Shownotes
Intellectual property is the most valuable asset of a company that is why it should always be protected. Otherwise, employees come in and learn all your systems and processes, and then they leave. The next thing you realize, there’s a competitor down the road that is being run by that former employee. However, many companies don’t do a good job of securing their intellectual property because they don’t understand that. Art Nutter, the founder, chairman, and CEO of PatentBooks and a company called TAEUS, delves deep into the subject of intellectual property, bringing to light the significance of patents. He also shares how PatentBooks and TAEUS were created and what they are all about.
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How To Protect Your Intellectual Property with Art Nutter
We have Art Nutter. He’s the Founder, Chairman and CEO of PatentBooks and a company called TAEUS. People will go, “PatentBooks, I got. What is TAEUS?”
People think it’s some Greek god of knowledge. I was going to invent that, but it’s an acronym for Take Apart Everything Under the Sun. That company was one that I started back in 1992 when the United States and big companies were thinking that foreign competition was copying their intellectual property. I approached AT&T one day and said, “You acquired NCR. Do you know what patents you acquired in that acquisition?” They said, “No.” I said, “I can tell you.” We proceeded to do that and turned to AT&T and then subsequently IBM into patent licensing powerhouses. IBM went from $100 million licensing income to $2 billion in licensing income over the space of ten years.”
I think about that and say, “You started TAEUS.”
Yes, I did. Out of the garage with frequent flyer miles, a laptop computer, a laser printer and that was it.
Did you have experience in patent or anything or taking things apart?
Yes, I’ve always taken things apart. We grew up on a farm. If something broke, we had to figure out how to fix it. I’ve had an inherent interest and curiosity in doing those things. However, the last job I had as an employee before I started TAEUS, I tended to get fired in most companies because I was usually the guy making too much money. That was my crime. I doubled the sales of this particular company in a space of nine months. This company was reverse engineering semiconductor memory chips. I discovered that there was a marketplace that was very interested in this reverse engineering data. That was this intellectual property marketplace because like I said in the late ‘80s, early ‘90s, US companies were thinking, “We’re getting killed by foreign competition. They must be copying our stuff, our ideas and our inventions.” In fact, they were and this was an easy way for them to document the other companies copying of their circuits. They literally would reverse engineer the circuits and then duplicate them exactly. It was government-funded in Japan and Korea and Taiwan and so forth. They wanted to establish semiconductor industries for themselves, which as from history, our semiconductor industry is pretty few and far between. You have the Intels, AMDs and in-house semiconductor capabilities but nowhere near likely the volume of semiconductor companies that did exist in here in the 1980s. Those businesses are now done overseas in Asia.
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I’m thinking about you started out with your laptop in your garage and you get called to AT&T. Walk us through the thought process of, “I’m going to start small. I’m going to start with AT&T.”
It was very straightforward. I only have so many hours in the day. I figured that if I’m going to spend my time working with one guy who has one patent or ten patents or something like that, or I can go to Ma Bell who has Bell Labs, who has 25,000 or 50,000 patents. Let’s work on those ones. It’s like the old Bonnie and Clyde stories that say, “Why do you rob banks?” They say, “Because that’s where the money is.” It’s the same thing, why do I go to AT&T? It’s because that’s where they had all the patents. I went to IBM too. In 1994, not many people know this, but Lou Gerstner had taken over the company at IBM and they were down to 30 days’ worth of cash. IBM hooked up with us and they said, “Art, we need you to go through our patent portfolio.” We read every single one of their patents and identified a bunch of patents that other people were using. Once we document that using that philosophy of taking apart everything under the sun to document the patent infringement. That was all the information that the licensing execs and patent litigators needed to convince the other side they had to pay.
For you, when you do take apart event, take apart of that it’s not physically disassembling but as also understanding the circuit boards and all that other stuff?
You have to understand what’s going on in the patent language itself? The language in a patent is at the backside of a patent. That’s what we do when we take a look at a patent. I’ll go to the last page of the patent and I go back from that back page to a paragraph that says, “I or we claim.” It’s a sentence. This is your seventh grade English teacher diagramming sentences where you diagram that sentence. You have to find each and every element of what is described in that patent in the target product. To do that, you have to have the smartest guys anywhere to find out exactly how you figure out where those elements are in that target product. We’ve ended up having to reverse engineer software circuits. Integrated circuits the size of your little fingernail. That has a million transistors on it. You’re talking about looking at those things scanning on microscopes, tunneling electron microscopes, connecting all the wires. The guy says, “Yes, that is the circuit that is described here in that patent. “Yes, there’s a match.” That’s what we do.
Intellectual Property: Patents these days are granted very liberally to the point where many of the patents probably should not have been granted.
You started in ‘92. When did you start bringing all employees and so on?
