Category: Patent

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Product Licensing Performance Guarantee: Make Sure Your License Has One

GuaranteeYou develop a useful product. Let’s say its a needle for performing biopsies. You file a patent application on your invention.

Then you approach a medical device company and enter into a license agreement where the company receives exclusive rights in the invention in exchange for a royalty on each product sold.

Years pass and the company still has not fully developed and marketed the invention. You sue the company for not doing enough to get your product to market. But you lose because the license agreement contained no performance guarantees requiring the company to meet minimum sales or use best efforts to make, market, and sell the product.

This is similar to what happened in the case of Beraha v. Baxter Health Care Corporation, 956 F. 2d 1436 (7th Cir. 1992).

Don’t Rely on Oral Assurance as a Substitute for a Performance Guarantee

The Beraha case demonstrates that one of the most important terms in licensing your invention or product is a performance guarantee. A performance guarantee protects you if the other party (the “licensee”) buries your invention or does not do enough to market or sell it.

In the Beraha case, Beraha originally proposed a license agreement that contained a guaranteed minimum annual royalty of $50,000 per year after the first year. However, Baxter responded with a proposal that eliminated the guaranteed minimum annual royalty and increased the royalty advance to offset the removal of the minimum guarantee.

At first Beraha refused to sign the revised proposal from Baxter because it did not contain a minimum guarantee or a best efforts clause. However, during a phone call with a Baxter Vice President and without committing to any specific level of effort, the VP said he would send Beraha a letter . On the basis of the assurance that a letter would be coming, Beraha signed the exclusive license with Baxter, which contained no performance  guarantees.

The letter Beraha later received said “…Although we work in an environment that is always subject to changing conditions, you can be assured that our present intent is to do our very best to make this project a success…” However, this letter had no effect on the license agreement that was already signed. This is due in part because the license had a merger clause. Most license agreements have a merger clause, which basically says that “no matter what I said before, the only terms that matter are the terms written in this license agreement.”

The court found that Beraha could not inject a best efforts clause into the agreement when it did not provide one and when the minimum sales provision was removed during negotiation.

The court left open a possibility that Beraha could recover if it could show that Baxter breached its obligation to act in good faith and fair dealing. But, there’s no surety that Beraha could recover under that theory because the court said, “the jury could find that Baxter did not breach the contract even if it exerted no efforts at all to develop the Beraha needle if Baxter can show that its decision to exert no effort was reasonable under the circumstances.”

You do not want this to happen to you. Therefore, your license agreements should have a performance guarantee. Performance guarantees come in several forms.

Minimum Sales Requirement

The best approach is to provide a clause that requires the other party (the licensee) to hit minimum sales in a defined period of time. For example, as in the first proposed agreement in the Beraha case, the minimum can be in the form of a guaranteed minimum annual royalty payment. This requires that no matter what the sales are during a given period, the other party must pay at least the minimum during that period. If the guarantee is $50,000 per year, then you are guaranteed at least that amount even if the unit sale royalties do not reach that amount.

Also you can provide the guarantee in units of product. So you can say that the annual minimum unit sales is 50,000 units. If the royalty rate is three percent of the net sale price, and you know the net sale price, then you can calculate the annual minimum in dollars.

Consequences if Minimums are not Met

What happens if the minimums are not met?

If the license provides that you are paid the minimum no matter what the sales are maybe you don’t care if target sales are not met. However, if you want to see your product succeed in the marketplace you might want to provide a provision that cuts off some or all of the licensee’s rights if the minimums are not met.

One example is a license that provides for termination if the minimums are not met for one or more periods. When the license terminates you can approach other companies to make and/or sell your product. Another option, is that an exclusive license can be converted to a non-exclusive license if the minimums are not met. This means that the first licensee can continue to mark and/ sell your product, but that you can go to other companies and have them make or sell your product as well. When the agreement is non-exclusive you can cut deals with multiple companies to sell your product.

Best Efforts

One alternative to defining the minimum dollars or units per period, is a license that provides this: “the licensee agrees to use its best commercial efforts to make, market and sell the product.” Sometimes “reasonable” is substituted for “best”. Regardless, see how wishy-washy that phrase is? What does “best/reasonable commercial efforts” mean? How will it be measured? A best efforts clause is an invitation for a dispute (e.g. a lawsuit) because it is uncertain what best commercial efforts means.

It is better to specify what activities are desired, such as minimum sales, a list of marketing activities, and/or other requirements.

Do not rely on oral assurances that the licensee will use their best efforts to make, market, and sell your invention or product. Put concrete numbers and activity requirements in a product or invention license.

Photo credit to John Walker under this creative commons license. The image above is cropped in from the original photo here.

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Henry Ford: The Assembly Line, Entrepreneurship, and Bigotry

HenryFord_ThePeoplesTycoonNo successful boy ever saved any money . . . They spent it as fast as they could for things to improve themselves.
-Henry Ford

Henry Ford revolutionized manufacturing with the introduction of the assembly line. While many companies were selling expensive cars for the rich. Ford’s goal was to build a light weight affordable car for regular working people.

Since the assembly line might be the single most important invention in industrial history, I wanted to learn more about the man behind the company that put it to use and the circumstances around its invention. Steven Watts’ book The People’s Tycoon: Henry Ford and the American Century provides an interesting biography of Ford and history of his companies. Unfortunately, as explained below, the exact circumstances of the invention of the assembly line are not clear. But first….

Don’t be a Bigot

Ford revolutionized manufacturing not just in the automobile industry but across industries with the invention of the assembly line. I started reading this book with a desire to learn about Ford’s life and to write about the interesting entrepreneurship and business issues of Ford’s life.

But Ford espoused antisemitic bigotry and ignorance. As I wrote about the entrepreneurship and business issues, I kept thinking about how Ford’s antisemitism overshadowed all of his successes.

