The auto industry has seen its share of folk heroes over the years, but none like Alex Severinsky. You've likely never heard of him, but his company, Paice, made big news this summer when it beat both Toyota and Ford in prolonged litigation over patents held by the Soviet immigrant's company.
These patents are critical to the operation of some hybrid vehicles, so when the International Trade Commission announced it would hold hearings on the matter, both automakers settled -- or caved, depending on one's perspective. The settlements, say sources who have followed the proceedings, may eventually total more than $100 million for the firm. Paice is the beneficiary of smart patent filings 16 years ago, as well as some lucky timing, as recall-ridden Toyota was not in a position to have its hybrid technology questioned in such a public way.
Prior to the settlements, a Federal judge had ruled that Toyota pay Paice $99 per Hybrid vehicle sold, which proved to be a starting point of negotiations. Toyota had sold over one million hybrids in the U.S. through 2009, and more than two million worldwide.
A Blast From The Past
Paice is said to have the top two most important hybrid patents in the world, and four of the top ten. Yet there's no reason to expect other breakthrough technology from the company. Paice is a company that exists entirely, or nearly so, to chase companies that may be in violation of encroaching on Severinsky's original 1994 patents, what is known as an "intellectual property" firm.
Except for people in the automotive engineering or patent litigation space, few have even heard of Paice. Certainly, the people of Bonita Springs, Florida, would have little idea that the company is based in its community, a hot spot for retirees and shuffleboard. That's because the corporate address is actually the private home of Paice CEO and director Robert Oswald, the retired CEO of Robert Bosch Corp., the U.S. arm of the German auto supplier. Oswald's house is on the golf course of the Shadow Wood Country Club.
Paice Company Location in Bonita Springs, Florida
Indeed, the management and board of Paice as listed on its website includes a lot of retirees, so Bonita Springs is probably as good a place as any to locate. Besides Oswald, "marketing advisor" Nathan Adamson retired from Ford in 1999 after a 30-year career. The company, in fact, oddly still lists two other retired Detroit executives in their management section, who are deceased -- technical director Ted Louckes (retired from GM in 1998 after 40 years at the automaker, and died last August) and director Robert Templin, retired from GM in the late 1990s, who died in 2009. A director, Joseph Tydings, is a lawyer and retired one-term U.S. Senator from Maryland when Lyndon Johnson was in the White House. Paice's CEO, Frances Keenan, is an officer with the Baltimore, Maryland-based Abell Foundation, which lists Paice as one of the green technology companies it has invested in. Abell's investment seems to have been, in large part, to fund legal challenges not to create new technology.
According to the American Intellectual Property Law Association, for lower bracket patent litigation cases, where up to $25 million is at risk, expect $2 million in the patent poker pot to litigate through trial and appeal. For more than $25 million at risk, ramp the figure above $4 million.
Playing The Game
While all these retired executives may, on the surface, seem like "hangers on" to Severinsky, they have been instrumental in funding and advising Paice's legal counsel about whom to litigate and how. Former Ford, GM and Bosch executives have had critical knowledge of Toyota's, Ford, GM's and other automaker's hybrid and engine control systems. More importantly, perhaps, these former insiders know exactly how the carmakers have tried to side-step Severinsky's patents. Presented with the opportunity, each person who joined the firm was in for a cut of the final judgments.
AOL Autos requested interviews with management, board members or Severinsky. The company's outside public relations counsel declined. "They don't say much, or communicate much," says one auto company executive who has had dealings with Paice. "I'm surprised they even have a PR representative."
The specifics of Paice's settlements with Toyota and Ford are held secret as a condition of their terms. One of the reasons Paice keeps a low profile, says one industry source, is because it may not be done going after auto companies for patent infringement. Paice's PR representative said by e-mail that the company does not have any active "litigation" with any auto or auto supplier companies. But the spokesperson did not return an e-mail to answer whether Paice was in "discussions" with any other companies about potential infringement of its patents.
Volkswagen is one potential target of Paice's, as is Porsche AG. Both have begun selling hybrids. Nissan's Altima Hybrid licensed technology from Toyota, but sold in relatively small numbers. Honda, of course, has also been a big seller of hybrids, but Honda's hybrid system is different from Toyota's, achieving lower mileage ratings. Some engineers believe Honda has been hamstrung specifically because it has avoided licensing both Severinsky's and Toyota's patents.
Griffith Hack, an independent Australian firm that specializes in intellectual property law, released a report in October 2009 that examined patents in the hybrid vehicle arena. In ranking the top-ten most important patents, it listed two of Paice's as first and second, and an additional two patents in the top ten.
The Man Behind The Technology
So, who is Alex Severinsky and how did he stumble onto the big secret of hybrid car technology? Severinsky, now in his 60s, is a professor of mechanical engineering at the University of Maryland, having earned a master's degree in electrical engineering from Kharkov College of Radioelectronics, in Kharkov, Ukraine, in 1967. He also holds a doctorate from Moscow's Institute for Precision Measurements. Severinsky is an immigrant to the United States who has worked in the field of anti-tank warfare instrumentation.
Severinsky worked on uninterruptible power supplies for computing in the 1980s when the industry was really beginning to take off. Severinsky always had an interest in automobiles and alternatives to straight internal combustion. Specifically, he was interested in the seamless management of drive torque that, in a hybrid application, would create the seamless transition between battery and engine. This, after all, was not a hardware challenge, but a software problem. Severinsky's background gave him a head start on how to deploy the electronic controllers to modulate the energy so that the battery gives an efficient power flow and doesn't overheat.
Ahead Of His Time
So why are Paice's patents so important and valuable? On September 6, 1994, the U.S. Patent and Trademark Office granted Severinsky a patent for his high-voltage method of powering gas-electric hybrid vehicles. He called it "Hyperdrive." The filing followed years of work and research, and may, depending on who you talk to, have represented an early version of the thinking that led to the drivetrain in most modern hybrid-electric vehicles today.
