Apple V Samsung With Tom And Tracy Hazzard From The Successful Pitch Podcast With John Livesay

We use that sort of patent portfolio or fortress strategy that we use. We use that because it builds a higher valuation across many things and then it's sort of a risk assessment on a portfolio. So when you have one single patent then there's this higher risk factor that gets mixed in by whoever's doing the valuation or the investment valuation and kind of considering it and looking at that.

Welcome to the Successful Pitch if you're a startup founder struggling with your investment investor pitch, we can teach you the steps to get funded fast. We interview investors who share their pitch funding criteria. We also talk with founders who share their startup funding success stories. Funding strategist John Livesay is your host each episode. Having helped many businesses craft their funding pitch. Inc. Magazine now calls him the Pitch Whisperer. John will help you learn to craft your own concise and compelling pitch using the same tactics he used help businesses during his 15 year award winning sales career at Conde Nast combined with insights from his best selling book the 7 Most Powerful Selling Secrets. Once you are pitch perfect from the tips you learn on this podcast, John can make the all important warm introductions to the right investors who have appeared on the show. Your Funding Success begins with the Successful.

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Today the Successful Pitch I have a bonus episode of two really smart and really nice people named Tom and Tracy Hazard. They're based in Orange County, California, so just down the road from me in LA. They're product designers and design experts of has design. They've collectively designed and developed over 250 products which has generated over $1 billion in revenue for their retail clients and counting. They hold over 37 utility and design patents with an unprecedented 86% commercialization rate which is double the national average. Their entrepreneur experiences are taught in a Harvard Business review course in 26 universities around the world. Both Tom and Tracy have their products in all the major retailers, wholesale clubs, electronic boutiques and office superstores. Their best selling Mesh office chair has been in Costco for over four years straight. Tom and Tracy are the hosts of the 3D printing podcast WTFF.

Which you have to know 3D podcasting to understand what that is, which is ranked number one in iTunes with over 45,000 listeners monthly. Besides being featured on numerous podcasts and publications like Entrepreneur, Forbes, Wired, Fortune, Small Business and CNN Money, Tracy pens a regular featured Ink column on innovation and I've been fortunate enough to be in one of her columns. So they are the experts in talking about everything to do with innovation and design and I asked them to record a special episode with just the two of them talking as if you're at eavesdropping in on their personal conversation like you would on their 3D podcast. But in this case they're talking about the latest ruling by the Supreme Court in Apple versus Samsung and how that impacts people who have a design patent and their valuation. I think you're really going to love this episode. Enjoy. The interview begins in 45 seconds right after this information on how you can get funded fast.

Are you a funder struggling with your investor pitch? Do you need warm introductions to the right investors to get your startup funded? Do you need a funding roadmap to get you there fast? All of this and more can be found in Crack the Funding Code. Join hosts John Livesay and Judy Robinett, best selling author of how to Be a Power Connector and board member of Elluminate Ventures, on their free Crack the Funding Code webinar. Simply go to Judy Robinette, that's J U D Y R O B I n e t t.com and click on the webinar tab to see how to tap into their network of investors from around the world. There's a link in the show Notes as well. You're only one click away from getting funded fast.

It occurred to me the other day that listeners of the Successful Pitch podcast, especially the founders that listen to the podcast all the time, might be very concerned about the Supreme Court ruling, Apple v. Samsung, about design patents and its effect on their valuations and their pitches.

I think it's a valid thing to be concerned about, especially because there is as of now, no real official test yet as to how liable Samsung is for their infringement of Apple's patent.

Yeah.

Or how much less Apple gets in the process.

Right.

So let's go over it a little bit. This has been a patent battle playing out in the system for several years now, and most recently, I think in the summer of 2016, Samsung was held liable for patent infringement of the iPhone with their Samsung phones. And this is over a design patent which really dictated the outside ornamental look of the Apple iPhone. And Samsung was found to have infringed on that patent with the outside ornamental design of one of their Apple phones. And then Apple was awarded a huge sum of money, originally a staggering $548 million. And Samsung was hoping to get 400 million of that back. And they've appealed it to the Supreme Court saying just because the outside design is the we shouldn't have to be liable for all the profits of our Samsung phone because there's so much more in it in terms of electronics and software and other things that really represent a lot more of the profits that they make on their phone.

Right. The idea is that something that's an ingredient in the sales process and one of many reasons why somebody would buy an Apple phone and then Samsung happened to copy in this particular case isn't a reason to get 100% of the profits of the sales of those items during that time period. So that's what they're talking about is like whether or not they should sub cut up the profit, divvy it up based on the percentage that that might have an impact on.

