The Role of the Independent Inventor

STRATEGIC PARTNERSHIP; GETTING THE EDGE ON NEW TECHNOLOGY

Invention Convention

Los Angeles, CA

September 5, 1992

The independent inventor. Is he a partner for the large corporation, or an adversary? That is what I will address today. The independent inventor, as a point of reference, is an individual, or a very small privately held business, substantially created and controlled by the inventor. If I were to conduct a survey of this audience, I think that the results would show that the corporate entity is not seeking out the independent inventor, and if independent inventors are in the audience, they, as a group, would have unkind comments about corporate America.

Let's first address the issue of the importance of new technology. Who cares? Why bother?

In 1987, Robert Solow won a Nobel Prize in economics for showing how industrialized economies grow, stressing that advanced technology is more important than the amount of capital driving a nation's economic growth.

I visited a major manufacturer in telecommunications, and posted on the walls at various spots were signs with the message that if you have an idea, patent it. Those signs were not posted along side the workmans's comp notice and the luncheon menus available from the sub shop. Those notices were very separate and clearly displayed.

It is interesting to note that in the past 20 years, the population of the world has increased more than 30% and the U.S. 22%. In constant dollars, the GNP has increased 72%, the Dow Jones increased 15%, personal income increased 55% and corporate profits increased 37%. Even though technology is reportedly increasing at geometric rates and increasingly strict patent laws in the U.S. have increased the value of patents in this period of time, the number of patents issued only increased 31%. In the four years from 1987 to 1991, there was only an 8% increase in the number of patents issued to U.S. residents. In fact, 1991 was the second year in the row the number of patents issued decreased. .And, further, this is in spite of the Patent Office's recent practice of regularly splitting a single invention into multiple patents.

What I suggest this says is that the number of individuals with a creative bent, whether corporate or otherwise, perhaps most closely corresponds to the population. Businesses can grow in size and number, the pace of life can speed up, R & D investments can increase, but the bottom line is that inventorship appears to follow the size of the population. Like real estate, there is only so much of it, and when that is gone, that is all there is.

Is there an important role for the independent inventor?

My first point is that the independent inventor is a very rare breed. Let me tell you how rare.

What happens when you tell people you are an inventor? People look at you as if you're nuts because they are not used to it. As a sidelight, at a trade show a few years ago, a successful inventor commented that his business cards don't say president, or any of his other titles, they just show after his name P T E. for Patentee. In the United States the patent right is Constitutionally protected, and yet people hesitate to say it. Talk about killing a conversation! Just say "I'm an Inventor".

In the United States in 1990, according to the U.S. Patent Office, there were 174,000 patent applications filed. In the same year, there were 96,000 patents issued. Of those, only 51,000 or 53% were issued to U.S. residents. So, just how important is the independent inventor?

In the entire electrical classification, there were 10,000 patents of U.S. origin, and 1,400 of those were owned at grant by an individual or assigned at grant to an individual. In my field, telecommunications, there were only 363 patents issued to individuals. In robotics, the number was only 12.

The corporate entity argues that it is being overwhelmed analyzing individual patents. The independent inventor is too much a rarity. Yet AT&T alone, with its giant Bell labs, with its tens of thousands of engineers and systems people, and virtually unlimited financial resources, generates 400 to 500 patents annually.

The corporation has different buying-in levels for patented technology with different risks and costs: the new invention, the invention as a commercial prototype, and the invention as a commercial success. Negotiating a strategic license typically at the new invention level requires a review of the greatest number of ideas, and is the highest risk, but it is also the least expensive. Buying patented technology that is commercially successful is the most costly, but has the least risk, and then there is the suit, which is often the highest cost, highest risk.

Unfortunately, today, the corporate executive only thinks in terms of suit, and begrudges the inventor that has brought his invention from concept to commercial success. Because intellectual property is so easy to duplicate and improve on at that point, they consider they have no obligation to the inventor. Neither the ethic or the profit motive are there. Only the threat of losing significant litigation appears to be a common corporate motivator.

The question then becomes, is it worthwhile for the corporation to deal with that rare independent inventor who just doesn't think like their stereotype corporate individual? Furthermore, the corporate man argues, we spend 15% of our revenues on R & D, and employ every PHD graduated from any college of note everywhere in the world. Why bother?

