Valencia’s Alfred E. Mann Foundation has won a $131 million jury verdict against Australian cochlear implant maker Cochlear Ltd., marking one of the largest patent victories in Los Angeles in years and a win that could nearly double the foundation’s endowment.
The long-running case, in litigation for seven years, was fought over technology fundamental to most cochlear implants – surgically implanted hearing devices – sold globally. An L.A. jury finally found late last month that Cochlear, the leading maker of the devices, infringed on patents developed decades ago by the foundation, which licenses the technology to the No. 2 maker, Valencia’s Advanced Bionics.
Even after paying for potential attorney fees and giving a share to Advanced Bionics, which was a party in the case, the win would be a windfall for the non-profit’s approximately $100 million endowment.
What’s more, the winnings could rise even further. Because the jury found that Cochlear infringed willfully, the judge has discretion to triple the damages or award attorney fees before entering a final judgment in coming months.
“This is a big deal,” said David Hankin, the foundation’s chief executive. “It’s hard for an organization like ours to take on something like this, especially against a company that’s got a hell of a lot more resources than we do. … We’ve been pretty lean and mean the last several years.”
The foundation, which develops and licenses technology for medical use, has seen its net assets decline recently, to $112 million in 2011 from $138 million in 2009, according to tax filings. It has also seen the number of employees drop to fewer than 80 from 110 in 2007 amid a reining in of expenses.
The foundation does not expect to see any money from the verdict until summer of next year at the earliest, according to its general counsel, as the case will almost certainly be appealed and could still be overturned in the higher courts.
In a press release, Cochlear Chief Executive Chris Roberts said, “We strongly disagree with the jury verdict and will appeal any judgment entered against Cochlear by the Court.”
Shares of Cochlear, which has a market capitalization of $2.9 billion, fell nearly 4 percent on the Australian Stock Exchange on Jan. 24, the day of the verdict’s announcement.
Hearing breakthrough
Cochlear implant technology was one of the first big breakthroughs of the Alfred E. Mann Foundation, which was founded by biotech magnate Alfred Mann in 1985.
The foundation began research on cochlear implant technology in 1986. According to its attorneys, Mann testified during trial that he met with representatives of Cochlear, then the only major manufacturer of the devices, in the early 1990s to discuss possible licensing but was unable to come to a deal. After the meeting, he turned to his colleagues and told them they were now in the cochlear implant business.
The foundation spun off Advanced Bionics in 1993 as a for-profit manufacturer. It would become a typical model for the foundation – investing in risky technologies, then licensing them and taking an equity stake in spin-off companies that sell the product.
Advanced Bionics bit into Cochlear’s market share, growing to roughly 20 percent of the global market, and expanded into other areas such as pain relief. The company was sold to Boston Scientific in 2004 for $740 million, plus earn-outs that could have totaled billions more. Boston Scientific unwound the merger in 2007, selling the company off in pieces, including the hearing aid component of the business back to the original owners for about $150 million. Sonova Holdings AG bought the reconstituted company for $489 million in 2009.
In the suit, the foundation claimed Cochlear had copied its technology for years. Specifically, it claimed Cochlear was using its telemetry technology, a now-standard feature that monitors the device to make sure it’s functioning properly.
It filed suit in 2007 claiming infringement of two patents. The foundation, which had never filed a patent suit before, hired a team of big-name litigators that includes Daniel Johnson Jr. and Daniel Grunfeld, who collectively racked up legal costs that Hankin estimated at more than $10 million.
The expensive fight coincided with lean years for the foundation. It lost $30 million in 2008 alone, largely due to investment losses, and cut costs.
Cochlear, for its part, said its technology was different than the foundation’s and also alleged that the foundation’s patents were invalid.
But after seven years of litigation, a jury heard the case last month and found that Cochlear had sold $1.75 billion in products that infringed on the foundation’s patents, dating back to 2003. Using a hypothetical royalty rate of 7.5 percent, it found that the foundation was entitled to $131 million.
Patent attorney Ben Davidson, who reviewed the case for the Business Journal, said the size of the case, the players involved and the type of technology at issue is a rare combination.
“This is a patent that goes to the very heart of what you’re doing as a company,” he said. “It’s by a company that has legitimate credentials in the field. They have licensed this technology to your competitor and they are asking for significant damages. So a case like this presents real challenges and a real threat for a company accused of infringement.”
The win may not mean a licensing deal moving forward, however. One of the infringed patents expired in 2009 and the other expires later this year, after which other companies can use the technology without a license.
The foundation continues to develop new products. Last year, it spun off a Valencia company, Core Manufacturing, which makes implantable medical devices. Hankin said it is planning another spin-off, Axonics, a company focusing on pain eradication, and will take equity stakes in each of 20 percent to 30 percent.