And honestly, that seems reasonable to me as someone who has a lot of patents and understands what goes into a patent and how big a role it plays in a product, it seems to me logical that just because Samsung copied, intentionally or not, the look of the iPhone doesn't mean that that look was completely responsible for all the profits they got. They have their software, their technology, their user interface, operating system, et cetera.

Exactly. I mean, there's lots more reasons why you buy an iPhone versus a Samsung phone. And the thing is though, is that right now, while this was actually a very, very quick ruling by the Supreme Court and the decision was very clear, but the process by which it's going to be determined and used as a rule of thumb as to how to divvy up the profits and how to decide what that percentage is that's liable is now been dropped down to the lower court that made the original ruling, which is leaving a lot of uncertainty. And that's maybe why there's a little bit of concern anxiety in the founder community, especially those that are depending their valuations on these patents, because the decision here changes the valuation that your design patent, if you have one, might be valued at in that process.

Right. Yeah. The Supreme Court, I guess, declined to issue a ruling on a test or a measurement. How do you decide how much of the profits should be owed to an infringer who infringes on a design patent that represents a portion of the value of the profits of the product? So the lower courts are going to have to resolve that test and that's going to take some time and eventually they will come out with a test and, and I'm hoping that will be a very good thing because then we'll all know what the potential liability is in this kind of a situation.

Yeah, it'd be great if it's extremely clear. That's hopeful thinking though. But I really want to step back and start talking about this from our perspective. So we have 37 patents pending and issued in the mix, and probably I think close to 25 of them are utility and 10 or 12 of them are design. So we don't really rely heavily on design patents. They're there, they're in the mix. But as we've in practice, we've never treated them with a high valuation before. We've always treated design patents as more of maybe an offensive strategy or even a defensive strategy in certain cases where we're plugging some holes and surrounding the utility patent with good other patents. And we call it a patent fortress strategy.

Yeah, that's we're building sort of a large base of intellectual property around a certain product, and sometimes there's a utility patent involved, and other times we want to add design patents to that to make it a stronger defense against potential infringer. But other times there are appropriate situations where you may just want a design patent on your product and they are limited in what they can protect. But if the ornamental look of your product is really critical to the identity of your product and the success of your product, then design patent may be very useful for you.

But we use that sort of patent portfolio or fortress strategy that we use. We use that because it builds a higher valuation across many things and then it's sort of a risk assessment on a portfolio. So when you have one single patent, then there's this higher risk factor that gets mixed in by whoever's doing the valuation or the investment valuation and kind of consistent considering it and looking at that. But when you have a mix of things that are in various states of issue, some of them might be provisional, some of them might be filed, some of them might be issued. When you have a mix of those things, it makes it harder for them to assess you at that high risk state. Some of it is more balanced here. Some will likely issue, some will likely be defensible. It gives you more options and it gives you a better valuation overall. And that's what we found.

But still, what this Apple Samsung lawsuit show us is that design patents can be very valuable. I mean, even if the courts end up saying, Apple, you have to give back some of that 548 million to Samsung because you don't deserve all the profits they got from their phone. Certainly Apple is going to get to keep a lot of the money that they got, I mean, at least $100 million probably or more. So it was certainly a worthwhile endeavor.

To worthwhile patent to have filed, right.

To have filed, and then also to litigate because, I mean, Samsung, let's face it, the major competitor to Apple probably did want to make their phone look as much as an iPhone as they could, because they didn't want the look of their phone to be something that would keep people from buying a Samsung phone.

Right.

And in this case, once you've defended this once, it's also a deterrent to future infringers and more knockoffs get settled quicker than go to court. And so that's really the other important part of what they've done here. But I want to kind of go back to, as a founder or a patent holder standpoint, really what you can do to help yourself and protect yourself and kind of address some of these valuation issues that you'll have as you go into that. And really the thing that we found over time is that when you go to file a design patent and when you include a design patent in your patent portfolio is to dial it in and make it very specific on one element so you might file. And this is exactly the case of what Apple did is they filed one on the the shape of the overall phone, they filed another one on the shape of the icon. So they had a different design patent for the shape of the icons that were on the home screen of the phone. So by divvying up all of those design patents and not doing all in one is an extremely important strategy. We've learned this the hard way on office chairs.

We have, or our clients have, I should say, and us and our clients have both learned for sure. And we have experienced a client that had a design patent on the entire ornamental design of an office chair, and mostly especially on the upholstery stitching of that, because that was a unique look that they wanted to protect. And so they filed it. The design patent got issued and a competitor knocked off that chair completely. And with one slight detail difference, what.