The key application at the time, says David Cole, chairman emeritus of The Center for Auto Research in Ann Arbor, Michigan, was the modulation of energy from the battery. Cole says this was important because it concerned the control of energy flowing from the battery and the internal combustion engine to the wheels in a continuous, seamless way. "But you have to remember that in 1994, companies were not thinking about this," he said. "The approach may have been ahead of its time and really had no customers for the technology. Companies like General Motors and Ford and others were thinking electric vehicles, and Paice's patents are specific to hybrids."
Nevertheless, Severinsky had made the rounds to the automakers, including Toyota. The timing has long made Toyota look suspect in the proceedings with Paice. Given the fact that the first Prius was launched in 1999, development on its hybrid would have been taking place right around the time Severinsky filed his patents and was meeting with automakers. But one Toyota engineer -- who talked to AOL Autos on background because he was not authorized to talk on the case -- said the big reason why Toyota fought Paice was that it did not think that Severinsky's patent reflected anything new that wasn't already contained in expired patents that Toyota had researched.
The thinking at Toyota, and eventually at Ford and other companies that entered the hybrid space, says Cole, was that Severinsky's technology was so basic to any hybrid technology that the patent couldn't be properly enforced. And companies, in and out of the auto industry, believe if they tinker the technology application enough, it will sufficiently deviate from a patented application so as not to violate it. Cole compared the thinking to that of the intermittent windshield wiper, a case made famous in the 2008 film "Flash of Genius," which depicts inventor Robert Kearns and his battle with Ford, which believed it could make the wiper without paying a licensing fee to Kearns, who had presented the idea to the automaker.
Toyota insisted throughout the multi-year court battle that it developed its hybrid system independently of Severinsky's patents. But this is the nature of patent litigation: If someone has filed first, and in the right language, the technology belongs to them. Toyota takes pride in its own patents, more than 4,000 of them, which forced Ford and Nissan to license some of Toyota's technology for the Ford Escape Hybrid and Nissan Altima Hybrid. (Paice was also litigating Ford over patent infringement regarding to Ford Fusion Hybrid.)
With the Ford Fusion Hybrid and subsequent Hybrids Ford produces, the automaker agreed to cross license its patents with Toyota in the future to avoid more legal challenges down the road. But it shared Toyota's skepticism about the validity of Paice's patent claims. One of the reasons Nissan, for example, is pursuing an electric strategy instead of a hybrid one is that it would have to pay so much to rivals Toyota and Ford in licensing fees.
It wasn't until Toyota launched its second generation Prius Hybrid in 2004, and extended the technology to Lexus models and the Toyota Highlander, that Severinsky was able to make a clear enough case to go forward with litigation.
In December 2005, following a 10-day trial that got little attention in the media, a jury found Toyota had infringed on one of Paice's patents. Paice was awarded damages of $4.3 million. (The judge in the case, David Folsom, wrote in a later decision that he "felt the jury's award was low.") Paice did not complain, though. That's because the company was focused on trying to win a permanent injunction that would bar Toyota from making, using or selling the hybrid cars in the United States for the life of the patent, which expires in 2012.
"When you have a threat of an injunction that would be incredibly disruptive and incredibly costly to Toyota's business, Paice's bargaining position was that much better to negotiate a higher royalty rate going forward," said Eric Lane, a senior intellectual property associate at San Diego's Luce, Forward, Hamilton & Scripps who followed the case on his Green Patent Blog.
Instead of an injunction, Judge Folsom awarded Paice a royalty of $25 per car. Both sides appealed the decision. The appeals court upheld the infringement verdict but questioned the fairness of the royalty, and so Folsom bumped it up to $98. In 2007 Paice filed a second patent infringement suit in Texas involving two Lexus models and the Camry hybrid.
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Threat To Business
When the International Trade Commission agreed last July to investigate Paice's claims, it spelled bad news for Toyota and Ford. The ITC had already shown a leaning toward small patent holders and intellectual property firms. And if it ruled against Toyota, it could order all of Toyota's hybrids that are imported, including the Japanese-built Prius, to be stopped at the border.
Ford caved first, advised by several industry consultants that it did not need the distraction of a messy, embarrassing loss to Paice, especially since the company was on a roll both with its image and its finances. Neither did Ford want to again be seen as a bully, as in "Flash Of Genius."
Toyota, already dealing with a flood of recalls calling its record and commitment to quality into question were likewise advised, according to an industry source, that it did not need to have its "green" prowess challenged by a public loss to an ITC decision.
Not only did Toyota agree to license the Paice patents specifically laid out in the complaint, but to make Paice go away for good, it agreed to pay Paice on all 23 of its patents related to hybrid technology, according to a statement by CEO Keenan at the time. The last patent under the agreement doesn't expire until 2019, insuring Paice a nice annuity for the next nine years, on top of the money Toyota has already had to pay.
A Fair Practice?
Some might call Paice a "patent troll," which is a derogatory term for a company that buys patent rights of bankrupt firms and tries to shake down companies in infringement cases. In this case, the term doesn't quite fit unless, perhaps, one applies it to Abell Foundation that invested in Severinsky.
M-Cap, an intellectual property firm, published an analysis of Paice's claims and argued that the company was abusing the patent process, and that Toyota and Ford used technology and principles that were patented well before Severinsky's, and in the public domain. Indeed, the first U.S. patent related to the principles of the gas-electric hybrid was filed in 1909.Critics may be right. But in the end, in the highly technical and often opaque world of patent law, it only matters what the judge rules -- or what the plaintiff can scare the defendant big company into paying.