Geoff Mantooth 1610

Patent Danger in Safety Devices (Home Depot never saw this coming)

Patent Danger in Safety Devices (Home Depot never saw this coming)

Suppose a business plan calls for not just selling lumber, but cutting it to the length that a customer needs. A laudable goal because it gives customers what they want.

Now suppose that implementing the plan calls for having retail employees pull a spinning saw blade toward themselves. If this sounds like something prone to safety problems, you’d be right. Add to that patent complications.

Home Depot used radial arm saws to cut boards. Radial arm saws, similar to their cousins chop saws, are marvelous machines capable of slicing through anything in their path. Unlike a chop or power miter saw, where the spinning blade is pulled down into the lumber, the blade of a radial arm saw is pulled forward into the work. The operator has to hold the lumber in place with one hand. Home Depot found out that so many of its employees lost fingers or otherwise suffered injuries that its costs approached a million dollars.

Enter Michael Powell. Powell was Home Depot’s contact for installing and repairing the chain’s radial arm saws. Home Depot considered yanking the saws out of the stores. This would have hurt Powell’s business so he set out to develop a solution to the problem.

His answer was a tunnel-like cutting box that surrounded the cutting area. The board was inserted into the cutting box tunnel. The saw entered through a slit in the top of the box. The saw was surrounded by a guard that slid on top of the cutting box. The operator gripped the lumber indirectly by way of a push handle that slid into contact with the lumber. Powell’s solution also solved a problem gaining more and more interest in woodworking circles — collecting the spewing sawdust.

Powell made a few of the devices for Home Depot to test, selling them for about $2,000 a piece. The devices were so successful that Home Depot’s injury rate fell to zero. The devices were so successful that Home Depot ordered 2000 … but not from Powell. Home Depot paid about $1,300 a unit, saving about $1.4 million. The move cost Powell roughly $4 million in sales. The units supplied by the other company were almost identical to Powell’s.

Early on, Powell applied for a patent. After it issued several years later, he sued Home Depot based on the company’s continued use of the safety devices. The jury found that Home Depot infringed, a conclusion no doubt made easier by the copying of Powell’s units.

What makes this case so interesting is that the jury awarded Powell almost four times his anticipated sales in royalty damages ($15 million). Under patent law, an inventor can recover either his lost profits or a reasonable royalty. In almost every case, lost profits result in a higher award to the inventor than does a reasonable royalty, although as a practical matter lost profits are hard to prove. Powell’s profits obviously would have been less than the purchase order price of $4 million. A reasonable royalty typically is some percentage of the price, say 5-10%, and likely would have been far less than profits.

Powell’s expert witness convinced the jury that by the time the patent issued, about two years after Home Depot bought the devices from the other company, Home Depot had a very good handle on the actual worth of the safety devices. Not only did the company save money by preventing injuries, but by custom cutting lumber, Home Depot could sell more lumber and associated products, such as nails, hinges and other items. The expert pegged the royalty at about $7,000 per unit.

A reasonable royalty attempts to fabricate a license between the inventor and the infringer. What number would the two sides agree to? That’s a hard thing to determine, particularly in the heat of litigation where the two sides are battling one another, the complete opposite of making an agreement.

Would Home Depot ever have bought 2,000 of the units at a price of $7,000? Would Powell, without access to Home Depot’s spreadsheets during a license negotiation, have held out for $7,000, particularly when he had his underlying saw business with Home Depot? As it stood, Home Depot left its decision making in the hands of the jury. The jury didn’t appreciate the copying of Powell’s patented design and bought the high number. The judge agreed, adding almost $6 million to the tab with enhanced damages and attorneys’ fees. The award was upheld on appeal.

By saving $1.4 million for safety devices, Home Depot found itself cut open by a $24-million judgment.

Geoff Mantooth practices patent and trademark law as a shareholder in Decker, Jones, McMackin, McClane, Hall & Bates P.C., a Fort Worth, Texas firm.