and we allowed honest customers to move through the lines faster,” Katz says. “But it was extremely demanding. We were sleeping on the floor of the office some nights, and we were cash-poor.” Goldman was looking to retire and soon did, and Katz was looking to raise more money and bring in professional management.
On a fund-raising trip in 1968, Katz was riding an elevator in New York when he was introduced to an investment banker and former Marine named Lee Ault. “He told me about his company and convinced me to attend a presentation,” Ault recalls.5 Instead of just helping to raise money for Telecredit, Ault also signed on to become its CEO. The company was still considered a hot technology start-up, Ault says, with stock trading in the 50s, but it desperately needed to start turning a profit.
Soon after Ault joined the company, however, Telecredit was hit with a nasty class action lawsuit. To recoup the rising costs of the Telecredit service, grocers had begun charging customers ten cents per check if they wanted to get cash back, continuing to charge customers nothing to cash a check to buy groceries only. Lawyers grouped some outraged customers and filed suit against Safeway, Ralph’s, and other supermarkets, an action that prompted those grocers to drop the Telecredit service. The news sent the company’s stock below $2, and Telecredit was forced to lay off four hundred workers. “We’re lucky we didn’t go broke,” says Ault.
In dire need of cash, Katz came up with a plan to license Telecredit’s patents to other companies. “Since I had a good understanding of the technology,” Katz says, “I believed I could engage in useful discussions.”6 By then, however, many of the technologies that Telecredit had pioneered were coming into widespread use. Online, real-time telephone credit authorization was becoming popular. The point-of-sale authorization terminal and the automated teller machine were already on the market from a variety of banks and manufacturers. Naturally, no one wanted to pay to license a technology they were already using.
“I remember one meeting with the CEO of major bank,” Ault recalls.7 Ault was there with Katz in the hope of striking a patent licensing agreement when the CEO lost his temper. “He was shouting obscenities,” says Ault. “The veins were sticking out of his neck. I thought he was going to have a coronary.” Katz backed off, allowing the CEO to cool down. Katz later returned with a counterproposal. Instead of subjecting himself to a possible infringement action, the bank CEO decided it was better to pay for a license.
Ault was amazed at Katz’s negotiation skills. “He’s the best negotiator I’ve ever seen, and I’ve been told by lawyers that he has the best mind for patent law that they’ve ever seen. He can read a patent and decipher it and know it backwards and forwards. He knows the field in the way that a Wayne Gretzky or a Larry Bird knows which way all the other players are going at any given moment.” When people would ask Ault whether Ron Katz was at all like his Oscar-winning brother, Ault would say, “The difference between Ron and Joel is that when Ron is on his stage, he doesn’t need a script.”
In one negotiation after another, Katz not only prevailed and reached settlements with leading financial and technology companies but also usually did it in a way that preserved a cooperative relationship going forward. “He would always end up with them in his back pocket,” says Ault. Telecredit got virtually every maker of ATMs—including Diebold, Docutel, and IBM—to license its patents. The few legal actions Telecredit initiated were settled under favorable terms.
Katz’s patent-licensing program brought in $10 million from more than twenty companies over two years in the early 1970s, revenue that put the company on track for steady profitability. “This was a good thing,” Katz says. “Payment was recognition of the inventions. We were able to capitalize on our innovative status for the first time.”8 Only when he started to license the patents did Ronald Katz begin to consider himself first and foremost an inventor.
Now Katz accelerated the pace of his inventions. He stepped back from day-to-day involvement in Telecredit, leaving the company in the hands of Lee Ault, and focused on building upon his ideas. “Ron always had a great fascination with online systems,” says Ault.9 (Ault eventually sold the company to Equifax, which spun it off as Certegy Inc., which remains a profitable, billion-dollar company that trades on the New York Stock Exchange.) “Ron learned a lot in building Telecredit, and what he did after naturally evolved from it,” adds Ault. “It was a cumulative thing.”
It was also a legal thing. Inventors need an incentive to keep following up on their ideas. Patents are their legal tool for protecting their ideas and extracting value from those insights. In the preceding decades, patents had become notoriously difficult to enforce. Judges in certain parts of the country were considered pro-patent, and judges in other parts of the country were considered anti-patent. Corporations in danger of being sued by outside inventors tended to locate themselves in anti-patent jurisdictions or, better yet, to influence the process so that politicians appointed anti-patent judges. This uneven and capricious system of patent enforcement had endured for the previous half century, to the point that it became exceedingly rare for an independent inventor to win a case against a corporation. That’s one reason Katz had always aimed to negotiate and avoid going to court.
