Patents: Suddenly Detroit Has A Huge New Bill To Pay

The Big Three settle with the estate of prodigious inventor Jerry Lemelson

On June 8, with little fanfare, America's Big Three auto makers agreed to fork over a fortune in patent fees to a foundation created by inventor Jerome H. Lemelson. Hundreds of parts suppliers may also get roped in, pumping hundreds of millions into the Lemelson Foundation's coffers. That's no small feat, given that the inventor himself is dead and some his patents were filed four decades ago.

While the terms of these deals are part of a secret out-of-court settlement, the auto makers are probably paying a percentage on each car sold so they can continue to equip their assembly lines with bar-code readers and other automated inspection gear. The Big Three pioneered many of these applications. But the Lemelson Foundation insists the technology is covered by patents the inventor filed in 1954.

Courts were inclined to agree in pretrial decisions last year, which is why the Big Three buckled in June. A few days later, parts suppliers serving the Big Three began receiving letters announcing "exceptionally favorable terms" on licenses to Lemelson's patents. Some of the letters were signed by Gerald D. Hosier, Lemelson's patent attorney since 1989, who now represents the foundation. Other letters came from the Big Three. All state that the special offer expires on Nov. 22, implying that costs will rise after that date.

PERVASIVE TECHNOLOGY. Autos are just the beginning. Hosier has indicated that any company using "machine-vision" technology could be a Lemelson target. That worries David Y. Peyton, director of technology policy at the National Association of Manufacturers in Washington. "Bar coding is pervasive throughout the economy," he says. Warns Timothy J. O'Hearn, partner in intellectual property practice at law firm Jones, Day, Reavis & Pogue: "If everyone just takes out a checkbook, these patents will become an industrywide tax by the Lemelson Foundation."

Neither Hosier nor the Big Three--nor the dozen parts suppliers contacted by BUSINESS WEEK--would disclose license terms. But earlier deals shed some light. In 1992, a dozen Japanese auto makers settled with Lemelson over this same set of bar-code patents. It cost them a tidy $100 million as a one-time payment in lieu of ongoing patent royalties. The sum was calculated as a royalty of one-fiftieth of 1% of each company's average car price multiplied by the number of cars they would sell in the U.S. in a decade.

The Big Three spurned a similar offer, however. So their June deal was probably more costly. That was Lemelson's wish, anyway. In May, 1997, he told BUSINESS WEEK the license terms obtained by Japan were designed to reward the companies that responded promptly. "We won't reward the ones who fought the patents," he said.

Where does all the money go? The bulk, minus lawyers' fees, now flows to the Lemelson Foundation, which is headed by the inventor's wife, Dorothy. Its existing programs include the $500,000 Lemelson-MIT Prize, awarded annually since 1995 by Massachusetts Institute of Technology to an outstanding U.S. inventor. The foundation also supports educational programs in innovation at the Smithsonian Institution and three dozen universities.

Most of this wealth derives from a patent application filed in 1954. Lemelson was an unknown inventor then, but he would eventually win some 500 patents--making him the No.4 patent champion, behind Thomas Edison, Elihu Thomson, and Edwin Land. Though Lemelson didn't invent bar codes per se, his 1954 application described various techniques for linking computers and cameras to collect data and to process the results. Ultimately, it produced a cluster of 18 patents that cover robot-vision systems as well as bar-code systems. The last patents in the group were granted in 1992, after 38 years of haggling with the U.S. Patent & Trademark Office. That's when Lemelson demanded royalties from all manufacturers that use bar codes, especially the world's auto makers.

Car companies were incensed. By 1992, bar-coding had become ubiquitous in the auto industry. Today, these labels are the basis of computerized inventory controls. And they're used, for quality purposes, to track almost every individual part in the factory and in the marketplace.

To entice companies to buy a license, Lemelson offered a package deal: the rights to all his patents, in perpetuity, for a lump-sum payment. Japanese and European auto makers soon signed on, along with some of their parts suppliers. Electronics giants such as Motorola, NEC, and Philips also paid up to avoid further suits. All told, more than 100 companies signed deals, funneling--through 1997--some $550 million to Lemelson, his foundation, and attorney Hosier, whose fees have run as high as a third of the negotiated settlements.

SUBMERGED THREAT. When Detroit refused to knuckle under, Lemelson sued the Big Three. But the cases against GM and Chrysler were tabled pending the outcome of Lemelson vs. Ford Motor Co. The turning point came in April, 1997, when a Nevada U.S. District judge pulled the rug from under Ford's strategy by ruling that Ford couldn't raise the issue of so-called submarine patents during a trial.

The term "submarine" has huge resonance in patent circles. Coined by Lemelson's critics, it implies that the inventor deliberately stalled some of his patent applications en route to publication. The goal, critics say, was to wait until the technology was in general use, then surface with the patent and spring it on hundreds of unsuspecting companies who had come to rely on the technology. Critics howled loudest about Lemelson's 1992 bar-code patent, which lurked underwater for 38 years.

Lemelson and Hosier have vigorously repudiated the submarine accusation, saying no struggling inventor would deliberately incur such delays. But industry's anguish over massive submarine patent fees helped propel a 1995 revamping of U.S. patent laws.

Submarine talk, however, didn't hold water with the federal circuit court. When Ford appealed the Nevada decision, the court declined to hear the case in July, 1997. Out-of-court talks started soon after, leading to last month's settlement. "Jerry knew we were probably going to win before he died," says Hosier. In October, 1997, cancer robbed Lemelson of his chance to witness Detroit's defeat.

It's too soon, however, for the Lemelson Foundation to count its new riches. Some suppliers may hold out for more favorable terms or take court action. "There are many solid arguments that were never decided in the Ford case," says O'Hearn of Jones, Day. His firm is already working with one group of suppliers and is urging others to join forces to address the licensing requests.

Even if suppliers balk, however, the machine Lemelson set in motion will keep humming. The current roster of licensees barely scratches the surface of bar-code users in such industries as computers, machine tools, packaged foods, and pharmaceuticals. And more Lemelson patent applications are still at the Patent Office, under Hosier's watchful eyes. So Lemelson could end up casting a very long shadow.