Watts’ has a chapter in the book entitled “Bigot,” which describes Ford’s anti-semitism. Among other instances, Ford owned a newspaper, the Independent, through which he waged a campaign against Jews. This eventually resulted in a libel suit being filed by Aaron Sapiro against Ford and the Independent in 1925. Rather an testify at trial, Ford shutdown the newspaper, publicly apologized, and paid a cash settlement.

But he continued to hold and privately express anti-Semitic views. When Ford was privately asked if the idle newspaper presses from the Independent should be sold, he is reported to have said, “I made a deal with these Jews and they haven’t lived up to their part of the agreement. I might have to go back back after the Jews again.”

Watts’ says, “…[Ford’s] mindless bigotry against Jews indelibly stained his reputation and raised questions about his moral and ideological character that would linger for the rest of his life.”

A stain that lingers after Ford is long dead. Rather than posting nothing about Ford, I think it is appropriate to lead off this post noting Ford’s bigotry. A bigotry that overshadows his business successes.

Invest in Yourself – The Gospel of Spending

Twenty years after Ford launched the car that made him famous, Ford started a controversy when he insisted that hard work was a good idea but thrift was fruitless. When asked about how to become successful in America, Ford said:

“No successful boy ever saved any money . . . They spent it as fast as they could for things to improve themselves.”

This was in contrast to the traditional advice at the time to work hard and save your money. Some denounced Ford’s “gospel of spending.” But according to Watt, the dissenters were overwhelmed by publications that supported Ford’s advice on spending, with one publication saying “He who nurses the nickels misses the knockouts.”

Ford followed his own advice while developing his first prototype automobile and while building his businesses. An employee of a tool company, said of Ford:

[he] would be in our place two or three times a week buying something that had to do with something he was making… Mr. Ford loved anything in the way of tools, any kind whatsoever. Anything new that came out in a tool, he wanted to see it…

As Ford was making his first automobile, the Quadricycle, his wife, Clara, was concerned about his purchases:

Clara Ford became concerned about the constant purchasing of materials. As Henry’s sister Margaret recalled, Clara ‘wondered many times if she would live to see the bank account restored.’

The key here is not just spending. But, the spending must a reasonable investment in yourself or your project.

Starting It On the Side

Countless inventors and company founders started their companies and invented their inventions while working a day job and then working on the side. Ford is no exception. Ford developed his first automobile while working as engineer at the Edison Illuminating Company. Ford eventually became Chief Engineer, which meant he was on call all day, but he had flexibility and free time to “tinker, to visit machines shops, to trade tips and shoptalk with mechanics, and to experiment with improving his little gasoline engine.” He also took a job teaching metal working class at the YMCA, which gave him access to the school shop to on work metal parts for this automobile. Ford said:

Every night and all of every Saturday night I worked on the new motor. I cannot say that it was hard work. No work with interest is ever hard.

Bouncing Back from Failure

Ford failed many times. But kept going. Ford spent $86,000 (more than $2 million in today’s dollars) developing and manufacturing a car at his first investor backed company, Henry Ford Company. But he failed to produce a working production vehicle. Many say this was due to the fact that he continually changed the design of the automobile and never stopped to commit to making a particular design. Only three months after forming the Henry Ford Company, Ford either resigned or was fired. That company was renamed Cadillac Automobile Company.

Ford resented control by his investors in the Henry Ford Company. Ford said “They were to stay by me to have the experimental work done…From here in, my shop is always going to be my shop…I’m not going to have a lot of rich people telling me what to do.” After gaining fame as a race car builder and driver, Ford would make another attempt at automobile manufacturing in the Ford Motor Company.

Knowing the Target Market

Ford famously wanted to build an inexpensive car for the masses. However, Alex Malcolmson, an investor in Ford Motor Company, wanted to make an expensive car for the wealthy with a higher profit margin. Many other car companies were making expensive cars.

For a time, Ford did reluctantly produced an expensive car. For example, before making the Model T, Ford made the Model N, which weighed 1,050 pounds and sold for $600, the model K weighed some eighteen hundred pounds and cost $2,800. Eventually Malcolmson was forced out of the Ford Motor Company and Ford was left to pursue an inexpensive car.

The implementation of the assembly line allowed Ford to sell the Model T for $500. Ford said, “There are a lot more poor people than wealthy people. We’ll just build one car for the poor people.”

Invention of the Assembly Line

The adoption of the assembly line may be the most revolutionary change in industrial history. The idea is that the work should be moved to the worker instead of the worker moving to the work.

Before the adoption of the assembly line the best time for assembling a car chassis at the Ford plant was 12 hours and 28 minutes. By 1914, the assembly line enable this to be accomplished in 1 hour and 33 minutes.

The exact details surrounding the invention and adoption of the assembly line are muddy and uncertain, at least according to the account in Watts book. There conflicting stories about the origins of the assembly line. Watts says:

Henry Ford’s own version of things changed. At one point, he declared that the inspiration came from observing the overhead trolley that Chicago packers used in dressing beef at the slaughterhouses. Another time, he claimed that he got the idea from observing a watch factory where parts sat on a moving belt and assemblers took them off as required.

Others offered different stories. William C. Klann, foreman of motor assembly at the Highland Park facility, asserted that the conveyors used to transport sand in the factory foundry inspired the idea of using a similar method in the assembly process.

Charles Sorensen, in a memoir written many years later, averred that as early as 1908 he and several subordinates had arranged stock parts sequentially on the floor of the old Piquette Avenue factory, put a tow rope onto a car chassis with wheels, and pulled it from pile to pile, attaching appropriate components one after another. “Over several weeks we developed it as well as we could,” Sorensen wrote. “Then we laid it away and put it on the shelf until we were ready to use it.”

