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Oh No! You Just Got a Cease and Desist Letter, Now What? | Henge Docks

by Pablo Fuentes | Last Updated April 26, 2017
Oh No! You Just Got a Cease and Desist Letter, Now What?

Imagine this.

You’re super excited. You’re following your dream, starting a company and launching a product that you are thrilled about. You’ve raised money, have customers lined up, a website built, and everything is lined up to build a great company.

Then, 18 hours after you launch, you get hit with a cease and desist letter.

What do you do?

This is exactly what happened to Henge Docks, a company that designs and manufactures high-end Apple accessories. To find out how they managed to survive this ordeal, we spoke with Matt Vroom, founder of Henge Docks, about how he coped with receiving a patent lawsuit within the first 24 hours of operating as a business.

It's an amazing story and one we are excited to share.

Check it out:

Listen to the podcast:

Show Notes

A summary of our interview with Steve Munoz from Duncan Munoz Business Machines is below.

You can use the links below to jump to your interests.


Maybe tell us a little bit, what does Henge Docks do?

Matthew Vroom: We are the leading supplier of docking stations for Apple notebook computers. Basically, what a docking station does, at least in the PC world is, as you move from your mobile on the go to your desktop with your monitor set up, you can just drop your computer in and it forms all the connections.

In the PC world, that's relatively simple because most PC's feature kind of a serial port on the bottom and Macs use a lot of proprietary connection and also all of their own individual connections on the side so there aren't a lot of options available out there, but we've been able, over the last seven years, we launched in May of 2010, to carve out a really nice market without a lot of competition.

When we sat down before, you started telling me a little bit about the patent lawsuits you've been facing. That is something that a lot of small business owners might think about at different points in their careers or in their journey of starting a company. You have a really unique perspective on all of this so maybe give me a quick rundown of, so how did you that you design your prototype and then how you had your, you call the "storybook" launch, and then what happened after that?

Matthew Vroom: Sure thing. It was a typical kind of ramp up. I was designing the first prototypes in my bedroom after I quit my job in 2008 and we thought had that we were wandering in to a relatively niche market. We're going to sell a few dozen of these things a month and it was just supposed to be this niche market product. It was the first foray that I'd done in to mass manufacturing.

This is pre-Kickstarter so we did it the hard way. We raised money from friends and family to get the first manufacturing done, did all the supply chain stuff, got everything set up in China. We didn't actually launch the product or do any sort of public announcement until we actually had inventory in-house.

How long was that process from the moment that you first said, "We're going to make a docking station," to the moment that you were ready to announce to press, how long are we talking about?

Matthew Vroom: That is a very good question. Like most startups, the idea goes back years and years and years before that. I slowly developed the capability and the desire to pursue something like that full-time so I would say from late 2008 until probably May of 2010 was how long it took, so almost two years.

Yeah, then really working with the manufacturers to ramp that up and get the tooling made. With every hardware product 98% of it's really easy and the last 2% takes 98% of the time.

I thought going in to this, there wasn't a lot of documentation for people doing really small hardware startups. Now, it's very well documented, thanks to Kickstarter, but during this time period, it was really kind of winging it. There were a handful of books out there, one or two blogs.

I was under the impression that it was going to be a matter of weeks. As we started researching it, then I thought it was going to be months. It took 18 months, I think, total from end to end, to get it going.

Once we engaged with the manufacturer and we started working through it and doing DFM, which is Design for Manufacturing, just like how does the plastic flow in to the molds. Just little problems like that and then really get a high-quality finish that can match what Apple does was extremely challenging.

There's a saying that amongst small business people and large business people, too, actually that everything takes twice as long and costs twice as much as you thought, but seems like for hardware, it's like four times as long and four times as much.

Matthew Vroom: Yeah, we use the figure two and a half. Two and a half times. If you keep pushing the bounds, you're going to keep running in to those things, but bracing for those externalities that come along and also making sure that you're innovating within that spectrum so you have a graceful cascade when something doesn't necessarily work out. If you're shooting for the moon, you want to be able to land somewhere even if you don't hit that, that you've got back-up plans for your back-up plans.

You know this as well as anybody else, running a business you have to maintain that, it's not a false optimism, but you have to always be able to see a path forward or it will destroy you.

Okay, so we get to the point where you have a product. You're ready to announce it and what happens?

