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Peloton Gets $5.5 Million From Bike Design Firm Asserting Invalid Patent -- And What This Means For You

April 1

Peloton got sued for patent infringement by the design firm they hired to design their product. But they got the last laugh — and $5.5 million. What you can learn from Peloton’s successful patent infringement defense.

A federal judge on Tuesday, March 30, 2021, found that design firm Villency Design Group must pay exercise company Peloton $5.5 million in legal fees and expenses it incurred defending itself in a patent infringement suit asserting an invalid patent. The case is VR Optics LLC v. Peloton Interactive Inc./ Peloton Interactive Inc. v. Villency Design Group LLC,  Civil Action No 16-CV-6392 (JPO) (Southern District of New York).

The ruling highlights the importance of identifying and shoring up weaknesses in patents or trademarks you plan to assert – before initiating a dispute. It also shows that “duty to defend” provisions in contracts with vendors such as design firms are held up in court.

In this post, I’ll explain the ruling, how it may affect your company, and key takeaways.

Breach of Loyalty? Or Just Breach of Contract?

The $5.5 Million award of defense costs was entered against the design firm, who was found to be in breach of contractual provisions including “duty to defend” language in its original design contract with Peloton. The moral here? Don’t sue your client. Especially not for patent infringement based on the product you designed for them. Read on for the juicy details and the winning strategy.

A Tale of Two Patents

In 2012, Peloton hired VDG to design, develop and manufacture a stationary exercise bike with interactive features (integrated software application with touchscreen controls and streaming technology), which you can see here: https://www.onepeloton.com// .

Sometime later, VDG learned about a patent that might have been infringed by the Peloton® bike they helped design. Rather than acquire the patent in its own name, VDG formed a new company, VR Optics LLC, and purchased the patent, 6,902,513, issued in 2005 to Daniel R. McClure of Marietta, GA. https://patents.google.com/patent/US6902513B1/en (Interestingly enough, it seems Mr. McClure was a registered patent attorney.)

The McClure patent discloses “computerized fitness equipment that is designed to simulate … actual race conditions with other users.” The patent has 20 claims, including 3 independent claims and enjoys priority back to 2002, its filing date.

But Peloton found a winning defense – a 2006 patent, 6,997,852, issued to Scott Waterson et al and assigned to Icon IP. https://patents.google.com/patent/US6997852B2/en The 2006 Waterson patent covers methods and systems linking computerized fitness equipment. Pelton argued the Waterson invention was the same as the invention claimed by McClure in the 2005 patent – in patent terminology, that the Waterson invention “anticipated” the McClure invention.

But wait, you say, how could the 2006 patent anticipate the 2005 patent? Surely it’s the other way around, right? But no — the  2006 Waterson patent claims priority back to 1999, making it prior art to the McClure patent.  Remember, it’s all about priority – it’s not about the date the patent issued.

The Court agreed with Peloton that the 2006 patent “anticipated” the 2005 McClure patent, resulting in invalidation of the 2005 patent. And that was the end of the patent infringement part of the case.

Even better, Peloton was able to have the patent declared invalid on summary judgment, which means it did not need to go to trial to win the case. Summary judgment presents a significant savings in terms of time and legal fees.

The Value of Pre-Launch Patent Research

As an IP attorney, I cannot help wondering why Peloton did not do any research to find out whether someone had a patent on the innovative stationary bike they planned to sell. Perhaps they relied on the mistaken belief that if it’s not on the market, it’s fair game, anyone can make it.

What many do not realize is that the patent databases at USPTO.gov are full of innovations and technology that is not on the market. Many of these inventions are public domain – patent rights have expired or applications have been abandoned. Finding your innovation is public domain can be a good thing — it means nobody can assert a patent against you. If they do, you can present the expired reference you found in your pre-launch research.

Another valuable opportunity that can be uncovered in pre-launch patent research? A patent still in force that covers your proposed innovation, as in Peloton’s case. If you know about such a patent before you launch, you can either 1) design around the claims so you avoid infringing it; or 2) acquire it from the patent owner, who many times is an solo inventor more than happy to sell it and recoup their legal fees.  Worst case scenario, even if you decide not to take either action, at least you know it’s there and can proceed accordingly.

Patentability Search vs. Freedom to Operate Search

When we use the term “patent search,” usually what we mean is “ patentability search,” to answer the question: “How likely am I to get patent claims granted on my invention?”

If you do not plan to get a patent on your innovation but just want to know whether someone already has a patent you might infringe, ask for a “freedom to operate” search, not a “patentability” search.

“Patentability” looks at whether anything similar has been disclosed, i.e., whether you would be able to get claims granted on your invention. Expired patents, published patent applications, even scientific and technical papers, all can be disclosures that block anyone from getting a patent on an innovation. But none of these give rise to liability.

“Freedom to operate” looks at whether any patent has claims in force that might cover what your product is or does.  Comprehensive Freedom to Operate searches can be costly. But even a  cursory Freedom to Operate search can turn up those patents which are relatively easy to find, your highest risk.

I always recommend choosing a budget that makes sense for the project. Searching and analysis can be done at any budget, and your IP attorney should let you know if your budget is too small to be safe or worthwhile.

What This Means For You

The big takeaway – Priority determines who wins in a battle between two patents or two trademarks. Even though the issue date is printed on the Certificate in big numbers in the top right corner, it’s the priority date that matters, because patent and trademark rights are first come, first served.

Another key takeaway: Clever little legal tricks work on TV, but they rarely work in real life, and they can backfire. Apparently VDG thought it could hide behind the fact that VR Optics, the company that acquired and asserted the patent, was not VDG, it was a new entity. But Peloton and the court saw through it. In its countersuit against VDG, Peloton also named the VDG/VRO principals as individuals, thereby exposing them to personal liability for Peloton’s claims. Ultimately the judge granted the judgment only against the limited liability company (VDG). They got lucky.

Takeway number three: The case is a good reminder of the value of investigating any patents that might cover an innovative product you are developing. Even if you are not planning to get a patent on your product, you can gain (or miss out on) valuable opportunities if you do only market research, no patent research, before investing in R&D.

And one more takeaway: Don’t be discouraged by the high cost of taking a patent infringement case to trial. If one side’s case is much stronger than the other’s and both sides are reasonably unemotional about the dispute, settlements can be reached long before trial.  And then there is summary judgment: As soon as one side can present a winning case, it can bring a  motion for summary judgment. If it wins, as Peloton did here, the case is over, saving the winner time and money. And sometimes you can even get your legal fees reimbursed.

In Closing

For the defense minded: Before investing in R&D, or at least before launching, consider reviewing the patent literature to see if there is a relevant patent still in force that you might be able to purchase for a reasonable price, or whether an expired patent might be useful to keep in your pocket in case you are accused of infringement.

For the offense-minded: Are you thinking of asserting a patent, trademark or other IP against a competitor? Do your due diligence first. Don’t make assumptions based on the patent issue date or trademark registration date – remember to check the priority. And be sure to take a critical look at your IP and what you are asserting. Has your attorney gone through the weaknesses of your case and discussed strategies? It’s important to take an objective look at your case so you are prepared for the fight.

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