Professor Karl F. Jorda
Summer '94
Final Examination
For many years, eyeglass lenses made of glass (not those made of plastic) have been required by the U.S. Government to be of a specified hardness (strength) so that they would not be likely to break (in normal usage) and injure the wearer. Until 1985, a special heat treatment (annealing) of the lenses was adequate to meet government specifications. In 1985 new specifications were promulgated and the old heat treatment techniques were no longer adequate.
Edward Bell invented a new process for chemically treating the lenses so they could meet the government specifications. Bell obtained a patent on his process, which was adopted immediately by the entire eyeglass lens industry.
This industry is composed of three large competitors and a large number of smaller companies. The market share of these companies is as follows:
American Opticon (AO) 30%
Bash and Lam Co. (B&L) 25%
Universal Optical Corp. (Universal) 20%
All others (largest having 4% of the market) 25%
Bell, through his licensing expert, Elias Colt, has succeeded in licensing his process to a number of small companies, totaling about 15 percent of the market, but has not succeeded in licensing the three major companies, partly because of some questions about the validity of Bell's patent.
Thomasina Edison, Universal's Director of Licensing, has been approached by Colt to take a license. Edison has asked Universal's Patent Counsel, Perry Bailey, to check out the patent.
Bailey has told Edison that it is clear that Universal and the rest of the industry got its technology from Bell's work and is infringing the patent. However, because of some prior publications and prior patents, Bell's patent may not be valid. When pressed, however, Bailey states that, all things considered, he thinks there is a 60 percent chance the patent would be held to be valid by a court.
Colt tells Edison that Bell is going to file a patent infringement suit against one of the big three companies, and Colt thinks Bell might decide to file suit against Universal, the smallest of the big three, because he might have a better chance of winning, or settling, a suit against the smaller company.
Edison has negotiated the royalty rate down about as far as she thinks she can and Universal does not object in principle to taking a license at these rates. However, Universal does not want to have to pay royalties to Bell unless its two bigger competitors are paying the same royalties.
Edison believes that Bell may sue Universal first. Edison also believes, from talking to AO's and B&L's patent and licensing people, that neither AO or B&L will take a license until Bell wins a patent infringement suit against either AO or B&L. Also, Edison is afraid that if Universal is sued, and loses, Bell could obtain an injunction which would, in effect, require Universal to pay much higher royalties to Bell (before Bell would have the injunction removed) than Edison has negotiated.
Edison's objectives are, therefore:
Bell's objectives are:
What kind of business arrangement should be proposed that would meet the objectives of both Universal (Edison) and Bell?
Please outline the features of your proposed business arrangement - one that would result in a win/win resolution. Do not draft an agreement or clauses for an agreement.

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