Regarding the first use of the assembly line at Ford’s plant, Watts provides:

Evidence suggests that the first actual use of the assembly line came on April 1,1913, when workers in the flywheel-magneto department stood alongside a waist-high table with a smooth metal surface and were instructed by foremen to install one part and then slide the component along to the next worker, who would add something else.

This soon led to the idea of pulling the evolving component along at a set rate with a chain, a move that steadied the process by speeding up the slow workers and slowing down the speedy ones. By tweaking this system in various small ways over the next few months, Ford supervisors were able to cut the man-minutes required for assembling the flywheel magneto from twenty to five.

This quadrupling of productivity caught the attention of nearly all Ford production engineers, and they began to develop the technique in various areas.

The creation of the assembly line at Ford’s factory revolutionized manufacturing. However, Ford’s bigotry leaves a dark stain the part he played in this innovation.

 

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How to be a Disruptive Inventor: Lessons from Alexander Bell

TheMasterSwitch_TimWu[the inventor’s] significance is enormous…The inventors we remember are significant not so much as inventors, but as founders of “disruptive” industries, ones that shake up the technological status quo. Through circumstance or luck, they are exactly at the right distance both to imagine the future and to create an independent industry to exploit it.

On the same day in 1876 that Alexander Bell’s patent application on the telephone was filed, a patent application by Elisha Gray was filed on the same invention. Sixteen years before this, Johann Philip Reis of Germany presented a primitive telephone to a scientific group. And, Daniel Drawbaugh, a Pennsylvania electrician, claimed that by 1869 he had a working telephone in his house.

The story of the invention of the telephone is similar to other invention stories where multiple inventors independently invent the same or similar invention within a short period of time. Steve Johnson notes that this substantially simultaneous invention occurs because the invention becomes “an adjacent possible” once founding or necessary elements or parts are created, discovered, or otherwise available. Tim Wu, author of The Master Switch: The Rise and Fall of Information Empire, notes the same phenomenon. One might question whether a particular inventor’s act of inventing is ever significant, if the invention/discovery was bound to happen, by this or another inventor. Wu argues the inventor’s significant is very important for founding of disruptive information industries in a process he calls “the Cycle.”

In The Master Switch, Wu provides a look at the control and innovation in information industries, such as the industries involving the telegraph, telephone, entertainment, radio, TV, and the Internet. These information industries tend move from a freely accessible channel to a channel that is strictly controlled by one corporation or cartel.

Wu’s thesis is that the history of information industries shows that such industries oscillate from an open to closed state in what he calls, i.e. “the Cycle.” Based on this history, Wu predicts that the information industry of the Internet may move from an open platform (which it currently is) to a closed system. A separation principle is needed to protect the Internet from being turned into a closed system. The separations principle provides, in part, the following must be kept separate: those who develop information, those who own the network infrastructure on which it travels, and those who control the tools or venues of access.

The book provides a discussion of the development of the telephone industry as one example of (1) a birth of an information industry and (2) the characteristics of a disruptive inventor.

Inventor’s Enormous Value As Disruptor

Wu describes invention as making available the adjacent possible. The reality that there was no single inventors of the telephone “suggests that what we call invention, while not easy, is simply what happens once a technology’s development reaches a point where the next step become available to many people,” said Wu.  Wu notes that others had provided the tools for the adjacent possible telephone, e.g. others has invented wires, the telegraph, and discovered electricity and the basic principles of acoustics. Therefore the building blocks for the telephone were available and Bell had to put them together. Wu asserts, that “inventors are often more like craftsman than miracle workers.”

Given the regularity with which simultaneous discovery/invention occurs, should the lone inventor be accorded much significance? Wu says the inventor’s significance is still enormous:

…I would argue his significance is enormous; but not for the reasons usually imagined. The inventors we remember are significant not so much as inventors, but as founders of “disruptive” industries, ones that shake up the technological status quo. Through circumstance or luck, they are exactly at the right distance both to imagine the future and to create an independent industry to exploit it.

Bell build the telephone industry that eventually killed the prior communication industry, the telegraph industry dominated by Western Union. Bell’s patent turned out to be a critical asset for doing so.

Be an Outsider

Wu notes several conditions that help a disruptive innovator succeed. First, it is important for the inventor to be an outsider with some distance from the current industry:

Let’s focus, first, on the act of invention. The importance of the outsider here owes to his being at the right remove from the prevailing currents of thought about the problem at hand. That distance affords a perspective close enough to understand the problem, yet far enough for greater freedom of thought, freedom from, as it were, the cognitive distortion of what is as opposed to what could be. This innovative distance explains why so many of those who turn an industry upside down are outsiders, even outcasts.

Disruptive innovation supplants or destroys existing products or industries, and sustaining innovation provides incremental improvements. The outsider status of some inventors provides him/her the freedom of a disinterested party:

Another advantage of the outside inventor is less a matter of the imagination than of his being a disinterested party. Distance creates a freedom to develop inventions that might challenge or even destroy the business model of the dominant industry. The outsider is often the only one who can afford to scuttle a perfectly sound ship, to propose an industry that might challenge the business establishment or suggest a whole new business model. Those closer to—often at the trough of—existing industries face a remarkably constant pressure not to invent things that will ruin their employer. The outsider has nothing to lose.

Bell was an outsider. Bell was a professor, who taught the deaf, and amateur inventor. He worked out of the machine shop in his attic trying to transmit voice across wires. These early efforts are described by Wu as “mostly futile, and the bell company was little more than a typically hopeless startup.”

But not too Far Away

It is not any distance that will work. The right distance is needed because but too much distance from the industry or the adjacent possible puts you out of the game:

It may be that Daniel Drawbaugh actually did invent the telephone seven years before Bell. We may never know; but even if he did, it doesn’t really matter, because he didn’t do anything with it. He was doomed to remain an inventor, not a founder, for he was just too far away from the action to found a disruptive industry.

