Case Study

For one small tech company, the issue was simple: It could protect a potentially valuable patent, or it could tap a big new market. But it couldn't do both.

1 | 2 NEXT

The problem: The tech company could tap a big new market, or it could protect the patent on its technology. But it couldn't do both.

Frank Fitzsimmons knew there was trouble the minute he opened his e-mail that morning in March 2003. "It was one of those 'Houston, we have a problem' messages," says the president and CEO of Iridian Technologies, which is the undisputed leader in iris-recognition technology.

The company's chief technology officer had just learned that the International Civil Aviation Organization was balking at including Iridian's technology in its new standards for passports and other government-issued travel documents. All of a sudden, Iridian's hopes of breaking into a big new international market were in serious doubt--this after more than a decade spent developing and patenting highly sophisticated software that enables special cameras to read and analyze the patterns in a human iris. Those cameras snap an instant picture of someone's eyes and then match a code version of that image against iris-pattern information stored in a smart chip or central database to confirm identity.

When Iridian, based in Moorestown, N.J., launched in 1992, iris recognition seemed eerily futuristic, even Orwellian. But in an increasingly security-conscious world, more and more governments have begun to recognize the benefits of using such technology to prevent passport fraud and enhance border security. Indeed, soon after September 11, the ICAO, a United Nations-affiliated body that establishes global travel policies, had accelerated efforts to include biometric identification in the next generation of passports, visas, and other government-issued travel documents. Among the technologies being considered: fingerprints, facial recognition, and iris recognition.

Still, as Fitzsimmons discovered in that e-mail, there was one major hitch. ICAO officials, it turned out, were driving a hard bargain: In order for iris recognition to be included in the group's new travel document standards, Iridian would essentially have to give up the right to enforce its broad concept patent for its iris-recognition technology--meaning that competitors could devise their own iris-recognition software and Iridian would not be able to collect a dime in royalties.

Fitzsimmons's initial reaction was disbelief: "It was like, 'Wait a minute. You can't do this. It's not the American way.'" But officials at ICAO weren't about to back off. In both the fingerprinting and facial-recognition fields, they explained, no single company had a monopoly on the technology, and there was healthy competition among numerous vendors. Iridian, on the other hand, had a lock on both the broad iris-recognition concept patent, as well as more than two dozen other patents for software that captures and stores the iris image and then matches the patterns with a live iris. It was, in fact, the only established vendor in the field. Advisers for some of ICAO's 188 member nations worried not only that they would get hit with high prices but that there would be no backup vendors to supply the technology if Iridian went out of business.

With ICAO awaiting Iridian's decision, in the spring of 2003 the ball was in Fitzsimmons's court. He and his partners began evaluating their options. Key investors were dead set against giving away the patent rights. "We said, 'No way, no how,'" says Bill Ford, whose Washington, D.C.-based private equity firm, Perseus LLC, is one of Iridian's largest backers. Such resistance was easy to understand. By yielding to ICAO's demands, Iridian would open the door to new competition and risk its ability to capitalize on its technology before the patent expired--in 2005 in the United States and in 2006 in Europe and Japan.

With help from Iridian's board, Fitzsimmons launched a mini lobbying campaign to try to get ICAO to change its position. Over the course of several weeks, he and key board members called and met with everyone they could think of--members of Congress, officials at the U.S Department of Homeland Security, and delegates to ICAO from the United States, Canada, Britain, Australia, and the Netherlands. But those efforts went nowhere. Meantime, Fitzsimmons and Iridian general counsel Robert Levin attempted to negotiate with the ICAO in the hope that Iridian would be able to secure at least some return from vendors who might license its patent. "First we said, 'We're perfectly willing to license the patent for a standard commercial royalty,'" says Levin. "Then we said, 'How about a discounted royalty?' Then it was, how about a [token] royalty?" recalls Levin. "They weren't moving."

If Iridian didn't go along, it risked being shut out of its most promising market. The company had had modest success licensing its technology for use in nuclear power plants, prisons, and other high-security installations. But three years ago it had refocused its business plan around the idea that the company's real revenue growth would come from large-scale government applications. Being included in ICAO's standards would mean that governments around the world would be using iris-recognition software and cameras to check the identity of millions of passport and visa holders. And that could mean a windfall of tens of millions of dollars of licensing revenue.

1 | 2 NEXT

Try a RISK-FREE Issue of Inc. Today!

Renew | Contact Us | Current Issue

Select Services