I will submit that the independent inventor is responsible in substantially disproportionate numbers for pioneering technologies. In 1981 it was reported in the New York Times that the National Science Foundation found small firms produce four times as many industrial innovations per research dollar as medium-sized firms do, and 24 times as many innovations as the largest firms.

By ignoring the independent inventor, the corporation risks the long term health of its enterprise.

Let's look at how the individual as an inventor has done Historically. And I am going to have some fun here going back to the very early years of my industry, communications.

Transmitting messages over large tracts of space is an extremely ancient idea. Drums, smoke and beacons all were developed in their turn. However, it was only 200 years ago, in 1792 that Claude Chappe's idea of a semaphore was first implemented. This device, so successfully used by the government and the military, was not invented by either, an individual no one had ever heard of.

When Ronalds went to the British Admirality with the idea of an electric telegraph in 1823, they said "Telegraphs of any kind are wholly unnecessary and no other than the one in use will be adopted" refering, of course, to the semaphore. In 1837, Cooke, a retiree from the Indian Army, and Charles Wheatstone, a professor, patented telegraphy as we know it today. This device, again, was not invented by the government, railroads, coach lines, or the military. With that invention by independent inventors, the semaphore business substantially declined.

Mr. Bell invented the telephone in 1876. Telegraph lines were spanning the Atlantic. But Bell was a nobody. He taught deaf children. M.I.T. helped with the patent, but wanted to be paid cash rather than getting a piece of the action as Bell requested. Western Union turned down an offer to acquire the rights for $100,000. They were convinced that few people, if any, would want to use the strange device that started the vast telephone industry. In less than 25 years, one in fifty people in America had a phone. Where is Western Union today? I have put on the table a spoof of what their technical committee might have submitted in response to making an investment in Mr. Bell's invention.

Marconi was only 22 years old, a student, when he knew he could transmit messages without wire and filed the first radio patent application. Neither the Italian government, the British government, nor the British Post Office or any big company would help, so he founded his own company, the Marconi Wireless Telegraph Co.

Today, in addition to TV, Radio, and satellite communications, wireless cellular telephones and radio bypass are perceived to represent a significant threat to the core monopolistic business of the telephone utilities.

Vladimir Zworykin, an immigrant from Russia first demonstrated his television in 1924. It was the recognition of his work in 1928 by David Sarnoff of RCA, another individualist, followed by a significant development effort, that brought TV to the public, made RCA an industry giant, and eventually caused the decline of commercial radio.

The laser, that fundamental pioneering building block for highspeed fiberoptic telephone transmission and now for high speed computers, did not come from AT&T Bell labs or any of the many other multi billion dollar communications companies. It came from Gordon Gould, an independent inventor.

There are other examples. Certainly, Haloid, a small family firm would not be today be what it is, the XEROX Corporation, had it not been for the licensing of independent inventor Chester Carlson's invention. The companies that turned down Xerography were among the most sophisticated of their day: General Electric, RCA, IBM and Remington Rand. And as for the industry giants of the time in the office duplicating field, the Ditto Corporation, Multigraph and Gestetner, what are they doing today?

Tom Watson, Jr, in his book Father, Son & Company said that not taking up Chester Carlson's offer to sell his patents was the biggest opportunity his father ever missed. And this included the decision to turn down the opportunity to buy Presper Eckert and John Mauchly's invention and company, Univac, which was later purchased by Remington Rand.

Wilson Sporting Goods, with its Profile tennis racket, has a top spot in the marketplace because of in-licensing the work of an independent inventor that everyone else rejected. The metal ski, the Head ski, was invented by an individual, not by the sporting goods giants.

So the independent inventor can create an industry, and a few are now getting paid for it, just as a TV celebrity, author, sports figure, or composer. These inventions have created immense wealth, and the principal mover and shaker should be well rewarded. This is a reward for someone who through his own talent, effort and perserverance creates worldwide industries employing thousands and thousands of people.

Charlie Hall, the inventor of the water bed, if he recovers the same amount from each of the industry members that he was awarded in his recent suit, might have enough that there won't be enough left for you and me. One enlightened manufacturer, in the patent's early days, played the game straight and licensed his patent for $25,000, paid up. What a bargain! Hayes, of Hayes modem fame, just drove one member of the modem industry out of business. Kearnes, of the intermittent windshield wiper fame, caused Chrysler's stock to drop when he took them on after winning against Ford. And he still has many others to go after. And so the story goes.