Wu credits Bell’s partnership with patent attorney, Gardiner Hubbard, a critic of the Telephgraph company, as placing Bell close enough to the industry. Hubbard formed Bell’s invention into a campaign to supplant Western Union as the dominate communications company. Here, like in the case of Telsa, the Bell brought on savvy partner to help with the commercialization efforts.

In contrast, Elisha Gray’s backer was Samuel White. White wanted Gray to focus on an acoustic telegraph. The acoustic telegraph appeared to be destined for large profits as compared to the unestablished telephone. Wu suggests that but for White’s opposition to Gray working on the telephone and Gray’s need to keep his work on the telephone secret, Gray might have developed a working telephone and patented it before Bell.

Don’t be Distracted by an Apparent Pot of Money for Incremental Invention 

Wu says, “The inability of Hubbard, White, and everyone else to recognize the promise of the telephone represented a pattern that recurs with a frequency embarrassing to the human race.” To a hammer, everything looks like a nail. Our minds are too lazy to seek out new ways of thinking when old ones will due.  “Nothing … concentrates the mind like piles of cash, and the obvious rewards awaiting any telegraph improver were a distraction for anyone even inclined to think about telephony, a fact that actually helped bell.” said Wu.

Conclusion

Wu says “through circumstance or luck” the disruptive inventor is at the right distance to disrupt an industry. However, you may be able to intentionally set yourself up for to be a disruptive inventor by exposing yourself to diverse ideas across disciplines to be in the position to recognize the adjacent possible, having some distance from the targeted industry, and not being distracted by the apparent financial gain available from incremental invention within the targeted industry.

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What is a NDA (NonDisclosure Agreement)?

NondisclosureAgreement2A NonDisclosure Agreement (NDA) or Confidentiality Agreement is a written agreement where one or more parties agree to keep information that is disclosed confidential. Generally a NDA will be used when one party wants to disclose confidential information to a second party. Occasionally, a mutual NDA will be needed if both parties intend to disclose confidential information to each other.

Patent Law and Disclosures
Prior to the enactment of the America Invents Act (AIA), the United States provided a one year grace period which requires that within one year after certain activities, such as a public disclosure of the invention, a patent application must be filed or the inventor is prohibited from filing a patent application. The AIA made changes to the law which raised doubts about how and under what circumstances the one year grace period applies. The new AIA provisions have not yet be interpreted been a court.

Therefore, it is now best to file a patent application in the U.S. before any non-confidential disclosure. Further, most foreign countries do not provide a grace period and require a patent application to be filed before any public disclosure. Therefore, in order to best protect your ability to seek patent protection, it is a best practice to have a NDA signed by any person or party that you intend to disclose your invention to before a patent application is filed. However, if a disclosure has been made without an NDA, check with a patent attorney, as you still may have an option to file a patent application.

Examples Scenarios
While the safest approach is to have a patent application filed at the earliest time before any disclosure, there may be scenarios where you believe it is necessary to disclose an invention or other confidential information to a third party before a patent application is filed. For example, it may be necessary to engage an engineer to assist in creating CAD drawings of your invention. Further, it may be necessary or desirable to work with a manufacturer or designer to develop a prototype of the invention before filing a patent application. The inventor may also need to disclose the information to bankers, venture capitalist, other financial backers, or potential business partners in order to move forward with the inventors business or to otherwise exploit the invention. In these and other scenarios it is important that the inventor or invention owner obtain a signed NDA from the party that is to receive confidential information about the invention so that the disclosure does not negatively impact your ability to seek patent protection.

NDA Provisions
A NDA generally has several components. A NDA will identify the parties to the agreement. It will identify the information that the disclosing party(ies) deem confidential. It will identify information that will not be considered confidential, if any. It will require that the receiving party maintain the information disclosed by the disclosing party in confidence and to take reasonable steps to ensure that the information is not disclosed. Often the NDA provides provisions that the information can used for (1) specific purpose, such as for the purpose of evaluating potential business and/or investment relationships with the Disclosing party or (2) more generally, only for the sole and exclusive benefit of the Disclosing Party.

Some NDAs have a specific time frame where the NDA is effective, such as for 3 years. Other NDAs provide a time frame that extents indefinitely.

Trustworthy Receiving Parties
NDAs are not self-enforcing. Therefore, you should endeavour to disclose confidential information only to those that are trustworthy. If the party that you are disclosing to breaches the NDA, you will be forced to hire a lawyer and take action against that person. This can be disruptive and time consuming. Therefore, it is generally worth investigating the trustworthiness of anyone you will be disclosing confidential information to under an NDA.

Conclusion
Having a written NDA signed is an important first step before disclosing confidential information to others before a patent application is filed.

Photo credit to flickr user DaveBleasdale under this creative commons license.

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Childhood Hands-on Play an Indicator of Furture Creativity

Play_StuartBrown“Unlike their elders, the young engineers couldn’t spot the key flaw in one of the complex systems they were working on, toss the problem around, break it down, pick it apart, tease out its critical elements, and rearrange them in innovative ways that led to a solution.”

Scientists and engineers at Cal Tech’s Jet Propulsion Laboratory (JPL) have over the years invented and designed major components of manned and unmanned space missions. In the 1990’s, JPL began replacing retiring engineers and scientist that started in the 1960’s. However, while the new hires came from top engineering schools, the new hires were not very good at certain types of problems solving that involved taking theory to practice. What were the new engineers missing?

Stuart Brown’s book Play: How it Shapes the Brain, Opens the Imagination, and Invigorates the Soul explores the important effect that play has on our lives.

Indicator of Future Creativity

One area that play positively effects is creativity. As Brown explains regarding JPL, the new hires had excellent grades from the best schools, but that was not enough. Nate Jones, owner of a machine shop specializing in racing tires, encountered the same problems as JPL did in hiring. Jones found that employees that had “worked and played with their hands as they were growing up were able to ‘see solutions’ that those who had not work with their hands could not.”

