Medical Device Link.

Originally Published MX January/February 2003

TOPSPIN

Fight or Join Forces?

By seeking common ground, medical device company executives can avoid patent infringement litigation and advance shared strategic objectives.

Brad Sorenson and Dan Goldberger

In March 2001, QRS Diagnostic LLC (Minneapolis) spotted some unsettling news on the Web site of Dolphin Medical Inc. (Hawthorne, CA):

Brad Sorenson (left) is president and chief operations officer of QRS Diagnostic LLC (Minneapolis), and Dan Goldberger (right) is president of Dolphin Medical Inc. (Hawthorne, CA).

 Dolphin was intending to introduce a pulse oximeter designed in the Compact Flash format. QRS holds two patents on the design of medical devices in computer cards, including Compact Flash cards, and notified Dolphin that its new pulse oximeter could potentially infringe on the QRS patents. Within days, the companies’ patent attorneys had exchanged letters staking out each firm’s basic position.

The stage was quickly set for a legal fight. However, litigation was not inevitable. The two companies, in fact, managed to resolve the disagreement without going to court. The names in the byline of this article are those of the presidents of QRS and Dolphin. This is our story—an account of how we turned a looming patent dispute into a mutually beneficial business opportunity in order to advance shared strategic goals.

Patent Conflict

Founded in 1994, QRS Diagnostic strives to reduce the costs of diagnostic testing and patient monitoring by developing software-based medical devices contained completely in computer cards. QRS holds patents, granted in 1998 and 2000, on the design of medical devices that encode physiological data acquisition and interpretation into PC Cards, Compact Flash cards, and Springboard modules. Intent on defending its patents, the company routinely scouts potential competitors through trade publications, at trade shows, and via the Internet in order to discover possible patent infringements.

QRS had been keeping an eye on one particular firm, TFT Medical (Tampa, FL), after information arising from conversations between QRS and TFT Medical engineers raised suspicions. As it turned out, TFT Medical was, indeed, developing a pulse oximeter in a Compact Flash card. Meanwhile, Dolphin Medical, a vertically integrated medical device company, was in the process of completing its acquisition of TFT Medical. By March 2001, Dolphin had posted news about the device on its Web site, which is when QRS contacted the firm.

From the start, QRS let Dolphin know that it would aggressively defend its patents. Dolphin insisted that its device did not infringe on QRS’s patents, and that it was itself protected by a set of patents that TFT Medical had licensed from the University of South Florida (see sidebar, page 27).

The companies’ lawyers ex-changed preliminary letters. Then QRS got a legal opinion stating that Dolphin’s manufacture and sale of its Compact Flash pulse oximeter would infringe on QRS patents. Dolphin, of course, acquired its own legal opinion. Unsurprisingly, that one stated that the new device would not infringe upon the QRS patents.
So there they stood: QRS on one side, and Dolphin on the other, of a fundamental dispute. Both companies faced potentially protracted and costly court litigation. As the company presidents, we had to take action. We began by outlining and carefully assessing our options.

Possible Courses of Action

QRS and Dolphin had three basic choices to consider. First, one firm could concede. Second, the companies could turn the matter over to their lawyers and fight it out. Finally, the potential adversaries could endeavor to see if somehow the dispute might open a door to new, joint opportunities. Neither company was going to just give up. So, we could fight or explore the possibility of finding some common ground.

QRS and Dolphin both understood the downside and risks of litigation. Each company was looking at spending $1 million to $2 million to take the dispute to trial. Both had priority uses for their cash, and neither regarded enriching their law firms—however capable and well appreciated—as high on the list. Litigation would also have imposed opportunity costs, principally the diversion of management time, attention, and energy away from running and growing each business. Our firms did not need, or want, the distraction.

Moreover, all business executives want to control their destinies through their own decisions and actions. When companies turn to the courts, they put their fate in the hands of others. We two company presidents understood that we could not control, or even really predict, the outcome of patent litigation.

Dolphin faced a problem of its own. Litigation could have complicated its acquisition of TFT Medical and the launch of a promising new product family. In addition, Dolphin Medical Inc. is a majority-owned subsidiary of OSI Systems Inc., which is a public company. Public companies, of course, always have to be cautious about the potential impact of legal disputes.

QRS also had another concern. The company certainly wanted to validate its patents and intellectual property rights. When a firm wins a patent infringement suit, its adversary is prevented from using the winner’s technology. While this is important, it does not positively advance application of the technology to achieve strategic business goals. The market had already validated QRS’s computer card technology platform and the significant potential value of using computer cards to turn off-the-shelf computers and handhelds into fully functioning, and cost-effective, medical devices. What QRS really wanted was to reinforce and amplify the market’s strong validation of its technology, and to continue capitalizing on its positive potential. No court could grant that kind of victory.

QRS and Dolphin wanted to steer clear of the costs and risks of litigation—to see if they could find, and forge, a win-win arrangement. Fortunately, almost from the start, once we had staked out our legal positions, both firms were open to considering collaboration.

Dolphin’s corporate executives were more inclined to look at big-picture business opportunities than were the developers of the pulse oximeter in Tampa, who were understandably personally invested in their device. For QRS, licensing its patents and technology is a core part of its business strategy. An agreement enabling Dolphin to license its patents would provide QRS with even more market validation. Therefore, we, as the presidents of QRS and Dolphin, endeavored to find a way around the legal wrangling and toward a mutually beneficial business relationship.

