Tiny Company Dials for Dollars by Enforcing Key Technical Patents

Los Angeles entrepreneur Ronald Katz and his nine-employee firm are booking big business with the likes of AT&T;, IBM, Microsoft, Sprint and others. He’s a supplier, of sorts, even though his tiny company doesn’t really make anything.

So what does Katz have that those companies need? It all boils down to a collection of computer telephony patents owned by Katz--patents that have been debated and belittled for more than a decade and the subject of lawsuits for nearly as long.

Earlier this month, Katz clenched a victory in his biggest test yet, a costly, three-year patent-infringement case involving AT&T.; The telecommunications giant agreed to settle the litigation by paying an undisclosed sum for a worldwide, nonexclusive license covering Katz’s patents on interactive voice applications.

The beneficiary is Ronald A. Katz Technology Licensing, a private partnership that was formed to enforce the patents and negotiate licensing agreements. Neither side would disclose the size of the payment, citing a confidentiality requirement.

More than a year ago, the judge in the case issued a 105-page ruling that Katz says upholds his claims. AT&T; officials declined to comment on the case or the settlement.

For Katz, the ruling and the subsequent settlement represent formal recognition of the validity of his patents and a victory substantial enough--he hopes--to silence the doubters and trigger an avalanche of license fees and royalties from other companies.

“It’s a great vindication because I have had to fight very, very hard with lots of different companies,� he said. “The power and impact of that ruling was also significant because it broke a logjam of licensees who were watching the AT&T; litigation with great interest.�

Katz holds 40 patents on technologies that have become part of today’s ubiquitous automated customer service and calling systems, which handle such things as dial-up banking operations, credit card and calling card verification, teleconferencing and interactive call-in services for product support and customer service.

Over the years, the breadth and strength of those patents have been attacked and tested by a string of companies and experts in the field of computer telephony. Harry Newton, a fierce critic, told Forbes magazine in 1997: “Katz personifies all the worst aspects of the U.S. patent system. . . . His patents are written in such a vague way that anything that comes along could be construed as violating his patents. Companies pay money just to get rid of him.�

Newton, longtime publisher of Computer Telephony magazine, later softened his stance somewhat.

But Katz has plodded on despite the backlash, collecting more than $300 million in legal settlements and licensing and royalty fees over the last five years, according to his estimates. Longtime licensees include American Express, First Data, Sprint, WorldCom, Home Shopping Network and the Gallup Organization. Newcomers include AT&T;, IBM and Microsoft.

With the AT&T; victory, Katz said he expects to attract many more licensees over the next five years and more than $1 billion in patent-related income.

If Katz’s patents are as broadly enforceable as he believes, nearly every company that operates call systems that route, process or provide information based on a caller’s location or phone number, or on digits punched into the phone, could be subject to royalty payments to Katz.

“If it includes all the automated systems where you can get bank balances or stock quotes and those kinds of things . . . it would affect a very high percentage of companies in this country,� said John MacLeod, chairman and chief executive of National Dispatch Center Inc., a San Diego company that provides paging and other messaging through large call centers.

“It is a huge universe, and we’re just guessing, but there’s over 2,000 companies we believe are probably using this technology,� Katz said. “It’s really not hard to tell who is using our technology.�

Katz, his employees and more than 20 outside lawyers already are starting that work. That, of course, won’t help his popularity within the computer telephony world.

But the 64-year-old Katz doesn’t seem to mind.

“I think this is like most patents. People just don’t want to believe that someone has patents on these types of technologies,� he said. “Someone told me that Thomas Edison’s patents were challenged. As an inventor, you’ve just got to fight the fight.�

Part of the rub for Katz’s detractors is that he does not have a substantial technology background. He graduated from UCLA in 1958 with a degree in business administration. For years, he spurned computers in favor of legal pads for sketching out his ideas.

Katz was born in Cleveland but has spent most of his life in Los Angeles as part of a family of creators and entertainers. His late father, Mickey Katz, was a musician who played in Spike Jones’ band. His 89-year-old mother is an artist who still paints and sculpts, and his older brother is Joel Grey, the actor and singer best known for his starring role in “Cabaret.�

“They tried to teach me violin, and it didn’t work,� Katz joked. “I wanted to do something in the business world.�

Katz is not without technology experience, though. He teamed up in the early 1960s with Robert Goldman, forming Telecredit, a real-time credit and check-cashing authorization service. The company’s system later was granted a patent.

Eventually, Katz began tinkering with computerized telephone answering systems, deriving ways companies could sort and process calls by prompting callers to enter their account numbers and other information. He applied for patents for the concepts and put them to work at First Data, then part of American Express.

Katz said he assigned the patents to the company but bought them back in the early 1990s for an undisclosed sum. American Express got an ownership stake in Ronald A. Katz Technology Licensing--and that may turn out to be worth a good deal.

As Katz himself noted, “It’s a very small business, with very high margins.