The managers at JPL found as similar pattern. They found the older employees, in their youth, had taken a part clock to see how they work, or made soapbox derby racers, build hi-fi stereos, or fixed appliances. The young engineers that had done the same thing–worked with their hands in their youth–were good at problem solving, but those who had not, were generally not. After making this discovery, JPL managers changed their interview process for new hires to ask applicants about projects and play they engaged in during their childhood.

In view of this Brown states, “The engineers that JPL found to be so adept were the one who had played [using] their hands in their youth…They performed well as adult engineers not because they had lots of practice working on watches, but because in a sense they were doing for work what they had always done for pure enjoyment.” This is along the same lines as  Paul Graham’s advice to hire programmers that write software in their free time.

Brown continues: “..there is a kind of magic in play. What might seem like a frivolous or even a childish pursuit is ultimately beneficial. It’s paradoxical that a little bit of ‘nonproductive’ activity can make one enormously more productive and invigorated in other aspects of life.”

Defining Play

Brown asserts that it is difficult to provide an all-inclusive definition of play, but provides that play generally has the following properties: (1) it is apparently purposeless and done for its own sake, (2)  it is done voluntary, (3) it has inherent attraction, (4) it provides freedom from time in that we can loose track of time in a state of flow, (5) it provides diminished self-consciousness, (6) it creates potential for improvisation, and (7) it creates a desire to continue doing it.

The examples provided by Brown may be anecdotal, but Brown is not the only one drawing the connection between childhood play and creativity.  If childhood hands-on play is, in fact, an indicator of future creativity, business owners and hiring managers may like to consider this factor when choosing employees or business partners.

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Fending Off Competitors with Barriers to Entry: Hard Problems and Networks

BarriersToEntry_HardProblems“If you can develop technology that’s simply too hard for competitors to duplicate, you don’t need to rely on other defenses. Start by picking a hard problem, and then at every decision point, take the harder choice.” – Paul Graham

Patents are not the only barriers to entry. Sometimes the technology can’t be patented, sometimes patent deadlines are missed, sometimes there’s not yet enough money to pursue a patent, sometimes you’re not sufficiently certain whether the invention will be the next big thing so as to justify pursuing a patent. Sometimes your looking for protection instead of or in addition to patents and you already explored the legal alternatives to patenting. What other barriers are there?

Barriers to entry provide a competitive advantage in the market place. If it is too hard for your competitors to enter a market or solve the problems you are solving, then you will have less competition. With less competition, you will be able to charge a premium for your solution. Financial backers, such as venture capitalist, are often interested in barriers to entry related to your solution because those barriers protect the financer’s investment. Barriers to entry come in many forms. Below I look at the strategy of picking hard problems and building networks, among the many others that might apply.

Pick Hard Problems

Paul Graham explains why it is important to pick hard problems to solve.

Use difficulty as a guide not just in selecting the overall aim of your company, but also at decision points along the way. At Viaweb one of our rules of thumb was run upstairs. Suppose you are a little, nimble guy being chased by a big, fat, bully. You open a door and find yourself in a staircase. Do you go up or down? I say up. The bully can probably run downstairs as fast as you can. Going upstairs his bulk will be more of a disadvantage. Running upstairs is hard for you but even harder for him.

What this meant in practice was that we deliberately sought hard problems. If there were two features we could add to our software, both equally valuable in proportion to their difficulty, we’d always take the harder one. Not just because it was more valuable, but because it was harder. … I can remember times when we were just exhausted after wrestling all day with some horrible technical problem. And I’d be delighted, because something that was hard for us would be impossible for our competitors.

Seth Godin notes Ford’s advantage by taking on hard problems:

Henry Ford did the same thing [take on hard problems] with the relentless scale and efficiency he built at Ford. Others couldn’t imagine raising their own sheep to make their own wool to make their own seat fabric…

“How do we do something so difficult that others can’t imagine doing it?” is a fine question to ask today.

Build-in Network Effects

VC, Fred Wilson, notes another way to create a barrier to entry is to develop a product or service that features a network effect. Fred provides an illustrative story–read the whole story here–involving the dentist industry where the first entrant provides high priced software for managing a dental office. A second entrant run by two entrepreneurs develops a low priced version of the software with mobile apps which eat away at the first entrant’s market. Then an open source version of the software is developed, which kills the first and second entrant’s businesses. Fred concludes:

…software alone is a commodity. There is nothing stopping anyone from copying the feature set, making it better, cheaper, and faster. And they will do that. … we asked ourselves, ‘what will provide defensibility’ and the answer we came to was networks of users, transactions, or data inside the software. We felt that if an entrepreneur could include something other than features and functions in their software, something that was not a commodity, then their software would be more defensible. That led us to social media, to Delicious, Tumblr, and Twitter. And marketplaces like Etsy, Lending Club, and Kickstarter. And enterprise oriented networks like Workmarket, C2FO, and SiftScience….
[emphasis added]

Conclusion

When you build technology that requires a network of users and you gain a user base, it is hard for competitors to be successful because simply copying the software is not enough. The competitor needs users too. Getting users is (or at least can be) hard. So the “network effects” barrier to entry may simply be one type of “pick hard problems” barrier to entry.

Photo credit to flickr user Anton Steiner under this creative commons license.

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How to Invent Like Nikola Tesla

 Tesla“I do not rush into constructive work. When I get an idea, I start right away to build it up in my mind. I change the structure, I make improvements, I experiment, I run the device in my mind.” – Nikola Tesla

Nikola Tesla had a theoretical approach to inventing. His theoretical approach to inventing was different from Thomas Edison’s experimental approach to inventing. Tesla would work the invention over in this mind and try to discern the fundamental principle on which the invention would be based. In my first post on Tesla, I discussed lessons for licensing inventions based on how Tesla’s AC power system was licensed to Westinghouse. In this second post, I’ll look at the process that Tesla undertook when inventing.