Matthew Vroom: We've got all the units stacked up in our apartments in our ... My co-founder's wife was, of course, extremely upset about this, but we put it up and put a press release out, made the website live and we had a trickle of orders come in. Then, Engadget and, I believe, Gizmodo picked up the story back in the day and immediately. We were on Bluehost at the time because that was a thing. There wasn't Cloud services really available to a small company.

It didn't take very long for the traffic they were pushing to knock out our payment processor, knocked out our web servers and we ended up selling what we thought was going to be three months of inventory in three days. It probably would have been faster.

There was Super Bowl commercial like that I think years ago, right?

Matthew Vroom: I was going bring it up. It's that IBM one, right? They get one order…then two... and they start celebrating and then there's thousands. Then everyone gets quiet and they're like oh, no. That was what happened to us, but we had a little extra cherry on top of this whole launch.

What was the competition like when you launched?

Matthew Vroom: In the space, there was one other company that was building docking solutions for MacBooks. They were extremely expensive and not super capable and they didn't really match the aesthetic. They were something that were very much designed in the late 80's it kind of seemed like.

Well, what ended up happening was about 18 hours after we launched, we got hit with a cease and desist out of nowhere.

Can you help explain the Cease and Desist?

Matthew Vroom: It was a legal demand that we stop the sale of, and advertising for sale, of the products within 10 days that were supposedly infringing. There were two other founders that I worked with on this and one was a lawyer. He was in law school during this time period. We had already started filing a lot of IP for our own and I guess, intellectual property, around various design elements and also utility elements.

What is the difference between a design versus a utility patent?

Matthew Vroom: Design patents aren't worth very much, but utility patents are what people really want. Nowadays, there's a ton of different types of patents, but when you're thinking about patents in the classical sense, utility patents are typically what people are talking about. That's where a lot of the fighting you hear about takes place now. It would be something about how something functions and there's certain criteria for an idea. It has to be non-obvious, it has to be unique, so sometimes you can combine different elements together, but there's, I think, millions of patents now out there, so it can be difficult to eke out a space. Just because you have a patent on whatever you're selling doesn't necessarily mean that somebody else can't come after you for their own IP.

What happened when you got the Cease and Desist?

Matthew Vroom: Ironically, we sort of adhered to the Cease and Desist because we sold out all of our inventory in three days and we weren't going to be able to restock back in for another three months because that's how long it takes to do a production run in China. You have to get the stuff on the boat and ship it over and then pick it up and get it out to distribution. Production runs, producing a physical good can take anywhere from a few days to a few months, depending on what you're making.

We got hit with the cease and desist and it was a bucket of cold water to say the least. Two weeks before that, my co-founder had graduated with a specialty in intellectual property, so we were extremely lucky, but this was the point where we discovered why there weren't any major competitors in the space. Anybody else that had popped up got hit with a Cease and Desist and facing a potential lawsuit, with very high costs involved in litigation, even before you get to trial.

Something like 90-95% of patent lawsuits never even make it to trial. Never even make it past discovery because it's so expensive. That's why you see the patent troll industry is so strong, because it costs between $800,000 and two million dollars a year to litigate on a patent and your typical patent lawsuit will take up to three years to resolve so it can be really gnarly.

Then, there's some dead periods in there, too, where your competitors could be filing IP, it doesn't get published for six to 18 months, so you can start a business in entirely clean space and then, all of a sudden, find yourself on the other end of a patent gun, which is not a good place to be.

What ended up happening with us was the cease and desist happened. We actually ended up filing suit against them to basically preemptively have their IP invalidated with regards to our specific case.

We can threaten back so we actually filed against them to try to posture to kind of scare them off, because my co-founder and our general counsel didn't think that their IP and their case had a lot of merit. They responded by individually naming, so they sued the business and then they individually named two of the founders, myself and our general counsel in their own thing. They tried to pierce the corporate veil, right?

Right and they try to basically say like I'll see your response and raise you a personal.

Matthew Vroom: Yeah, so this, even though it's not fairly standard, but it happens and we knew that they were trying to scare us. It was still terrifying to be like named as potentially liable for $25,000 per instance of infringement that we were exposed to now and that's for every unit that we've sold. At that point, it was a comical amount of money what that could come out to.

And you see somebody who's protecting their space by wielding this intellectual property, which they’re totally allowed to do, but instead of competing in the marketplace, they were defending the space using legal methods and as a product designer and somebody who really is a big fan of innovation, that bothered me on like a very core, core level.