Strategic Synergy Sought and Found

Once we agreed to try to stay out of the courts, it took time to reach a breakthrough. In August 2001 we held a relaxed and candid discussion about our companies’ high-level business strategies and strengths. Seeking to find a strategic synergy proved to be the key to resolving our differences and moving forward.

QRS’s strengths are device design and distribution. The company prefers to focus its resources in these areas. Dolphin’s primary strength is its manufacturing capability, and the firm wants to leverage its investment in manufacturing facilities and capacity located in California and Malaysia. Also, Dolphin sells mainly to the hospital market, whereas the primary distribution channels for QRS lead to physicians’ offices. So, communication resulted in the discovery that the companies have complementary strengths, goals, and distribution arrangements. This recognition provided the basis for an agreement.

Dolphin could help QRS by acknowledging its patents. QRS could help Dolphin by distributing its pulse oximeter and by shifting the manufacturing of the complete line of QRS PC Card devices to Dolphin. A win-win outcome.

QRS and Dolphin announced their strategic alliance in September 2002. The agreement reinforces the claim that the use of computer cards for measuring and managing physiological data is protected by QRS patents, which QRS has licensed to Dolphin. QRS has exclusive distribution rights for Dolphin’s device in the physician office market. Dolphin will manufacture QRS devices and also distribute them under the Dolphin label in the hospital market.

Thus, QRS Diagnostic and Dolphin Medical turned a legal dispute involving possible patent litigation into a business partnership that has produced several positive results:

• The firms avoided litigation—a significant achievement in and of itself—saving the direct and indirect costs of legal action.
• Both companies upheld their right to operate and dissipated a potential legal cloud over their business.
• Both firms saw their patent claims validated and their technologies valued, and, on the strength of their dual patent portfolios, are better able to fend off other potential competitors.
• Dolphin now gets to take advantage of QRS’s distribution channel to the physician market, and QRS can tap Dolphin’s channel to the hospital market.
• Dolphin leverages its manufacturing capability and capacity and spreads out its overhead over increased volume. QRS, by the time it completes the shift of its manufacturing to Dolphin at the end of 2003, expects to reduce its cost of goods by 15% and its general overhead by 10%, thereby enhancing its competitive position.

There is even a personal bonus to the synergy. As Dolphin officials like to quip, since Dolphin has locations in California, Florida, and Asia, the QRS president, a Minnesotan, can play golf in the winter with Dolphin executives.

Keys to Resolving a Patent Dispute

• Recognize the real value of patents.
• Practice the Golden Rule.
• Keep communication open and honest.
• Stay focused on the deal, not the art of the deal. 
• Seek strategic synergy.
• Build support through communication.
• Invest time in the pursuit of resolution.

Lessons Learned

Certainly, medical technology companies must secure and defend their patents. But the experience of QRS and Dolphin shows that there are occasions when company executives can exercise leadership to avoid litigation and transform patent disputes into new opportunities. Our experience revealed and reaffirmed some important business lessons.

The Real Value of Patents Is in Use, Not Protection. Patents certainly have inherent value. However, the ultimate value of a patent is realized only when a company effectively applies the patented technology to build, differentiate, and sell products in the market. The medical device industry should view patents as a vehicle to leverage a company’s strengths, and not just as a barrier to preclude others from entering the market.

Cordiality Costs Little. The good old Golden Rule does apply. Executives should treat their counterparts as they would want to be treated. Mutual respect is essential.

Good Communication Is Priceless. Avoiding posturing, and maintaining open and honest communication during negotiations, help smooth out the inevitable ups and downs of the process.

The Deal, Not the Art of the Deal, Is What’s Important. The give-and-take of negotiation can be enjoyable and even exhilarating. But executives cannot be successful in resolving disputes if they become preoccupied with scoring small points along the way just for the sake of one-upping.

Strategic Synergy Lets Both Sides Win. To find common ground on which their companies can build a win-win agreement, executives on each side have to understand what the other side requires from a deal to make the deal doable. They must focus on each other’s corporate strengths and strategic goals. Ultimately, the only deal that works is one in which both sides come away with what they need.

The Cause Needs Champions. Executives responsible for formulating an agreement need to communicate with others in their own organization. It is critical to keep colleagues informed and bring them along so that they come to understand and share the win-win vision.

Time Is an Ally. A good deal can take time to consummate. Therefore, executives seeking to head off patent litigation should take the time to comprehend each other’s positions and to develop a relationship. Investing time pays dividends.

Conclusion

Medical technology companies collectively spend vast sums applying for, securing, challenging, and defending patents. It is necessary and inevitable. There is no doubt that patents are absolutely essential to support the development of new technology and the introduction of innovative products. Both Dolphin and QRS fully intend to continue to defend their patents.
Yet, we wonder: Might the medical device industry—including company employees, customers, investors, and shareholders—be better served if executives could skillfully avoid litigation whenever possible? And further, consider the patients whose health and well-being rely on medical devices. They would be better off if medical technology executives could focus as much attention, energy, and resources as possible on advancing their devices. 

Copyright ©2003 MX