But in 1982, everything turned around. That’s when the U.S. Court of Appeals for the Federal Circuit was established to hear all appeals of federal patent cases. With far more knowledgeable judges and uniform guidelines for patent enforcement, for the first time inventors now had something akin to a level playing field. This new central authority sent a clear message to the corporate world. This was the court that ended up ruling, in 1991, that Kodak had infringed on Polaroid’s instant photography patents. The judge ordered Kodak to exit that business immediately and pay Polaroid nearly $1 billion in damages, a record. “This was a clarion call to the marketplace,” says Katz. “Patents would be enforced uniformly. You now got a fair shot to make your case, and if you won you got money, and the other guy had to stop what he was doing.”10
Katz familiarized himself not only with patent law but also with the new field of alternative dispute resolution. Based on some of the negotiation principles he put in practice at Telecredit in the late 1970s, Katz codeveloped the nation’s first minitrial, Telecredit v. TRW. Following that, he led a project called the UCLA Minitrial Experimental Program, a joint undertaking of the schools of law and business at UCLA. The two-day program involved twenty CEOs and their general counsels, half of them representing the plaintiff in a mock trademark dispute, and the other half representing the defendant. After completion of both sides’ presentations and comments from the adviser, one CEO for the plaintiff was paired with one CEO for the defendant, and the pairs were asked to try to resolve the matter. Nine of the ten teams ended up resolving the dispute in the same way. “It showed that these senior business guys are problem solvers,” Katz says. The minitrial concept caught on and saved companies millions of dollars. It also gave Katz unique insight into what motivates corporations to resolve disputes quickly.
Armed with this insight, emboldened by the favorable changes in the patent laws, and again looking for something new to invent, Katz set up shop in his home office in Holmby Hills, California. Sketching ideas on yellow legal pads, he began to think more broadly about the ideas he had pioneered with Telecredit, especially the ramifications of marrying computers with telephones. He homed in on the computerized call center. The advent of the touchtone phone, caller identification, advanced database software, and other technologies, he thought, would lead to new applications at such call centers. Customers contacting companies to buy products, receive service, request information, or obtain check balances and transfer money could be presented with a whole new set of services. According to Katz, these are the thoughts that he had in the mid-1980s, ideas that formed the basis of the most creative time in his career.
“Inventions often germinate from an initial idea, but they encompass many ideas,” Katz says. “It’s like a cluster bomb. After jotting down the initial idea, almost overnight you’ll have more and more ways to make it more exciting and more interesting. With me, it was a sine wave—the number of ideas going up, then settling down, then going up. You may think you’ve got it, and you give it to the patent lawyer, but that’s only the start. Then the explosions begin again.”
Among the first patents in this new group was a “Statistical Analysis System for Use With Public Communication Facility.” This was a system “to provide digital data that is identified for positive association with a caller and is stored for processing,” according to one of Katz’s patent disclosures. The facility, or call center, would contain a database that served individual callers. The callers would use their touchtone keypads to input choices over the telephone. The database would process those responses, providing callers with a wide range of interactive services. Accessing the caller’s file, the system would transfer the caller to a live operator, who would view the data on file and provide additional services. This was not only an extremely broad concept but also a potential platform for thousands of interactive call-center features and applications.
In the mid-1980s, when Katz was working on these patent applications, such features and applications were not yet in use. If they had been proven to have been in commercial use for more than a year, the patents would have been rendered invalid. There’s no question that Katz exploited an open window for a set of technologies that his critics would later say were inevitable, no matter who was filing patents to disclose these ideas first. Among the many other methods that Katz disclosed was a process that relates to what happens after customers receive a new credit card. Customers call the credit card company from their home phones to activate their cards. That triggers a remote computer to match the cardholder’s phone number on file with the incoming caller-ID number. The system then requests that callers enter the last four digits of their social security number. With that, the card is activated once and only once for use. “That was my idea, the underlying technology to make it happen,” Katz says. But it was only one of hundreds of interrelated ideas that Katz kept having, one after another.
After the first three patents that covered this broad system of ideas were issued, Katz decided that it was time to put these ideas into action. Paper patents are one thing, but patents that are actually being exploited by a major corporation have far more economic value. The corporation using such patents would have a financial incentive to protect its edge in the marketplace. Katz needed a big corporation not only to recognize the value of his ideas but also to work with him to commercialize and enforce his patents. He went searching for a corporation that fit the bill, and he found a willing partner in American Express.