Nikola Tesla is an inventor best known for his contribution to the design of alternating current (AC). His AC power systems provided the foundation for the AC power systems we have today. Tesla invented (1) a new AC motor that used a rotating magnetic field, (2) a multiphase AC system used in generating and transmitting electric power, which was used in a hydroelectric project at Niagara Falls, (3) a high frequency high-voltage transformer (now known as a Tesla Coil), (4) new electric lamps, and (5) a combination steam engine and electronic generator, among other inventions. Bernard Carlson’s biography,  Tesla: Inventor of the Electrical Age, provides a detailed look at Tesla’s life and work. Here’s how Tesla took to inventing.

Theoretical Approach to Invention

Tesla explained his theoretical approach to invention as contrasted with Edison’s experimental approach:

I have unconsciously evolved what I consider a new method of materializing inventive concepts and ideas, which is exactly opposite to the purely experimental of which undoubtedly Edison is the greatest and most successful exponent. The moment you construct a device to carry into practice a crude idea you will find yourself inevitably engrossed with the details and defects of the apparatus. As you go on improving and reconstructing, your force of concentration diminishes and you lose sight of the great underlying principle. You obtain results, but at the sacrifice of quality.

My method is different. I do not rush into constructive work. When I get an idea, I start right away to build it up in my mind. I change the structure, I make improvements, I experiment, I run the device in my mind. It is absolutely the same to me whether I operate my turbine in thought or test it actually in my shop. It makes no difference, the results are the same. In this way, you see, I can rapidly develop and perfect an invention, without touching anything. When I have gone so far that I have put into the device every possible improvement I can think of, that I can see no fault anywhere, I then construct this final product of my brain. Every time my device works as I conceive it should and my experiment comes out exactly as I plan it.

It is doubtful that the final product always worked exactly as he planned it. But, the excerpt shows that he thought that moving to experimental prototypes too soon forced the inventor to get too deep in the details of the invention. When deep in the details of prototyping the inventor might loose sight of the fundamental principle at issue. In loosing sight of the principle at issue the inventor might miss the ideal version of the invention.

Invention Incubation and Refinement

The final conceived invention did not come to him all at once. Instead a long incubation period may occur. In this period the invention or idea is set aside from deliberate effort and the invention and its components are allowed to incubate in the mind. The subconscious mind is allowed to work on the problem. Tesla discussed his incubation and refining stage of the inventive process:

After experiencing a desire to invent a particular thing, I may go on for months or years with the idea in the back of my head. Whenever I feel like it, I roam around in my imagination and think about the problem without any deliberate concentration. This is a period of incubation. Then follows the period of direct effort.

I choose carefully the possible solutions of the problem I am considering, and gradually center my mind on a narrowed field of investigation. Now, when I deliberately think of the problem in its specific features, I may begin to feel that I am going to get the solution. And the wonderful thing is that if I do feel this way, then I know I have really solved the problem and shall get what I am after.

After incubation, Tesla would analyze the possible options and choose a direction. As Carlson stated, “In spite of the vast popular literature celebrating Eureka moments, Tesla found that an insight, intuition, or hunches had to be refined in the mind through rigorous thought and analysis.”

Expansive Imagination

But to come up with the ideas in the first place, Tesla needed to tap an expansive imagination. Carlson states:

“Tesla’s great strength was that he was willing to think like a maverick. With his [AC] motor, for instance, while most other investigators worried about changing the direction of the magnetic poles in the rotor, Tesla instead figured out how to create a rotating magnetic field in the stator… If everyone knocks on the front door, Tesla is suggesting, then one way forward is to go around the house and see if there is a back door. To find that back door, though, one needs to cultivate an expansive imagination…If we don’t take chances in our imagination, how can we even begin to find the maverick ideas or ideals?”

How to Invent Like Tesla

To invent like Tesla, you need to cultivate an expansive imagination. Next, gather information relevant to your field and allow information and ideas to incubate in your mind, often without deliberate concentration on the idea or problem. Once you have centered on a solution or invention, work through variations, improvements, and refinements in your mind before moving to the prototyping stage.

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Licensing an Invention: Lessons from Nikola Tesla

TeslaNikola Tesla was reduced to taking work as a day laborer digging ditches after previously working as an engineer with the Edison Company and then being forced out of a company he started with two other investors. He was down on his luck, unable to find work as an inventor or engineer.  He was broke and despondent describing this time as “a year of terrible heartaches and bitter tears.” He lamented that all of his high education in science and mechanics was “a mockery.”

But in the midst of this hardship he did not give up on inventing. He continued his work and filed a patent on a hydromagnetic motor. Opportunity would come through an unexpected place–through a network connection prompted by the mere discussion of his hydromagnetic motor invention on the ditch digging job. This story shows the need for carrying on in the face of adversity.

Nikola Tesla is an inventor best known for his contribution to the design of alternating current (AC). His work on the AC motor and AC power allowed for transmission of power for longer distances. His AC systems provide a foundation for the AC power systems used today. His work on AC electricity brought him recognition and wealth in his 30’s, but in his forties his stature fell somewhat by his actions and efforts related to the wireless transmission of power. Bernard Carlson’s biography,  Tesla: Inventor of the Electrical Age, provides a detailed look at Tesla’s life and work.

The success in licensing rights in Tesla’s AC motor and AC power system patents to the Westinghouse Electric Company provides potential lessons for licensing an invention and taking it to market.

 1. Use your Network to Find A Partner

While Tesla was working day labor digging ditches, as explained above, Tesla told the foreman about his invention efforts on the hydromagnetic motor. The foreman then introduced Tesla to Alfred Brown, who was the senior Western Union Manager. Brown knew he needed the business help of Charles Peck, who he knew previously. Brown was technically oriented and Charles Peck was business savvy.