Constituted about a 10% or less change. I mean, it wasn't really, I would.

Say less, quite honestly. I mean, from my perspective at the time, I thought, well, this is really enough of a knockoff that this company will surely be found to have infringed by the courts. And this case actually did go all the way to court, to trial, the whole thing, because both sides, I guess they wanted to fight about it and they couldn't agree. And there was just one difference in stitching on the backside of the chair. Because this design patent included not only the appearance of the upholstery from the front, but also the back. There were many, many drawings covering all of the elements of this design, but the competitor added one stitch seam on the backside of the chair to the knockoff that did not exist in the original. And very surprising to me, the jury came back and said that the competitor did not infringe on the design patent because of that one additional stitch change that it was not considered the same design for. Personally, I didn't agree with that. That's what the court found.

So since then, the strategy has always been, in this particular case with office chairs is we file one patent for the chair back another one for the chair seat if necessary. The arm pad design, if it's different. The base of the chair, like all the elements, are broken up into multiple design patents. Now it's more costly to file, but in this particular case, now with this new ruling, you would have more of an opportunity to stop someone from a infringement based on just an element or.

Certainly a better ability to recover damages from a company that clearly did copy your design. So by breaking it down to the upholstery on the upright back cushion of the chair, and you can even break it down into the front side, the front face of that cushion design if it's really unique. And then the backside separately, or don't even file a patent for the backside if you don't want to, that if somebody then incorporates that design into their design, the rest of the chair could be different and they could still infringe. And we had made a recommendation to another client of ours at a later time to do the same thing. We came up with a unique design for an upholstered pattern. It was the sort of hallmark element or signature design element of this chair design that ended up being a very successful design in Staples stores across the country. And we then recommended to our client, they file a design patent for that.

And they refused because they thought design patents weren't that valid, weren't that valued, and they refused on it. And a year later, Staples decided to buy direct and cut our client out of the loop. And they lost $4 million of value for that one single chair because they didn't file a design patent and couldn't stop Staples from making it. So what would have been a few thousand dollars under 5 probably for filing a design patent? They lost $4 million a year.

It was really a short sighted decision and client learned the hard way, unfortunately. And going forward, then they were all the wiser. And if they think they have a product that is going to succeed well, and it has a unique element, then they can protect it because it's True. We have witnessed a company like Staples, in fact, actually Staples, when even though they wanted to go around the supplier and direct source a product, if there was a patent involved, they stayed away from it and they didn't. And in this case, they probably would have kept buying the chair from our client had there been a design patent.

It just would have been too risky to go around it. So that's where we talk about offensive and defensive strategies to using patents. And in this case, I think that this ruling actually only reinforces it, even though it's not known what the test will be by that lower court yet. We think this is really critically important for those of you out there pitching and worried about valuations, which are so fuzzy anyway, at the early stages of business, when you're really in your early season stages or just beyond your market proof stages, these kinds of things create the company value that someone's buying into. They're buying in more to the idea. They're also buying into something that's an asset of the company. So having these patents and having multiples of them, including design patents, make or break that valuation for you and that investment for you. So we really want to encourage you to continue to do those. Don't be discouraged by the design patents that they have lower value and they're not worth doing. There are so many reasons that they are worth doing, and you should continue and move forward with that plan.

Absolutely. I agree with that, Tracy. There's just all kinds of evidence, certainly in our experience and in other business experience, that you can read out there in the media, that intellectual property portfolios, patents in particular, add tremendous amount of values to a corporation, especially when they're seeking to be acquired. So we encourage a really an offensive and in some cases a defensive patent strategy. I agree with you. This case just shows that there is a value for the patents, that the courts do recognize them. They're just talking about where does it begin and end.

Right.

Semantics of dollars. Right.

Having that defined at some point hopefully will be a very good thing and it won't be so ambiguous so that if, unfortunately, if any of you end up in a patent litigation at some point, it won't be as much of an unknown. Well, if we get down this and get a ruling in our favor, is there really going to be any money there? Well, I think there can be, and there will be proper tests for determining what that value is.

Right. And clarity of standards can always help settlements happen quicker so that there's less likely to be litigation involved in the process because it's been ruled all the way up at the top at the High Court. So we want to encourage you to do that and we really hope that you have a successful pitch and that patents become a strong part of that asset that creates that success level that you have. So we thank John for inviting us on the show and we really appreciate it. And if you need to contact us in any way or ask us questions about that, please reach out to John directly and we'd be happy to answer them for you.

Thanks for listening everybody. Hope you enjoyed this. This has been Tom and Tracy on.

The Successful Pitch Podcast.

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