In 1988, Katz met with Henry “Ric” Duques, the chief of an information services unit at American Express that soon was spun off as First Data Corporation. Duques already knew about Katz because he had been approached about acquiring Telecredit a year earlier. At the time, Duques was on the verge of becoming one of the most powerful figures in the multitrillion-dollar credit card industry. After First Data was spun off from American Express, Duques had built it into a giant with a $30 billion market capitalization and twenty-eight thousand employees. First Data provides the behind-the-scenes technology for banks and retailers to verify and process the transactions of two-thirds of all U.S. credit card holders. “Some speculate that First Data now has enough scale that it could bypass the Visa and MasterCard networks if it wanted to,” said Credit Card Management in 2002, the year Duques retired from First Data.11
In 1988, though, Duques was only a rising executive looking for new ideas. “I loved his energy,” recalls Duques. “When Katz got on a project, he would call you every day to follow up.”12 Duques also appreciated Katz’s sense of humor. “When I found out his brother is Joel Grey and I asked him about it, Katz said, ‘Yes, I was the one who changed my name.’”
The two formed a joint venture, FDR Interactive Technologies (later named Call Interactive), half of it owned by the First Data unit of American Express and half of it owned by Ronald Katz. The new company set up an interactive call-processing center in Omaha, Nebraska. In 1989, it signed up clients ranging from the New York Times Company to Philip Morris to CBS News. ABC’s Monday Night Football used the technology to conduct live polls, asking millions of viewers their opinions on various gridiron matters. After a phone number was flashed on screen, the Call Interactive systems processed the calls automatically and then tabulated and flashed the results back to the viewer. Candymaker Mars Incorporated used the service to stage a nationwide vote on the next new M&M color. “We are the reason that there are blue M&Ms today,” says Duques. “This was cutting-edge stuff at the time.”
The joint venture brought in millions of dollars of revenue, but again it wasn’t profitable because the costs of starting the business and deploying the new technology were high. The technology itself, though, was a big hit, and it attracted rivals. After a small competitor brought out similar interactive call-center technology, FDR filed an infringement suit; the case was settled with a modest cash payment plus a permanent injunction enjoining the competitor from further use of the patented technology. Then a much larger rival, West Interactive, got into the market, undercut Call Interactive on price, and began attracting a lot of business. “The market got commoditized,” says Duques. “The technology was easily duplicated.”
When Katz and Duques approached West Interactive about taking out a license for the technology, threatening a lawsuit if it refused, the West executives were furious. They drew a line in the sand, according to Duques. “You think you can patent air!” Duques recalls the executive saying. “We will never pay you for this!” But after the litigation and negotiations were over, it was a different story. “They paid,” says Duques. West Interactive eventually paid $4.4 million as an initial payment plus ongoing royalties for the patent license. “Katz had an intellectually sound argument,” says Duques. “The law says that you can indeed patent a process.” Ironically, as is Katz’s bent, he developed an excellent relationship with the West executives after the suit, and he and West recently jointly developed and patented a new technology “Methods and Apparatus for Intelligent Selection of Goods and Services in Telephonic and Electronic Commerce.”
The West episode served as a source of additional insights. Practicing your ideas and enforcing your ideas in the marketplace naturally lead to follow-on ideas. Craving to devote himself again to full-time invention, in 1990 Katz sold his interest in the joint venture, which included his existing call-center patent portfolio, to First Data, netting more than $4 million. Meanwhile, he was again furiously working for FDR as a consultant, prosecuting patent claims for customizing automated call services and enhancing the FDR-owned patent portfolio. “If you call a company . . . and they ask you if you want chicken powder and you say no, the next time they shouldn’t have to ask you if you want chicken powder,” Katz says. “This shortens the call. It’s intelligent and efficient.”13 Katz patented a method of performing these kinds of customized call-processing services. He stayed on as a consultant for a couple of years, continuing to enlarge First Data’s portfolio of his patents. By the time he left in 1992, Call Interactive was bringing in about $80 million in annual revenue.
What Katz did next was probably the riskiest and most unusual move in his career. He saw far more value in the patents than did anyone else. He saw that many of the ideas had been commercially demonstrated and enforced in the marketplace. The settlement with West Interactive had set a legal precedent. Katz saw years of value, and he knew that only he could provide the critical testimony that could confirm those new concepts in courtrooms and boardrooms.