Peck and Brown agreed to cover Tesla’s development and patenting costs. They also provided him with a salary of $250 per month. The three agreed to split the profits in thirds with a third to Peck and Brown, a third to Tesla, and a third reinvested in future developments. Before focusing on AC motors, Peck and Brown first encouraged Tesla to work on a pryomagnetic generator.

Not every inventor needs a financial/business partner but sometimes its helpful. You never know who in your extended network can help. Its not clear that Tesla was asking for help from the foreman. It appears that he was merely talking about his invention. Tesla was able to talk freely about his thermomagnetic motor invention because he had already filed a patent application on it. Sometimes you might want to keep your invention confidential even after filing a patent application for business or competitive reasons (not patent reasons). But in other cases, talking about the invention after filing a patent application in conversations with others can produce unexpected positive connections and results.

2. Know When To Pivot

Tesla’s efforts at making a pyromagnetic generator ran into problems. As Carlson recounts, Tesla was “[d]istressed that he was an able to perfect this invention, [and] Tesla feared that Peck and Brown might abandon him….” But they did not. Peck had confidence in Tesla. Peck encouraged Tesla to focus his work on an electric motor.

Peck likely encourage Tesla to work on electric motors, because he was aware of the market at the time. Carlson writes, “Peck and Brown were probably comfortable with Tesla investigating motors because of the growing discussion in electrical circles about using motors in central stations.” It can be difficult to know where to pivot to. But it is important to be aware of the market developments, which can indicate where to turn next.

3. Have Something to Show

Tesla had to convince Peck and Brown that he should work on AC motors rather than DC motors. Nearly all of the central stations in the U.S. in the mid-1880’s were running DC not AC. The DC generators and the copper distribution network required Edison to sell DC systems in densely populated areas. Westinghouse therefore saw an opportunity to design AC systems that could serve dispersed populations profitably.

In order to convince Peck and Brown that AC was the way to go, Tesla devised a demonstration. The demonstration had a similar purpose as Christopher Columbus’s alleged demonstration to Queen Isabella where Columbus allegedly stood an egg on its end in order to convince the Queen to finance Columbus’ ships.

To demonstrate the power of AC rotating magnetic current, Tesla attached a four-coil magnet to the underside of a table. He placed a copper plated egg and several balls on top of the table. Tesla applied two out-of-phase currents to the magnet, which caused the egg to stand on end and caused the egg and the balls to rotate on the table top. Tesla explained that the spinning was caused by the rotating magnetic current. Peck and Brown were then impressed and supported Tesla’s work on AC motors.

Tesla learned from this that to sell others on his invention he had to provide a demonstration or a show. I think this is likely true for many inventions. It harder to sell an invention without a prototype or a demonstration that allows others to see how it will work. Oral and written descriptions often do not have the persuasive power of a prototype or demonstration that others can see and touch. In Tesla’s case the demonstration was not even a motor. Instead the rotating egg showed the power of AC. Since a motor’s function is to rotate an output shaft the rotation of a metal egg was a sufficient proxy to achieve the desired interest from Brown and Peck.

4. Have a Story to Tell

Every successful inventor must tell a story that sells the invention to financial backers, other companies, decision makers, and/or the ultimate consumer. As Carlson stated, “no idea, no invention goes anywhere unless one is willing to tell a story about it, a story that another person finds interesting and persuasive.”

Not only did Tesla have something to show, he had a story that accompanied the demonstration. His story tied his invention to a famous figure, Columbus, who achieved what others thought was not possible–sailing west without falling off the flat earth–and in doing so, made a remarkable discovery, America. The implicit link that Tesla made was that if Peck and Brown got on board with AC, they would be associated with an endeavor that would change the world.

5. File Patent Application(s)

After Tesla developed a prototype model polyphase AC motor in his lab, he proceeded to file a patent application. And instead of filing multiple applications on individual motor designs, he and his patent attorney Parker Page filed one comprehensive patent application that included not only a new AC motor, but also a new system of electrical power transmission. According to Carlson, this was a bold and unusual move at the time. However, now it is quite common to file a patent application covering an overall system.

As Tesla did, the safest position is to file a patent application before going public with the invention. In the U.S. (but not most foreign countries) there is a one year grace period, but its best not to rely on it if you don’t need to.

6. Build Your Reputation, Obtain Social Proof

Brown and Peck decided on a strategy of patent-promote-license regarding Tesla’s inventions. They decided that in order to successfully promote Tesla’s inventions, Tesla needed to gain recognition in the field. Tesla had not previously joined any trade organizations or been involved in the electrical engineering community. First, they obtained the endorsement of a known exper in the field, Professor William Anthony. Tesla demonstrated his AC motor to Anthony and Anthony was impressed. Anthony then spread the news about Tesla’s motors to his fellow engineers and discussed the motors in a lecture he gave at MIT.  Therefore, the endorsement of Anthony provided the initial social proof within the relevant community. Then, Peak and Brown contacted the technical press and Tesla’s inventions received favorable coverage there. Then Tesla was invited to give a lecture on his motor and system of electrical power transmission at a meeting of the American Institute Electrical Engineers. This set the stage for the licensing of the patents to Westinghouse.

Not every invention requires a strong technical reputation in order to gain recognition with the intended audience. However, you need to have an understanding of what your audience expects in order to gain their attention and have them take you seriously. Tesla gained the social proof within the required group in order for his invention to be taken seriously. You need to figure out what social proof and reputation is necessary or helpful in promoting your invention. And as Telsa’s experience shows, you don’t have to have a preexisting strong reputation, you can build one when you need it.