Just getting my head wrapped around that, along with all the other stresses of having a startup was kind of a big deal, but what happened after that, I think, is where the real lessons are in the story.

What happened next?

Matthew Vroom: Basically, we, before the whole process really starts and you go in to a courtroom and you're doing all that, there's a period of ramp up and discovery where the two companies are posturing back and forth. They usually have some opportunities to try to settle so we were asking their counsel, kind of trying to get a range of like what they'd find acceptable. Hey, do you want to buy us?

We are looking to settle this out because we really hit the market in a way that we were pretty sure that they never had. The parent company, when we were looking at it, was supposedly doing 20 million dollars a year in revenue.

We were looking at them as a part of this conglomerate with some serious bucks. It looked like if we couldn't form a deal with them, we weren't going to have the ability to be able to fight this through and we'd made a decent amount of cash from the sales of those initial products. But the thing is instead of spending that on growing the business and buying inventory and doing all those things, we had to spend it on lawyers.

That was very, very difficult, but the interesting thing that happened was, we were ... This is where the most valuable ... There's a few lessons I learned about this, but the most valuable lesson that I learned out of this was when we were talking to their general counsel, their IP lawyer who was working on prosecuting this, we would have these conversations about how do we get out of this?

There's got to be a business solution for this and the business answer to hey, would you like to buy us, is oh yeah, we'll buy you for a dollar. That's how we'll make this go away, right? Instead, their answer was basically like, go to hell. That's a very strange thing to say.

So they were not open to negotiating?

Matthew Vroom: Not really. They wanted us to just disappear. I'm like, but we have a product that's doing something that your product's not. The business answer is, yeah, we'll buy you for nothing and that's where the negotiation starts. We were getting stonewalled, which was very strange and we weren't getting anywhere with that. They wanted us to just disappear. This started in about May, this went on to July and we started bleeding through pretty much all the capital that we had raised.

We were ending up in a situation where our management team was so stressed out that my co-founder quit and that was a real hard thing because we went way, way back and just kind of losing that faith and he couldn't see the risk/reward payoff there. And his exposure was huge in this potentially and he just didn't think we could do it.

Did you feel like you were running out of options? How did you figure out your next move?

Matthew Vroom: This is where the valuable part of the lesson comes in. I got to the end of my rope, I was terrified by these guys. I was in business school at the time and I had taken a road trip around the country. I happened to be staying with my girlfriend at the time in Central Illinois, now my wife. I, out of desperation, just decided, I'm going to call their CEO and this is probably something that if I hadn't been me, a lot of other people would have done it, but I was terrified to do and I assumed that, during the entire process, that the messages had been getting through and that their counsel had been working in their interest and relaying these messages. I got on the phone with the guy and immediately the conversation, I thought I was going to get torn a new one, and immediately ... I'm standing in the driveway shaking as I pick the phone up just like…who am I to be calling this CEO of this massive company?

He was pretty friendly and he immediately started talking business. This was really strange to me because we had tried to make these offers and then, all of a sudden, the lawyer's response is go to hell and that their CEO wants to play ball.

Looking back on it, what had happened was their lawyer had not been doing what he should have been doing. He was making a lot of money off of this, and I was pretty shocked to find out there was no communication. We could have saved a lot of money and a lot of time if I had just picked that phone up right away and gone to the source.

That was a really important lesson: trust, but verify everything. This happens over and over and over again in business. Worst case scenario, he would have cussed me out and hung it up. Honestly, it wouldn't have been that bad.

What happened when you met?

Matthew Vroom: We make it to Chicago and then something really interesting happened. It was a Tuesday morning meeting at like 9:00 am and I'm wearing my, if you can imagine this like, I was in a wedding earlier that summer and so I only had my suit with me, I didn't have my dress shoes because we had purple Converse that we wore. I just show up in a purple tie, purple Converse and a suit.

As I pull in to the parking lot of this massive industrial park complex, something struck me as being a little bit off. I looked around the parking lot and it was, like I said, business hours on a Tuesday and the parking lot was like 80% empty. I was like, that's weird. We walk inside and there's nobody at the receptionist desk and the first four rows of cubicles are empty. That's when I realized that I wasn't dealing with like a 50-million-dollar company or 20-million-dollar company like some of the Dun & Bradstreet estimates said, that I was dealing with a much different entity. Somebody who's smaller and this is something that they're probably trying to eke all of the momentum they can out of this product line because they're having trouble keeping up with the new models that are being released and things like that. Their other businesses I figured out probably were not doing as well as I'd anticipated.