In our field, automated voice processing, a multi billion dollar industry that has evolved in the past decade, all the pioneering patents I am aware of have been issued to independent inventors or independent inventor started companies. This is in an industry that has many, many immense international corporate giants spending billions on research and development.

Think about this recent case. Do you think cold fusion works or were the inventors publicists as has been alleged? Even leading academicians from M.I.T have derided the concept. Would you invest $1,000 to see if there was some validity? How about ten million of your corporation's scarce dollars? Could such an idea get through your technical committee's structure? Would you be willing to go to your Board of Directors to justify your decision? Yet, the Patent Office has now received over 150 patent applications from numerous countries for cold fusion technologies. The corporate talent to appraise the value of a pioneering invention has been shown time and time again to simply not be suitable!

One last matter before discussing whether a strategic alliance between the independent inventor and the corporation is worthwhile. The facts are, the independent inventor does not have just one patent. Most patents are issued to multiple patent holders. A study done for the Patent office showed over 60% of the independent inventors have more than two patents. 20% have six or more. 6% have more than 16 patents. In my case, for example, I received one patent in my first five years, twice that number in the second five, and am now running at better than one patent a year. The independent inventor can be a continuing benefit if he is on your side.

Can the corporate entity and the independent inventor work together? There are many factors working against it, but that doesn't preclude a tremendously mutually rewarding and profitable relationship. But, fundamentally, the two come from different ends of the spectrum.

The individual inventor is independent. In many cases, he couldn't be hired by the corporation. And if he was, his inventive instincts would die. He would die in a corporate environment because he would be lost among the trees and wouldn't see the forest. He wouldn't be able to act on his own ideas. The corporate personality doesn't recognize the truism that the word invention means just that. To everyone else, an invention is either useless or won't work. Otherwise someone else would have thought of it and that someone else would then stand in the current inventor's stead. A review committee, almost by definition, will almost always kill significant new ideas.

If the new idea imperils the company's principal business, or the ego of a key executive, then goodbye idea. As every salesman will relate, the idea in selling to a corporation is to present an idea in such a way that the purchaser will think it is his idea, not yours. The inventor can not work that way.

Can you imagine Albert Einstein, who, I understand, was a patentee or Stephen Hawking being part of Bell Laboratories or Bell Canada culture? Or the culture of any other large entity? They would be out for no other reason than they don't tie their tie the right way, or because they couldn't conform to the company rules, or because their boss felt they were too smart for their own good, or because of their dumb ideas. And besides, they are so unpresentable.

The independent inventor often is not a product of a corporate culture. He is a free spirit. He doesn't need to communicate because he does everything himself. And he is in love with his invention, and frustrated that corporate America doesn't understand what he is trying to describe. I can personally relate to the inventor's frustration in trying to convey to an executive how an invention works in one minute before he has to go off to a meeting.

He also works quickly. Usually a Type A, he personally gets done what needs to be done immediately, and has very low tolerance for long delays or corporate politics. He is seldom a salesman.

He is also broke. Potential licensees know it. He knows it too, and that knowledge does not help him market licenses. His is a life of hope and despair. The original inventor of the Semaphore allegedly committed suicide over the disparagement his invention received from others. Kearnes, of the delayed wiper fame, suffered as well. It seems like we all have to go through the Siberian Gulag. But, the inventor accomplishes an incredible amount on so very little money. He often not only invents, prosecutes a patent, makes the first and markets the first half dozen on less than the annual salary of one corporate executive. A corporation wouldn't begin to try what the inventor will do without investing and risking tens of millions of dollars.

The bottom line is that the independent inventor is the consummate risk taker. He is spending his own money, using his own time, assuming all responsibility, overwhelming all obstacles.

And once he has set his mind to making something work, he doesn't go home at 5:00 as an employee would. Nor does he stop thinking about it while in bed at 3:00 A.M. When he drafts his disclosure for the patent attorney, it is well thought out, in spite of the high probability of errors.

Can a corporation find, much less hire such a person. The fact that the answer is clearly no is indicative of the value of that inventor to the corporation.