The beauty of the TAEUS business model is that I have to have the smartest engineering resources in any particular technical discipline. What I do is I hire tens of thousands of consultants and contractors keeping my W-2 fix staff at a very minimum because these guys that know their stuff and that can answer those very difficult questions are super expensive. For the right guy, I only need him for probably four to six weeks. I’m done because I take the information that they are able to discover, map it back to the patents, deliver that report to them to our client, and that’s what they need to consummate a deal.
For our audience who is like, “I developed something. I patented it. I think somebody else is infringing on my patent.” Maybe somebody is going like, “Do I need to retain the service of TAEUS?” What does your ideal client look like?
The ideal client is somebody who thinks they have an idea that somebody is using it because I can help them. I can go up there and say, “Let’s take a look at this patent.” There are a number of different metrics that we use to evaluate the quality of a patent. I don’t want to get too much on a soapbox or a rabbit trail on this one, but patents these days are granted for all kinds of different things. Frankly, they’re granted very liberally to the point where many of the patents probably should not have been granted. In a couple of metrics, we look at those patents from a legal perspective, an engineering perspective and a business perspective to see if it’s worth doing. IBM patented how to queue up in an airplane to go to the bathroom, these are dumb patents. The ideal client here is somebody who, in my world, is somebody who has tens of thousands of patents that don’t constrain us from working for everybody else. I like spending the time with the people who have the large patent portfolios. We go through their patent portfolio, identify those patents that are most likely to be used by somebody else. We are skate raking and scaling those patents to see which ones are the ones that are the most valuable.
If you have a patent on something that’s commonly used, but lots of other ways to solve that particular problem, unlikely that there’s a high probability that when you do that investigation that you’re going to see a match because they might have done it some other way. If you were looking for those patents that that’s the only way of solving that particular technical problem and then we’re also looking at for those inventions that drive a major cost impact into that product like or the value of that product. For instance in an iPhone or iPad, the ability to have a virtual keyboard was a game-changer. Prior to that, you remember back in the old Blackberry days, you had physical keyboards, little tiny things, but those kinds of patents are very valuable. Data compression, streaming video, streaming audio, those kinds of inventions are very valuable because those allow the internet to work. Those are the kinds of patents that we investigate.
TAEUS, smooth sailing?
The technical definition of what you can patent is anything under the sun invented by man.
Not exactly. TAEUS is an adventure. I had to grow through this. I started working when I’m seven years old. I’d had various and sundry companies all the way up through my very short career at the Air Force Academy. I had been burned in some of those instances by people who stole the checkbook and wrote bad checks all over town on the company tab. I didn’t allow people to run the finance or any aspects of this. I started TAEUS in ‘92 and about probably in ‘95, ‘96, we were at $2.5 million a year. I couldn’t get much beyond that. I’d plateaued at around $2 million to $2.5 million. It took me about five or six years to grow beyond that. Frankly, I fried. I’m mentally and physically exhausted. I had to walk away from the thing. I said, “God bless you. Hopefully, I come back and you have a company.” I did at that point delegate off the responsibility of running finance, marketing, engineering and everything to everybody else.
When I came back from that six weeks, the company was doing well, much better than it was when I left. I’m like, “Note to self, you should leave more often.” I did successfully delegate that. Sure enough, we went from $2.5 million up to $5 million or $6 million in a year or two. I’m thinking, “This is great.” I needed a COO. I’m a decent peddler. I can go out and hustle up some business. I know how to model the business so forth, but on the execution side, there are people that do it better than I do. I had to go through three different COOs in one year. I got to the third guy, he was a good guy. He put a lot of discipline back into the organization and sure enough, we grew again. We’re growing like gangbusters. We went up to $10 million in sales and with great profit margins. We’re talking 70% profit margins. That enabled me to be a sugar daddy around town. That was a very significant blessing but yet, it was a calling that we had.
Before we get too far, let’s define exactly the sugar daddy because the connotations are awful.
Folks had asked us to contribute to a particular cause, capitol campaigns and those kinds of things. There’s a story of the power of prayer there. We did make a pledge to St. Mary’s High School here in Colorado Springs. They were doing a capital campaign. We made our pledge and they said, “How would you like to pay that?” I arbitrarily divide it up into three chunks of cash.” It turned out that was the largest cash donation it’s ever been made in a 125-year history of St. Mary’s High School. I didn’t know that. I came up with the number because we’d had a good year. They asked me to pay and I didn’t have the money because the company almost went out of business the next year. That’s what the devil things messing with you. I said, “Keep praying.” He said, “Are you bailing on your pledges?” “No, I’m not bailing on the pledges. I need some prayers.” We prayed. The next year comes around, the company did not go out of business and it improved. I was able to make part of the pledge but then the third year I said, “Keep praying.” The next year, they did keep praying. They came around and I was able to make good on the entire pledge that third year. There’s a stadium here in town that’s named after my mom and dad as a result of that.