I started formulating a really half-assed plan…and then we go and we sit down in the conference room. It was like your typical scene. They have there the CEO, some VP, two engineers and two other random people so I'm one person on the side of this table like what the hell am I doing here? They've got their whole board. I can't even hardly see all of them in my peripheral vision.

Immediately, the discussion starts and their head of engineering just starts screaming at me across the table. I don't know if they were trying to play good cop, bad cop at the time, but somehow, I managed to hold my cool. I have kind of a bad temper, so I don't know why I didn't just go off.

I was able to hold it together. It's actually kind of funny to walk through this now, because I haven't told the full story in a really long time. Anyway, I start trying to negotiate with the guy and I put my MacBook on the table next to me and it was tethered to my phone. I had a jail broken iPhone at the time and I had our pre-order system hooked up to our email because it was just real ghetto. I built the website and stuff and I'm not a developer.

We were accepting pre-orders for product, like email sign-up and every time a pre-order would come in, my Mac Mail program would make the mail incoming noise. Ding.

It was sitting there for a while and I'd opened it up a little bit earlier in the meeting to show them our website and walk them through how our designs work.

I had left it open and it was sitting there dinging. Finally, somebody goes ... I think the CEO was like, "What is that?" I was like, "Oh, sorry. That's the pre-orders." He's like, "What?" I was like, "Every time that dings, that's an order coming in." He was like, "What? How many pre-orders do you have?" I pulled it up and it was something like 20,000 at that time.

Then, the conversation changed and he dismissed everybody else from the room. That's when I realized was we might actually be able to negotiate something out of this so I was up against the wall kind of facing shutting the company down, which pretty much was my only option.

Did you do this on purpose? Because that sounds brilliant.

Matthew Vroom: No, that was an accident. I pulled the laptop out to show the website or a schematic or something and it's sitting there making that noise. I noticed it doing that and I was going to close it or mute it when it was doing that. About the same time they asked, I was like, I'm going to leave it and keep doing that. This was all just like winging it, right?

I was just adapting. I would have loved to have come up with a better plan beforehand, but I never even considered that I'd walk out of this with a negotiated deal.

How did the negotiation go forward?

Matthew Vroom: Then, I made a really, kind of hilarious mistake. We started negotiating and I was trying to figure out where I could draw the line and that was basically I told them, I was like, if we want to settle this, I was willing to give them a piece of the company, like 1% over this number. He did the write down a number thing. It was like 50%. He slid it across the table to me.

It was classic, old school thing. I'm not talking crap about this guy. He actually turned in to a fairly good partner and I really enjoyed the time that I got to spend with him. He went from this demon in my life to this is just a guy trying to do business as well, in a period of 30 minutes. I was having this massive head check.

I needed to come up with a number that would satisfy everything and I was trying to do the math in my head. I'm an art major, I'm not great at that. I was trying to come up with an equity number, dividing all the other percentages that we had outstanding that would leave me still with over 50% of the company. I miscalculated in my head and I gave him the 20% number as an exchange for basically being 1% over this, we're going to continue to pursue this and 1% under this number, then we've got a deal.

I got a handshake deal across the table. It wasn't until later when I ran the math that I was off by like 2% or something when I was crunching the numbers. I still had my co-founders so we had plenty of control over the company at that point, too, but it was just kind of a funny little carrying a number in my head screw-up.

We got a handshake deal and the rest of it went fairly smoothly through that. A couple years later when we raised our A round, we ended up we bought that section of the company back from them and then resold it to our new investors for like 10X the value.

So you were able to basically get rid of that patent threat?

Matthew Vroom: Yeah, so we were able to settle it out. The other part that happened here that kind of goes back to just understanding a little bit more about the oddities of the patent system was one option that we had, the piece of IP that they had should have never been issued. It was, the abstract on it was something like an electronic device by which a computer or other electronic device is connected to a multiple of electronic connections. It was just a really weird piece of IP that had been issued in like the late 80's, I think.

The issue we had was that it was expiring in like 18 months after this was taking place, but we can't wait 18 months, right?

People were looking at it and like probably your best course of action is to get the USPTO, US Patent authority to invalidate this piece of IP, but they were really backed up at that time. They're still backed up now. It takes between 18 months and three years to get a piece of IP through.