7. Make the Sale

Ultimately Peck worked out a license of the patents to the Westinghouse Company for what amounted to $200,000 over ten years. More work had to be done in the development of Tesla’s AC power systems at Westinghouse, but licensing was a step along the path that ultimately put Telsa’s power systems in commercial use.

Peck died later and Tesla was unable to find someone like Peck who could guide his inventive efforts and help sell his later inventions. Therefore, Tesla is often known for his later inability to successfully commercialize his inventions after the AC motor/power invention. Yet, as shown above, Tesla benefited from the partnership with Peck and Brown. They were able to successfully guide the licensing of this inventions related to AC power. Of course, not all inventors require a business partner. But inventors and entrepreneurs sometimes forge relationships that foster a balance between creativity/imagination and business.

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Do I need a utility patent or a design patent?

Design patents protect the visual ornamentation embodied in an article of manufacture (e.g. a product). In other words, a design patent protects the way a product looks. This is in contrast to a utility patent that protects a process or the way a product functions or operates.

The Ordinary Observer
The protection afforded by a design patent is quite narrow as compared to that provided by a utility patent. Design patents are effective at preventing direct knockoffs. Courts have set out an ordinary observer test for determining whether a design patent covered a product, e.g. whether the product infringed the design patent. The court will consider whether the product and the design shown in the drawings of the design patent are substantially the same in the view of the ordinary observer.

What do your customers care about?
If customers would be satisfied with a competitor’s product that has an appearance that is not substantially the same as your product, then a design patent may not provide a large competitive advantage. However, design patents are particularly useful for product the visual appearance of products where the appearance an important factor in the purchasing decision of a customer.

Protecting Unique Portions of Product
Design patents can be drafted to cover not just the entire visual appearance of a product, but also a portion of the visual appearance of a product. In this way, the most unique portion of the product can be protected regardless of the more usual or unimportant portions of the product.

Protecting an Invention with Design and Utility Patent Protection
When concerning whether to seek a design patent or a utility patent, it is important to consider whether you would like to stop competitors from copying the visual appearance of your product (design patent protection) or the functional features of your product (utility patent protection). You might decide that you want to prevent competitors from copying the visual appearance and the functional features of your product, in which case you would file a design patent application and a utility patent application on your product.

Summary
A design patent (1) is relatively inexpensive compared to a utility patent, (2) protects the visual appearance of a product or a portion of a product, (3) is effective for preventing or stopping direct copying of the visual appearance of the product, (4) has a 14 year term, and (5) does not require the payment of maintenance fees after the design patent is granted.

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What if someone else invented with me (Co-Inventor Disagreements)?

When more than one person contributes to the conception of an invention, each person contributing will be a co-inventor of that invention on the corresponding patent application. The combination of all of those that contributed to the conception of an idea claimed in a patent is known as the inventorship of the patent or patent application. This article explains steps that can be taken to handle future situations where a disagreement arises between the co-inventors.

Inventorship
Inventorship cannot be negotiated. In other words, you cannot agree that someone that did not contribute to the conception of the invention is an inventor. Likewise, you cannot agree that someone that did contribute to the conception of the invention is not an inventor. If a person contributed to the conception of the invention claim in a patent application, that person must be named as in inventor.

Sometimes workman or engineers are hired to make a prototype of the invention. If the hired person only carries out your instructions for making the invention, then that person might not be considered an inventor depending on the circumstances.

Ownership
On the other hand, ownership of an invention can be negotiated and transferred. Therefore if one person conceived on the invention, and a second person provided funds to patent and commercialize the invention. The first person would be the inventor, but the second person could not be named as an inventor. Instead the first and second person could form a partnership, corporation, LLC, or other entity, where each person’s ownership interest could be divided in the entity and the entity could own the invention. Further, the first person could sell all of the right in the invention to the second person and then the second person would be the owner and the first person would be the inventor.

Joint Inventors
If there are two or more inventors, under the patent law, each inventor will own the patent jointly with the other inventors. However, under the law this allows each inventor to make, market, sell, license, or otherwise grant rights in the patent and receive moneys therefrom without splitting the funds with the other inventors. Further, the each inventor does not need to get permission from the other inventors to undertake such activities with respect to the patent.

Co-Inventor Disagreements
One problem arises, if all inventors are not in agreement. This can occur when one inventor is engaged with an company that has an interested in licensing or selling the product/service. They may be less likely to do a deal if they know that an uncorperative inventor could sell the same rights to that company’s competitor, in which case they would have to compete with that other company to sell the patented product. That competition would make the deal less valuable to either company than if they had no competition.

This is normally not a problem when all inventors are in agreement. However, it becomes a problem when inventors having a falling out or disagree about how the patent should be utilized. Further it is problem if one inventor wants to proceed forward with commercializing the invention and the other inventor no longer wants to participate. While at the beginning inventors maybe in agreement about how they intend to proceed, it can take between 3 and 5 years to obtain a patent and a lot can change during that time.

Legal Entity for Ownership and Invention Exploitation
Whenever there are more than one inventor it is best to form a legal entity in which the inventors own an interest (e.g. own shares). The ownership of the invention can be transferred to the legal entity. The internal operating documents of the entity can describe (1) the ownership interest of each inventor (and other non-inventors, if desired), (2) how the invention will be commercially exploited, (3) how disputes are resolved between inventors, (4) what happens if one or more inventors wants to proceed but other inventors do not, and (5) many other business considerations.

The legal entity formed can be a written partnership, a corporation, an LLC, or other entity. The legal entity provides the vehicle for owning the patent, making decisions with respect to the patent and its commercial exploitation, and dealing with situations where an inventor wants out of the business. Further the legal entity may be attractive to potential business partners and licensees because they would need to deal with one entity and not multiple inventors.

Therefore, forming a legal entity to own invention rights in an invention having multiple in inventors can lend clarity to the commercialization and decision making processes related to the invention and related patent application or patent.