Let's look at the idiosyncrasies of a corporation for a moment. Usually, the corporate intellectual property department is staffed, and headed by attorneys. When a patent notice letter comes in, there is only one thought. "How do we protect ourselves from this guy". A knee jerk reaction sends out form letter 1A saying "thank you but we are not interested". The future value of the technology is seldom addressed. Dealing businessman to businessman with the large corporation is all but impossible because policy dictates that "my lawyer will only speak to your lawyer". Then comes the question "are you alleging infringement". That puts on a whole new spin. When pressed, tens or hundreds of thousands of corporate dollars will be spent with outside attorneys evaluating the patents without doing an internal analysis as to the strategic value of the patented technology to the corporation, as would be done if you were acquiring a competitive business. From the positive to the negative. The win-win opportunity for both sides is lost.

But we are seeing the winds of change. The value of the patent is again being recognized. As the world industrial community becomes globalized, everyone recognizes that the only way research and technological development makes any economic sense is if the results of those expenditures can be protected in the marketplace. It was interesting that the recent China accord negotiated by the U.S. Department of Commerce regarded the issue of patent and copyright protection as the single most important obstacle to trade with China, and threatened to sever trade ties with China if China did not recognize those intellectual property rights. That was a very strong statement of the importance of those rights to trade.

The previously mentioned Nobel prize has highlighted the importance of technological innovation to a nation's economic well being.

When Richard Donaldson of Texas Instruments gave his talk last year before the icensing Executives Society, he gave the reason that TI has become so aggressive in protecting their patents. What he said for TI holds every bit true for the independent inventor as well.

No one can continue to create, to invent, to bring products to market, and have competitors cherry pick. The inventor has all the costs and risks. The cherry picker will have lower prices because he does not have those expenses. Common sense will say that the creator, the inventor, the pioneer will stop innovating. That is exactly what happens. And yes, I have acquaintances, independent inventors, who are bright, as technologically advanced as almost anyone I have met, and very creative, who have given up because the patent system and the large corporation have failed them.

Donaldson said that protecting patents is an obligation of TI, and the inference, if I understood him right, is that it is the obligation of everyone to protect patent rights. It must follow that it is not just your patent rights, my patent rights, but everyone's. The system can not be partially effective if there is to be value in the system.

Patent suits can cost millions of dollars. Many good businesses could be started for the capital involved in one patent suit. A suit is a lose lose situation. It takes a lot of the resources of very talented people - time that could be better used. The waterbed suit, I understand, was over a royalty of $1.00 per bed. How many people in this room would care if they paid a dollar or two more per bed? But the industry ganged up on inventor Hall, and lost - except for the company that voluntarily negotiated a license for $25,000 early in the game.

With patents being enforced in 75% of the cases, the incentive for patented technology to be appropriated is decreasing. The best thing that can happen to an independent inventor today may be to have a large corporation willfully appropriate patented technology and make a success of it. If the idea is a real success, it can put the very existence of the infringing corporation or the product in jeopardy, or at least slow the company down for many years. Kodak found that out.

A major corporate defense against appropriating the intellectual property of the independent inventor and the small business in the past has been to outspend him. This is the "sue me" mentality. In many cases, it is just the knowledge of the independent inventor that he can not survive the many millions required to litigate a suit that discourages the inventor from being aggressive, and encourages appropriation of patented rights.

That is so self defeating. It should be put alongside the horse running into the burning barn, the buffalo stampeding off the cliff, or banging your head against the wall because you are upset about something.

Everyone loses with an underfunded inventor. EVERYONE. Who here would have been interested in investing $50,000 to apply for patent protection for the windsurfer in Europe in return for patent royalties. That, now, is sort of a no brainer. That invention was not patented internationally because the inventor lacked the funds. And where do you think the windsurfers are being made today? Mistral, the big name internationally, is not U.S manufactured.

Even worse is the situation where an inventor conceives something, and because of the costs either writes the patent himself, or goes to an incompetent patent attorney. Now there is a very weak patent. Is it just the inventor that loses? NO, Let me emphasize that. Everyone loses, including the public.

