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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.
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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.

The Decision

Before making the call, Fitzsimmons wanted to get a clearer fix on the competition. Last June, he and other Iridian managers began identifying roughly a dozen companies that they believed were most likely to enter the iris-recognition space before the company's core patent expired in 2005 and 2006. They then spent most of the summer doing crash reconnaissance on those companies, talking to industry insiders, studying annual reports, and compiling a densely packed risk matrix. For each of the dozen potential rivals, they listed such factors as barriers to entry, and how long it might take them to develop their own iris-recognition software. They also tried to assess whether getting into the market fit with a given company's long-range strategic plans.

The exercise proved reassuring. "We discovered that the competitive threat was not as large and immediate as we thought," Fitzsimmons says. That helped reassure Perseus' Ford and other hesitant investors. By last October, with the board's backing, Fitzsimmons told the ICAO that Iridian was willing to go along.

While ICAO has yet to publish the standards, new customers have been signing up. The British government recently announced that it will use Iridian software as part of an overhaul of its visa and passport programs. Frankfort airport in Germany is also set to test the technology. Fitzsimmons declines to release specific numbers but says those contracts could yield millions of dollars in new revenue. He predicts that within five years the vast majority of newly issued passports and visas will include smart chips or bar codes with iris-recognition information, and that iris-recognition cameras will be ubiquitous at airports.

Best of all, the company's risk assessment seems to have been on target--there's no significant competition in sight. As a result, Fitzsimmons is adding employees to get ready for a burst of growth. "We expect a substantial ramp-up," he says. "This market is heating up."

The Experts Weigh In

It seems that Iridian has been driven into a Faustian bargain--and that may mean it will have to compete with other companies. But in the long run that might actually be good for Iridian, since it will help create critical mass for the technology. If there's more competition, you'll have more evangelists out there talking up the benefits of iris recognition--and that will help establish it against other biometric technologies.

Bill Newman, managing director, Northwest Technology Ventures, a Portland, Oreg., venture fund

I feel bad for the position Iridian was put in. It develops something really cool, and then some international agency tries to force it to give it up. My God, what are patents and intellectual property rights for? I guess the one small comfort is that the patent Iridian is giving up has a relatively short life span. If it had a longer life, I would have told Iridian to say that it would agree to a modest royalty--say 5%--for licensing the patent. If ICAO didn't go along with that, I'd say to them, screw you. Go with the fingerprinting, which isn't as good.

Russell Parr, founder and president of Intellectual Property Research Associates, based in Yardley, Pa.

I'm sure there was real agonizing over the decision. It takes a psychological leap to say, "Hey, we own this," and then be willing to give it up for nothing. But though I'm sure it was painful, to me it's kind of a no-brainer--especially since the asset it's giving up, the core concept patent, will be expiring soon and therefore has a rapidly diminishing value. Compare that with the tremendous market opportunity the company gets. It instantly gets this huge amount of validation, and that's going to help it sell its technology into other markets.

Craig Grossman, law professor specializing in intellectual property at the University of Memphis

Last updated: May 1, 2004




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