At the end of 1993 he bought back the patents. He paid First Data several million dollars under his agreement to buy the rights, and the deal provided a limited license to American Express and First Data for their own continued use. Moving his office into two small rooms in Beverly Hills, with a secretary and a colleague, he set up Ronald A. Katz Technology Licensing, L.P. “At that time, I wanted to retire, but it was an opportunity to really have something,” Katz says.
His actions didn’t receive much notice in the business world except for the patent column in the New York Times on October 31, 1994, which referred to the man who was “stockpiling the technologies that allow telephones and computers to talk to one another.”14 The article continued, “By pressing buttons on their touch-tone phones, customers can ask a computer on the other end of the line what their bank balance is, when the next flight from Chicago is expected or whether that burgundy handbag currently being peddled on the television screen is also available in chartreuse.” The article noted the recent West Interactive settlement and quoted Katz as saying that he expected royalties to be “in the tens of millions, if not hundreds of millions of dollars.” So far, Katz hadn’t personally collected a dime from patent litigation. But his insights had multiplied to such an extent that the accumulated value was becoming unmistakably large.
For Ronald Katz, the time to vigorously enforce his patents had come. At first, he sought small licensees. He personally wrote letters informing companies of his claims, stating that “we would like to offer you a license” to use a group of forty-nine issued and pending patents covering the key operations of automated call centers. He would request a meeting and “an open discussion.” After successfully landing a couple of small licensees in this way, he went after some big fish, most notably the Home Shopping Network (HSN), one of the largest and most high-profile users of interactive phone services.
Needless to say, no corporation is thrilled to receive such a letter. “We were already investing heavily in the technology,” recalls Barry Augenbraun, who was the general counsel for HSN at the time. “The need to fill orders kept exceeding the limits of our capacity.”15 HSN was using this call-center technology “before we had heard of Ron Katz,” he says. “There were plenty of inventors who would come along and said we owe them money, and we would say, ‘This is bullshit and we’re not going to pay.’”
But Ron Katz, Augenbraun says, was different in two respects. He was “nonconfrontational,” and “he said that he wanted to ‘educate us’ about his patents, and he would come to town at his own expense.” Augenbraun adds, “He said that he was going to keep educating us. It became clear he wasn’t going away.” The other thing that distinguished Katz was his enclosure of a letter from a large and reputable law firm that was willing to take on any of his litigation on a contingency basis. “That was unusual,” Augenbraun adds, “because these kind of cases can cost millions.” It was a classic liver and stick approach.
As discussions began, Augenbraun found out that Katz’s brother was Joel Grey. “I said, ‘Are you Mickey Katz’s son?’” Augenbraun recalls. “I was a Mickey Katz fan from the time I was a kid. I went home to my wife, and I said, ‘I got a call from Mickey Katz’s son!’ This gave us something to talk about outside our normal relationship of claimant and claimee.” After studying the issues, HSN agreed to pay for a multimillion-dollar license, mainly because it would be better than fighting Katz in court but also because of a touch of idealism. “Our Constitution is such a work of genius,” Augenbraun notes, “and it says that the best way to promote useful industry is to give inventors an incentive to develop new ideas, and if you don’t, it will frustrate progress.” Paying someone a “tariff” for a technology you’re already using is “counterintuitive,” he says, but it’s “an anomaly inherent in our system.”
Using the same approach, Katz landed other big corporations as licensees, among them MCI, Sprint, Charles Schwab, and the Gallup Organization, which used the technology for automated poll-taking. But there was one corporation that wouldn’t be swayed by Katz’s arguments, and it was the single biggest fish in this entire sea: AT&T.
The telecom giant simply wouldn’t budge. Ironically, AT&T had been a minority owner in the Call Interactive joint venture with American Express, so it had already recognized the value of some of these very same patents. But apparently there was too much at stake, given that AT&T not only used this technology to serve millions of customers but also that it sold call-center technology. This is common in the world of patents, where the motto is “where you stand depends on where you sit.”