That patent, because of it's lack of clarity and potential errors is fodder for litigation. A strategic partner is less likely to be found, because of the increased likelihood of litigation. That means the value of the patent is decreased should a strategic partner be found. The corporation figures that it is being victimized. It is a lose lose situation for everyone. That doesn't infer that the patent is worthless, however. As technical people would say, it just means the results are unspecified. Remember, the value of Mr. Bell's patent was very much in issue until it was litigated. The enlightened corporation should recognize that their best value for significant technology is a well written patent, broadly protected. That is cheap compared with the cost and time involved in litigation.

Another corporate tactic has been to delay, being protected by the latches or estoppel umbrellas, and hope that time will work in the corporation's favor. The recent Aukerman decision largely pulled the rug out from that one. There simply is no equity in benefiting an infringer when it knew and willfully infringed known patent rights. Not being formally charged by the patentee with infringement to stop latches period should be totally irrelevant.

The current system promotes taking patented technology after it has been proved commercially valuable, knowing that the patentee can't sue everybody. The corporation takes a statistical chance that the clock will run out before the inventor gets around to bringing suit against it, and during that time has a competitive advantage over all competitors that are properly licensed. Aukerman shifts the odds in the patentee's favor.

The amount of the damages is changing in favor of the patentee. Damages from the Kodak Polaroid suit, from the 3M Johnson suit, from the Kearnes suit against the automotive manufacturers all mean that these liabilities can become substantial risks. Not only are very substantial CASH dollars involved, but entire businesses can be threatened. Corporate managers for propsering enterprises do not like open ended risks. It is just not good business.

Now to the financing of the independent inventor. Not long ago, a corporation could get a D & B and immediately determine whether the independent inventor or small business had the financial wherewithall to sustain their patent in court. That has changed because there is nowhere you can look to obtain that information now. Yes, you can look, but you can't find out the relevant information. When you deal with the independent inventor, or small businessman, you may not know the financing resources available to him.

The inventor today can be insured by at least one major insurance company. Yes, patent insurance. As an incentive to negotiation, the insurance company encourages the inventor to tell the prospective licensee of the existence of patent insurance so any question as to the ability of the inventor to finance a lawsuit ceases to be an issue.

More fundamental, however, is the existence of patent investor organizations. Certainly REFAC was one of the pioneers, and when a patent notice is received by a corporation from REFAC, my understanding is that it is taken quite seriously. There is no question that they are litigious when necessary, and that they are well financed.

In 1990, Gilbert Hyatt, of computer chip fame, said he plans to use any royalties received to help other small inventors. There are other like him that feel the same way. Honeywell, following their 96 million dollar award against Minolta, publicly stated they would establish a fund to protect the independent inventor.

The suit that just won a 34 million plus dollars award against A.T.& T. was funded by a partnership. Patent's can make investment sense, as they should.

The patent awards are becoming certain enough, and large enough, and fast enough so that investment money is flowing in to protect the independent inventor.

Whereas in the past the inventor may have been forced to seek a settlement on the court house steps because he lacked funds to go to trial, these organizations may step in at that point and go for the whole enchilada, with treble damages.

The contingency fee lawyer is becoming more common. Just a couple years ago, there was less than a handful that would take contingent patent cases. Now, there are many. It has become an accepted practice.

How many lawyers think of the hours worked at $200 per hour to accrue a bank account with ten million dollars. A long time. A life time! Yet, a single good patent case can easily net an attorney ten million dollars in a relatively short period of time.

But we still have not hit the real danger for the firm that is waiting to see who is sued first. That danger is that another corporation will make a strategic alliance with the inventor and through that vehicle, not only have a price benefit because later licensees have higher royalties, but receive a portion of the royalties and grant backs from competitors.

If there is a suit, the corporate strategic alliance partner may risk a few million to finance a suit against a competitor, but the upside can be immense. Turn the tables and picture yourself as a defendant in an infringement suit financed by your competitor. As a defendant, you are in a lose lose situation. A corporation savy enough to have arranged a strategic alliance has all the cards.

As an inventor, let me exercise my trade and relate what I believe the future will bring. Foreign companies appear to be the pioneers in recognizing the value of patents. The percentage of foreign patents issued in the United States has grown from 25% in 1970 to 53% in 1989.

Personal experience has shown that the foreign company overwhelmingly is the most active in-licensee of patented technology, and that is confirmed by others.