There’s a bit of an addition past TAEUS. We haven’t talked about it yet, PatentBooks. Let’s talk about PatentBooks and how that came about and what it’s about?
The whole business of TAEUS is providing information to people to allow them to do efficient patent transactions. If I show up and have a patent and I hand it to you, you’re using my patent and you’re going to say, “I don’t know. I’m not going to do this.” It contains tens of thousands of patents, my product does. How do I know your patent is being used? The TAEUS information would document how it’s actually being used. Then that gets you out of the technical discussion into the business discussion where you have to price that amount. As long as there’s a manageable number of those presentations going on, you can pay the other person on the other side of the table and that’s fine. When everybody in the world starts getting wind that there’s money in those, there’s a gold rush more or less. Everybody says, “I can get money from my patents if I approach this company and that company and so forth.” That’s what happened over the course of the time period from early 1990 into the 2000s. Everybody and their dog start coming out with patents.
In fact, the big companies begin denigrating patent owners by labelling them as patent trolls. That was completely derogatory and arbitrary designation because frankly, somebody who has an invention that is being used in a product or service that’s generating some income is entitled to some compensation. It doesn’t matter what you call them. They’re entitled to some compensation. You have to figure out how to do that. Deals stopped being transacted across the table with reasonable businesspeople that almost always are ending up in court and judges get sick of these things. We had to create an entirely new track within the US judicial system called the Court of Appeals for the Federal Circuit, which only handles patent cases. It was horrible. In fact, there were cottage industries that were springing up around the country, some Eastern District of Texas and Marshall, Texas. There is nothing, but tumbleweeds and old unemployed cotton farmers down there.
This judge decided he would have a predisposition for plaintiffs in this case, in this court, so everybody filed down there. The biggest court cases in the country were filed in the Eastern District of Texas. You take a look at this and said, “It’s wrong.” There’s something wrong. Along this period of time, I was a beneficiary of a number of miracles. I was in Tokyo. I had twisted my ankle sliding on some snow. It doesn’t snow very often in Tokyo. I was running and sliding and I sheared off all ligaments that connected my foot to my leg. They said I would never walk again. These are Olympic Training Center doctors here in Colorado Springs said that.
Intellectual Property: The spectrum of quality is the volume of patents within an entire portfolio of patents that are good.
I went to church. I’m a Catholic guy, went to mass and prayed to God, “God, I need some help here.” The next day, the same doctor said I’ll never walk again. A week after, he said, “Art, I’ve never seen anything like this. You’ve been completely healed.” I’m like, “That’s cool. I’m a deal guy so I was praying to God. I said, ‘Tell you what, God. Do hear me and I’ll tell everybody about this.’” I did. I told everybody about this over the next couple of years. That’s my proclamation of God’s inner intercession there and it didn’t sit well with a lot of people. I was a deal guy. He fixed my foot, I’m going to tell the story. Shortly after that, our oldest daughter, Marisa, became sick with the swine flu in the middle of her second pregnancy. If you remember back in October or November of 2009 when that swine flu epidemic came around the world, 41% of young pregnant moms died. My daughter went from, “Dad, I don’t feel too good,” to five days later being on life support and airlifted to University Hospital in Denver. I was in Asia aboard my trip and came back. She was a science project. Finally, they said after a month in there on this, they said we have to unplug her. I’m like, “I’ve got to tell my family about this.”
That night, we discovered St. Gianna Molla, who’s the patron saint of pregnant moms. We prayed to her. She turned in the hospital that night. Her husband and I went there to unplug the next morning. The nurses said, “Don’t touch that dial. She responded inexplicably. No change in medication.” She walked out of the hospital three days later. I’m like, “I made a deal with God.” I started going to daily mass during that month’s period of time praying to God like, “What’s up with this?” I said, “I’m completely at your disposal but if you save my daughter, I will go to daily mass forever.” She saved my daughter, so I go to daily mass. It’s a good thing. Shortly after, people often refer to their businesses as a calling. I got a calling. I’m sitting this on one night. Nobody else around and I hear this voice said, “Art, I need to make patent transactions more efficient around the globe.” Nobody else in the sauna. I’m thinking, “I’m in. I don’t know what I’m doing, but I’m in.” It turns out, we had all of the elements of making the most efficient patent transaction marketplace out there. That is we know the spectrum of quality and everybody’s patent portfolio because it’s exactly the same whether you’re at IBM or AT&T or Bell Labs or Apple or Samsung, the spectrum of quality is exactly the same.
What is a spectrum of quality means?
It means the volume of patents within the entire portfolio of patents that are good. The ones that you could use in a litigation and win. There’s a volume of patents a little bit greater than that that you could use in a negotiation. The vast majority of patents
