Doctor billion: case ends with rare windfall for inventor.

Consider it the inventor's equivalent of winning the lottery.

When Dr. Gary Michelson and his company, Karlin Technology Inc., settled their lawsuit against medical device manufacturer Medtronic Inc. for $1.35 billion, the spinal surgeon-turned-inventor was catapulted into rarefied ranks.

The vast majority of inventors never even earn a dime from their handiwork, while those who do might make a few thousand dollars a year. Even the most successful ones generally earn $10 million to $15 million over a lifetime.

Thus, when Michelson cut his mega-dollar deal for his portfolio of 100 U.S. patents, 110 U.S. patents pending and 500 foreign patents, it turned more than a few heads in the patent world.

"The sad statistic is that of the 18,000 patents issued every week in the U.S. less than 1 percent makes money," noted Rusty Ruscetta, president and chief executive of the Inventors Assistance League in Glendale, which advises investors how to market and profit from their products.

Michelson's agreement, which includes a $550 million payment to settle all legal claims, is unusual in another way. Only $50 million will be disbursed over time, with the remaining $1.3 billion to be wired into the bank accounts of the surgeon and his company in the next few weeks.

Of course, Michelson, 56, is not your average inventor. With his medical training, he turned his talents toward a lucrative market for spinal devices that make surgery easier and reduce complications. It's a growing business that accounted for more than $1.4 billion of Medtronic's $9 billion in net sales in 2004.

He had another advantage: unlike most surgeon inventors who share royalty profits with the hospitals they work at, Michelson, a former surgeon at Centinela Hospital Medical Center in Inglewood, developed his inventions on his own, through his company.

Then there was the fact that he was willing to put up $60 million of his own money in a long-running legal dispute against Medtronic, a cash-flush Fortune 500 with far more resources than he had.

"I don't want anybody to get the impression that if you throw enough stuff, something sticks," Michelson said. "There are any number of inventions here that will produce or will be converted into successful medical devices, surgical procedures and instruments."

Outsized settlement

Nevertheless, the size of the agreement stands out in a world in which many inventors dream big but end up with nothing.

"To get a patent, it costs a minimum of $5,000, and once they have the piece of paper they don't know what to do with it," Ruscetta said. "They don't know who to contact or how to contact them."

Even when they do, it might not amount to much.

Ruscetta, who has been assisting inventors for 43 years in trying to turn their clever ideas into money, said he is often satisfied with an agreement that calls for royalties of 1 percent or 2 percent of sales, which he said isn't bad if a company is selling $1 million worth of product annually. Even so, that amounts to only $10,000 and $20,000 in annual income.

Patricia Lenz, executive vice president of marketing at San Francisco-based America Invents Inc., another company that helps market inventions, said that royalties can be higher on medical devices because of their complexity and lengthy development time. That limits the number of competitors in a market.

"It's so highly specialized," she said. "You have two or three companies making a certain type of valve that goes into the heart or a bone or something. It's a completely different animal."

Still, Lenz, who has helped inventors negotiate deals that earn them "several million dollars" over a decade, said that Michelson's deal "sounds like a lottery ticket."

But there are reasons for that. Michelson developed patents with substantial value to the industry, particularly for Minneapolis-based Medtronic, which makes implantable devices such as defibrillators, pacemakers and tools for spine and ear, nose and throat surgeons.

Most of Michelson's inventions are devices that help patients heal better, as well as instruments that make smaller and less invasive incisions during spinal surgery. Michelson said there are major cost benefits. He estimates they could save hours of surgical and recovery time.

Medtronic's spinal business, which it acquired in 1999, has been increasingly profitable, accounting for more than 16 percent of its $9 billion in net sales in 2004. And sales have increased 36 percent over the prior year.

"If you look at how their revenues break down, the spinal business is important to them," said Juan Noble, senior analyst who covers medical devices at Oppenheimer & Co. Inc. "It's not just the percent of revenue but it's historical profitability."

Medtronic, which had been paying Michelson royalties, first revealed the value it placed on some of Michelson's patents when it initially sued him in 2001 for $820 million. Two-thirds of that figure was Medtronic's estimated damages and costs associated with lost product revenue, allegedly caused when Michelson, concerned he was not receiving enough royalties, started selling the products to a Medtronic competitor.

But Michelson said Medtronic's internal projections from its marketing and finance employees revealed even more during the trial, which lasted five months last summer. "Their own people testified that for these inventions, it's not that they met their expectations but that they exceeded their expectations and did far better," he said.

Unusual circumstances 

Then there was the special license agreements Michelson had.

He drafted his agreements through his company, Karlin Technology, which provides more royalties for him than if he had shared those royalties with a hospital or research laboratory. (Michelson said he set up his own company not for legal reasons but because he did not work for a hospital that focused on research.)

Coe Bloomberg, a partner at Jones Day, said most doctors who are also inventors work on their products in a hospital laboratory and end up sharing half the royalties with the hospital.

"The highest number I can think of, based on the work I've done for an individual doctor, would be about $20 million for one product. And that's usually paid out over time," said Bloomberg, who assists Cedars-Sinai on its patent deals.

There also was Michelson's willingness to go to court against Medtronic, something the prolific inventor traces to his experience with other patent lawsuits against other companies for prior inventions.

"It's a very expensive process," he said. "It's very time consuming, it takes a tremendous toll on anybody emotionally and it's very disruptive. I think most people would like to lick their wounds and go away."

He spent more than $60 million in legal costs in the case against Medtronic. Those costs paid off when a jury initially awarded Michelson $110 million in unpaid royalties and, last fall, awarded an additional $400 million in punitive damages. Medtronic initially called the verdict "unjustified" and "excessive" but agreed to discuss a settlement in late January, according to the company's quarterly report.

Neither side would say what led to settlement discussions, but Medtronic's filing indicated that Michelson continued to seek additional money and damages after receiving the $510 million award last fall. The $510 million is part of Medtronic's recent settlement with Michelson and Karlin.

Still, there may have been one element of luck.

In licensing his inventions years ago, Michelson hooked up with what has become the most successful medical device maker in the world, a position that's reflected in a corporate kitty of some $4 billion.

As a result, Medtronic will not be reporting any losses to cover the settlement, unusual for an agreement of its size--and a likely reason the company was willing to settle for such a large sum.