While American corporate executives are totally asleep on their watch, foreign owned companies are acquiring their corporation's core technologies. The U.S. patent represents a portion of the U.S. technological base, and when the foreign corporation acquires it, particularly a pioneering patent, the fruits of that technology, for all practical purposes, are exported.

One of the changes of the future I predict is that the cycle will swing. It always does. In the twenty first century there will be a bidding war for advanced patented technology, just as there is today for sports figures and acting talent. It has to happen. Corporate America will begin to do as Wilson Sporting Goods did, and ask whether it is better to invest 10% to 15% of sales in corporate R & D (and every company will profess theirs is the best, even if it hasn't been particularly rewarding lately), or utilize known patent protected technologies. It will take a while because the Not Invented Here syndrome is so strong, and may not be able to be cured.

In the telephone business, there used to be a large General Telephone Automated Electric facility in Northlake, IL. There used to be the AT&T Western Electric plant in Cicero, IL. There used to be a very large International Telephone and Telegraph plant outside Chicago. Stromberg Carlson used to be a big name in the telephone industry. They all were characterized by large internal research and development staffs and capabilities. They did not make it and today are gone. History.

Quick. What was the last great invention from AT&T's world renowned Bell labs that comes immediately to your mind. The transistor, right? That was over 35 years ago?

The market for licensing agents will develop. Right now everyone goes to their lawyer, who is an expert in patent litigation, trial, or patent law. I will suggest that once corporations place a value on in-licensing technology, the issue ceases to be primarily one of patent law, but negotiating a winning licensing agreement. The licensing agent will be the link between the weird and humble inventor, and the lugubrious, overwhelming and sometimes arrogant corporate entity.

The delay of 10 to 20 months to obtain a license agreement will become history. Company A spends $250,000 and 12 months evaluating a patent. But before it completes its study, Company B negotiates a preferential license. Company A did the work and spent the money, but because they delayed, they lost to Company B. It will be like buying a house in a seller's market. You can have all the experts you want to view the house, but it may be sold to someone else by the time your reports come back. That will be an untenable situation.

The corporate patent department will drift from the Vice President of Legal Affairs to a business planning function with a very short decision line to the Chief Executive Officer. Buying a license will be very similar to buying another enterprise. It will be as routine and as important to a company's prosperity. The patent lawyer will be an advisory function, just as the accountant and engineer are today. He will not be the primary deal maker.

There will be buying, selling and trading of patent rights, just like businesses are bought, sold and traded. Intellectual properties will become part of business properties with gains and losses from the purchase and sale. I can even envision when the values of intellectual properties will be reported in the footnotes of corporate balance sheets.

Because of the importance placed on patents as an asset, rather than as decorations for the front vestibule, corporations will start protecting patent rights just as they protect other properties from loss, theft and trespass. That is already happening with TI, IBM and many universities. They have had underutilized assets in the form of patents and they are becoming very aggressive in generating revenue from these assets.

Lastly, corporations will start placing a value on the independent inventor. They will seek his expertise in evaluating everything from the future direction of the technology, to continuing the development of the invented product, to developing new products.

And as for protecting the independent inventor from corporate theft of intellectual property rights, there will be an organization similar to ASCAP, or the Software Publishers Association to protect inventors. That will happen! The patents of the independent inventor are entitled to the rewards just like the copyrights of the song writer, or software designer.

There is a particular property of the independent inventor that will have significant value. A university professor can tell you what everyone has been doing in a field. The consultant can tell you what others are beginning to do. The inventor can tell you what they will be doing. By his profession, he is one step ahead. That is the very nature of the inventive process.

That is why no one sees value in an invention when it is first disclosed, why only a few consultants will recognize an advanced idea when it is first shown encased a primitive container, and why industry professionals will claim it to be obvious after it becomes commonplace and neatly packaged.

Summarizing, when competition and corporate pragmatism require first - recognition of the value of innovation, in this matter today we are seeing a lot of lip service, and secondly, the irrelevance of the source of innovation, it doesn't make any difference where it is developed, it's just the price, and lastly, the unique value of the inventor as a corporate asset - then these two adversaries become very valuable partners.

Thank you.

Peter Theis is President of Theis Research in Gurnee, IL.



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