They had no interest in looking at taking this on as an invalidation because it was so close to expiration. Like, why are they going to spend time on that, so that avenue was closed to us, which made things a little bit more complicated, which was also a very good lesson, too.

What was the resolution of this going forward? How did this event shape the way you do business?

Matthew Vroom: This event had a very big impact on our business and the way we structured it because we had investors calling us up during this time period and we had wandered in to this really open market, but when you're looking to raise money and you have a patent lawsuit, that phone hangs up really quick.

We had to cash-flow the business and that really was a very defining thing. Also, in terms of our patent strategy, what we have tried to do, I think we have like 42 patents at this point now and 28 or 30 of them are utility patents, which are the ones that are really useful.  It isn't so much to use our IP. I believe that business should be done in the marketplace, not in the courtroom. We have a lot of patents as a defensive measure now.

What is your strategy and how you think about this defensive patent strategy?

Matthew Vroom: As an innovator, you're looking toward the future and where your products are going to go. You're filing IP for the things that are like five year out, right?

During that time period, other companies will build things. There's a couple of big players that are part of larger groups that some of their products land on our IP. Even if we can't directly create a standoff situation with somebody who is coming after us, some other competitor in the space or somebody else who just want to make life hard for us, even if we can't directly say, all right, you've got one, I've got two.

We can always go to somebody else and say hey, I'm going to mess with you if you don't mess with these guys. If they depend on their patent-holding.

You can say I'm going to mess with you guys if you don't send these guys a cease and desist and I will, at the end of this, sign a license saying this IP will never be used against you.

That is wild. What percentage of your time is dedicated to this defense of IP strategy now?

Matthew Vroom: Not very much. It's not a significant activity in the business. Investors like to see a strong patent portfolio so that we're in a defensible space. We don't use it offensively yet, but we could so they view that as a significant competitive advantage if it ever came down to it.

You were talking about competing in the marketplace, at what point do you see the break where you would use a patent offensively?

Matthew Vroom: That's a really good question. We have not used any of our IP offensively nor defensively. The end of that settlement was the last time that we ever got in to one of those situations. There's been a couple of opportunities where we could have done it, but, again, it was just a massive distraction. I want to be where the focus is.

I think right now, I would say, I would rather continue to innovate and build better products than anybody's out there and I welcome competition. I don't see a particular interest in that I would want to use that offensively, but I have a board and I've got investors and who knows? If there was a strategic acquisition that every happened, they may look at that as a potential option, but that's an entirely different course of action.

Where can people find your product?

Matthew Vroom: Yeah, our products are available through Amazon and our website. It's HengeDocks.com, like Stonehenge. You can just type MacBook docking station in to Google. We have a real unique partnership with Apple so if you're looking for a discount on one of the new MacBooks and new connectivity options with USB type C and Thunderbolt 3, we've got all of that covered now and a lot of really new exciting products shipping out.

What do you mean? What's the discount? Do you want to share a discount with our readers?

Matthew Vroom: Yeah, we're the only place where you can get a discount on a MacBook at all. If you go and you purchase one of our docking stations, you can also buy a MacBook bundled along with it, as well as, some other really cool products like Audioengine speakers and things like that. We focus on creating these value-added bundles.

Final Thoughts

At some point in a business's operational history, they will have to deal with something like a cease and desist letter. This usually doesn't happen within the first 24 hours of launch like it did for Henge Docks, but it is a common issue for businesses.

Matt and Henge Docks was able to survive this by bypassing the middle man, in this case the larger business's lawyer, and go directly to the decision maker.

In business, as well as in life, it's very important to verify that your message is actually being received. Sometimes, you just have to pick up the damn phone and make that happen.

Because Matt was able to keep a cool head, he was able to negotiate a business solution to make the cease and desist go away. Further, he even developed a working relationship with the other company and enjoyed the time he spent with their CEO.

So remember, a cease and desist isn't the end of your business. Make sure you are negotiating with the right people and that you are being heard. 

If you have any question or comments about today's episode, please leave a comment below.

Topics: small business war stories, podcast

Pablo Fuentes

Written by Pablo Fuentes

Pablo Fuentes is the CEO of Proven. He is a graduate of the Stanford Graduate School of Business and UCLA. He is a Brazilian Jiu-Jitsu practitioner and a blues guitar player and builder.

 

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