After months of hitting up against a stone wall from AT&T, Katz saw that this would be his career-defining showdown. If he lost, his patents were at great risk of being weakened and perhaps even overturned. If he won, everything would break loose for him. This was clearly going to take an enormous amount of money. Even Katz, who was already worth tens of millions of dollars, couldn’t risk the $25 million or more it would likely cost to complete a lawsuit against AT&T, a civil action that would likely drag on for years. This is the reason big companies are very rarely sued successfully by individuals for patent infringement. “Enforcement is kinder to larger companies,” Katz says. “Big companies can outlast and outspend the individual. In very few cases can an individual collect the full value of his innovation.”16
In 1997, Katz filed his patent infringement lawsuit against AT&T in federal court in Philadelphia. But the trial opened after an interesting twist took place. To help cover the costs and to bring in more potent legal firepower, Katz struck a deal with MCI to join his side as a full party to the litigation against their common foe. “It’s always nice to have a big company—one that was wealthy at the time—on your side,” Katz says. Why did MCI join the lawsuit? It was already being sued by AT&T for infringement of patents on toll-free calling services. This case presented a way of striking back, says Tim Casey, the former chief technology officer with MCI. “We had no counter-tool,” says Casey, now a partner in a Washington, D.C., law firm. “I couldn’t sue AT&T because I didn’t have anything to sue them on. It occurred to me that if we needed a license [from Katz], why wouldn’t AT&T?”17
The issues were so contentious and complex that the judge appointed a special master to manage the process of discovery—collecting and organizing the evidence—a task that took a full year. During the trial, Katz’s case seemed to get stronger as he continued to rack up new licensees. Among them were IBM and Microsoft, which licensed his patents for use at their own customer-service call centers. “In the technology world,” Katz says, “these guys are the Holy Grail.”18 Did Katz give those two companies a deeply discounted rate to fortify his roster? Katz says he did not. “Our patent licensing is consistent,” he says. “We don’t cut breaks for people just to get their names.”
The presence of MCI in the lawsuit set off a remarkable clash. “Everyone knew that AT&T was the nine-hundred-pound gorilla,” says Casey. “AT&T could afford to fight it to the death, and it had a reputation for doing so. But we weren’t afraid to get into it. They were our archenemy.”19 As it turned out, the Katz patents were stronger than anyone might have expected. “Back in 1984, no one was doing this,” Casey says. “It’s easy now to say, ‘Of course!’ But Katz didn’t try claiming rights to basic technologies like the audio response unit or to cover computer-based telephony in general. His patents were directed to the nuances that made the technology valuable—the applications—just like computers weren’t valuable until there was good software. Ron had the good software, and he had the presence of mind to file patent applications early on, to keep the applications alive, and to keep adding new ideas” to the portfolio.
In the end, AT&T buckled. After almost three years of litigation, a preliminary finding by the court was issued in favor of Katz. AT&T didn’t appeal the finding. The settlement happened on December 20, 1999, only a few months after MCI merged with WorldCom. “The resolution was a major event,” Katz says.20 Other than that, Katz won’t comment on the litigation or the reports that the payments from AT&T will total $100 million over several years. “I’m precluded from saying anything about the AT&T settlement,” he says. But it was clear that Katz had slain a giant. After the deal was finalized, AT&T’s chief intellectual property counsel, Francine Berry, jumped ship and accepted a top position with Ronald A. Katz Technology Licensing, L.P.
Such are the potential rewards for having the foresight to multiply insights in a key area of technology. In Katz’s case, he was rewarded with a constant stream of licensing checks. Katz used some of his windfall to develop new inventions for interactive customer services over the Internet, a new area of his patent activity. He also expanded the scope his licensing efforts. “We’re continuing to knock on doors and visit people,” he says. He’s going after the top two thousand companies in the United States, and he has already landed financial giants such as Bank of America, First Union, T. Rowe Price, and Vanguard as licensees. By 2002, he had surpassed $750 million in license fees collected, and he expects to reach $2 billion by the time his call-center patents expire in 2009—an all-time record for an independent inventor.
Has Katz received more money than he deserves? Perhaps. But we may be able to say the same about just a few others in our economy. Would this set of technologies have come into existence anyway, even if Ron Katz hadn’t come along? Probably. But that is true of almost any technology. Patents are a bargain between inventors and society. They serve as an incentive to innovate as quickly as possible and to disclose all the details of the invention so that others can build on the ideas. Why didn’t AT&T’s Bell Laboratories itself—with its thousands of researchers, its thousands of patent filings, its proclaimed synergies between phones and computing—come up with these inventions in its core business? For whatever reason, it failed to do so, and the company paid a hefty price for this failure.
Nowadays, everyone seems to take this set of applications for granted, but at one point none of this stuff existed. “Press 1 for this, 2 for that, and 3 for the other thing. Like it or not, that’s Ron Katz,” concludes Ric Duques, now retired from First Data. “He’s everywhere.”21