VideoTo the list of venues where intangible property has tangible asset value, add this one: The federal court system. Emboldened by Congress's creation in 1983 of what many lawyers have come to view as a patent-friendly federal appellate court, and by a 1996 Supreme Court decision giving judges more power to decide patent cases before sending them to juries, inventors and corporations are more willing than ever to take intellectual property claims to court. Also spurring the activity: a clutch of high-profile, high-stakes cases over the past decade, such as Polaroid v. Eastman Kodak, Honeywell v. Minolta, and Fonar v. General Electric, which have shown that intellectual property lawsuits can swamp balance sheets.
"As our economy becomes less manufacturing oriented, intellectual property becomes a much more important asset and represents a great deal of what shareholders have given a company to invest," says Christopher J. Steffen. A private investor and former vice chairman of Citicorp/Citibank NA, Steffen was chief financial officer of Honeywell in 1993 when that company won a $96 million judgment against Minolta for infringement of Honeywell's patented auto-focus technology for cameras. With that victory, Honeywell was able to wrangle licensing deals with other major camera manufacturers that netted it around $400 million in additional income, for a total of approximately half a billion dollars.
With consequences like that at stake, finance executives can't afford to leave the caretaking of intellectual property to their general counsel alone.
"It's very much a team effort, and the CFO has a role to play," says Jim Horstmann, chief financial officer of $90 million LaserMaster Technologies Inc., in Eden Prairie, Minnesota. "Especially at companies that can't afford to throw money at all their intellectual property, the CFO needs to work with the general counsel and some heavy-duty research-and-development people to pick and choose what they think is likely to be a product down the road and is defensible, and throw their resources at that."
Got a Million to Spare?
CFOs must discriminate in protecting intellectual property — trademarks, patents, brand names, copyrights, and trade secrets — because that protection doesn't come cheap. LaserMaster's operating subsidiary, ColorSpan, recently spent more than half a million dollars in legal fees to prosecute a trade-secret claim related to ink products it makes for its wide-format inkjet printers. ColorSpan alleged that privately held Sentinel Imaging, of Greenland, New Hampshire, had stolen part of its market for consumables by hiring two former ColorSpan employees who imparted trade secrets and customer information. The hefty legal fees it paid to prove that point didn't include the company's internal costs (principally executive time), which Horstmann says were "huge."
For its expenditures, ColorSpan won $2.2 million in damages last October after a jury agreed with its version of events — almost exactly two years after the suit was filed.
Sentinel is seeking to have that judgment set aside, and, while awaiting the judge's verdict, hasn't paid the money but has resumed sales of the consumable products over which the case was fought. While LaserMaster is mulling other legal maneuvers against Sentinel, its efforts so far have been extraordinarily costly for a company of its size.
"A run-of-the-mill patent case can cost $1 million," confirms attorney Ronald Schutz, who headed LaserMaster's case. Schutz is head of the intellectual property litigation department at the Minneapolis law firm of Robins, Kaplan, Miller & Ciresi LLP. For $1 million, a litigant can ordinarily expect the services of a law firm partner and a handful of expert witnesses. Longer and more complicated cases drive costs up rapidly. Contingency fees are relatively new to the intellectual property field and not widely used. Where they are, they can be quite welcome, especially when small companies take on large adversaries.
"Expansive patent cases can cost $10 million or $15 million," Schutz says. "There's a lot of lawyer time involved in understanding the technology and the prior art [previous developments in the technology] and analyzing the infringing product. There are often lots of documents involved, lots of depositions that need to be taken, and a lot of experts to be hired."
In a recent case in which a jury ordered six big oil companies to pay $69 million to Unocal Corp. for infringing on its patent for a cleaner-burning gasoline, Schutz's firm reviewed literally millions of documents. In the Honeywell case against Minolta, it had to review nearly a million documents written in Japanese.
While intellectual property litigation can be expensive, companies do have more options today in determining how to pay for that litigation. Trial lawyers once billed such cases almost exclusively on an hourly rate. But some firms today, including Robins, Kaplan, are now willing to take cases on a contingency-fee basis. When they do, the litigation tab can go sky high, typically starting at 40 percent of any recovery. Some lawyers will take a case on a sliding contingency fee scale — perhaps 10 percent of the recovery if the case is settled without initiating litigation, 25 percent if the case is settled before it goes to discovery (the stage at which lawyers begin taking depositions and interrogatories, and exchange information), 33 percent if the discovery stage is reached, and 40 percent once it goes to expert discovery. Still others will accept a discounted base fee, with a bonus for a successful result.
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